Your projects are vital for the future of your organisation. Adequate cost management enables you to optimise your resources (time, staff, equipment and materials), make decisions based on data about projects and their risks, measure financial performance, and provide senior management with key metrics.
What is cost management for the project?
Cost Management is a challenge to effectively predict and manage project costs whether you are developing a new product, designing a facility, or changing a key process.
Cost management refers to the planning and project budget management activities. Efficient cost management ensures the completion of a project in accordance with and in line with its budget. Because you at least partially evaluate the success of a project by its cost performance, cost management is a key determinant of the project outcome.
Cost management activities are carried out during the entire project cycle, from planning and budget allocations to project management and cost evaluation upon completion of the project.
Whilst cost management encompasses a whole set of activities, it is sometimes referred to in more specific areas such as spending administration, cost accounting and cost transparency. These terms are sometimes used by cost managers as loose synonyms for the broad function of cost management.
Four major steps in cost management
The theory of project management, says costs management comprises four processes. The cost management process consists of four different processes.
As part of the project initiation phase, resource planning uses a work-downstructure to calculate the full costs of the resources required to successfully complete a project. This is a hierarchic representation of all project deliverables and the work required for completing them. Managers usually identify the necessary resources for each component of the work breakdown structure and then create a total resource cost estimate for all project results.
Cost estimation is an iterative process using a number of estimation techniques to determine the total project cost. Cost estimation techniques vary widely from conceptual approaches that draw on historical experience and expert assessment to determinative technique which estimates costs on a component-by-component basis. These techniques will be discussed in detail later as their level of precision varies.
However, although the estimator’s task is always to create the most accurate possible estimation, determinative estimation techniques are only an option if the scope and the deliverables of a project have been reasonably finalised. In the earliest phases of project planning, you therefore use the less accurate estimation techniques, and then review and update estimates as the project is defined.
You can finalise and approve the project budget once you have produced satisfactory estimates. Cost managers typically release the amounts budgeted at the stage depending on the progress of a project. This includes contingencies and reserve appropriations.
Cost management is the practise of measuring cost performance by cost and schedule, providing comparison points throughout the project life cycle. The project management plan specifies the requirements for efficient cost control. The person responsible for cost management examines the reasons for cost variations – remedial action is provided if they consider cost variations to be unacceptable. Other related responsibilities include controlling costs for example to ensure that project budgets reflect changes in the scope of a project.
Key components of Cost management plan
These four processes are governed by the cost management plan. Costs management plan, which was developed during the project planning phase, is a document defining how the project costs are managed, controlled and communicated to the end of the budget project.
A cost management plan identifies, among other things, the person or group responsible for cost management, details how to evaluate the cost performance of a project, and sets out rules for communication to shareholders of the project’s cost performance. It also sets out the methodologies through which project cost differences are controlled.
Although you can personalise a plan to meet your company’s needs, they usually follow a standard format. Sections often include the cost variance scheme, cost management approach, cost estimate information, cost baseline information, cost and reporting processes, the process of change monitoring, budget for the project, and approvals. You may also want to include the level of expenditure authorities of key project staff, to indicate which roles can cost up to certain thresholds.