5 strategies for effective project cost management
As I discussed in my last article, “Is your project suffering from triple constraint?”, project cost is one of three elements that, if not kept in check, will cause a project to fail.
For example, if the customer wishes to reduce the estimated cost of implementing a new CRM system, then either the scope of the project must be reduced, or the time of delivery be extended, or both. The result is likely to be of lower quality, and a failure to achieve the original objectives of the project.
Why must a Project Manager manage project costs?
In addition to the way that costs affect the triple constraint, the Project Manager also uses project costs as a governing element when planning and executing the project. Managing those costs helps keep the project on track without overspending.
If project costs are not managed effectively, the project could result in losses to an organisation without producing forecast outcomes.
How does a Project Manager manage costs?
There are several steps to effective project cost management, and these begin before the project initiation stage when estimating costs for each task along the project timeline. With these costs estimated, a project budget can be developed – providing the Project Manager with a clearly defined financial estimate and providing the basis to describe actions to keep within budget.
As the project begins and progresses, the Project Manager must track expenditure and measure against estimates. This expenditure will include fixed and variable costs, such as labour, materials, fuel and power, rental costs and hire charges of equipment and premises, design costs, travel, etc.
There are various ways of tracking costs, including spreadsheets and in-house accounting systems. Whichever is selected, it is important that it provides an accurate and real-time comparison of actual cost versus estimated cost at any given point along the project timeline.
Five strategies to manage project costs effectively
Managing project costs must not be left to guesswork or hope. Here are five tried and tested strategies that help a Project Manager to manage project costs more effectively:
1. Include a contingency fund
It is essential to include a contingency fund when estimating project costs and allocating budget. While projects can come in under budget, it is rare for a project not to incur unexpected costs. Such costs may be by way of obtaining planning permissions, legal costs, extra labour, etc.
2. Plan for the natural disasters
Poor weather conditions, unexpected land issues and illness are all possible events that could implode a tightly budgeted project. Allow for delays caused by natural disasters, and the cost of getting the project back on track.
3. Allow for inflation
While it is possible to be provided with accurate estimates of costs (e.g. labour and materials), no cost is guaranteed. Especially in projects that have a long timeline, inflation may increase project costs. It is therefore essential to factor in inflation to the project budget – and not use the contingency fund for this.
4. Use appropriate budget and cost tracking methods
Using appropriate methods to track costs and measure against estimates is essential. The financial side of a project must be tracked in real time and be easy to record and observe.
5. Act fast when costs move out of line
When costs overshoot budget, it is imperative that the Project Manager acts fast. It is necessary to analyse costs incurred and understand them, before acting to either:
- Bring costs into line
- Utilise the contingency fund
- Increase project budget
- Adapt project scope
- Adapt project delivery timetable
Perhaps the best strategy of all when managing costs is to ensure that the Project Manager knows the project completely. This, of course, begins at the project planning stage, when project management is concerned with schedules, budgets and project specifics. The earlier you engage effective project management, the more effective project cost management is likely to be.
To discover how focused project management using PRINCE2 methodology can help your project be successful, contact Your Project Manager: