Steps to effective project cost management

Often, the success of a project depends on three factors: meeting deadlines, delivering quality and staying within budget. 

To achieve this success project management must involve effective cost management.

This is particularly strategic for service companies, where pricing varies according to the billing method used. This calls for rigorous cost management. 

In this article, we propose a strategy to deploy and precise tools for optimized cost management. 

What is cost management? 

Definition

Cost management is a process that involves evaluating, budget and control project costs.

Implementing effective management is essential, as it enables us to establish the budget we need to respect to ensure the success of the project. 

Cost management must be planned from the outset start and monitored at everystage of its development.

Issues

Managing costs requires understanding the environment in which the project is evolving. This will enable us to establish a realistic budget.

What's more, it requires careful monitoring to ensure that the project is moving in the right direction. 

Why implement cost management on a project?

Anticipating risks

Controlled cost management helps to prevent cost escalation and budget overruns. So it's important to take a preventive approach and anticipate risks before they occur.

Corrective action could be more complex to implement, and less effective.

Fuelling decision-making

Cost management requires clear visibility of the project's finances : status of expenditure, remaining funds, forecasts...

All this information will facilitate decision-making thanks to greater visibility and transparency.

Maximizing profitability

Managing project costs also allows you to look at what is working and  what could be improved. Thus, implementing cost management also means optimizing costs to maximize profitability.

To achieve this, a number of factors need to be taken into account. Modifying resource planning and optimizing resources, as well as negotiating with customers, are relevant ways of improving cost management and profitability. 

Facilitate the planning of other projects within the company

The more history you gather, the easier it is to plan a project. By mastering cost management on one project, you pave the way for the next. 

In fact, it improves your knowledge of your teams, their work capacity and the effectiveness of your communication tools and methods.

In this way, you gain time and precision in preparing other projects with similar contexts within the company.

Step 1: Plan resource capacity

The first step in implementing effective cost management is resource capacity planning, i.e. identifying the resources needed for the project.

By resources we mean all the tools, financial resources, equipment and staff. 

A strategic step

As with any project, determining the human and material requirements is a crucial step. 

Human resources are costly and need to be anticipated. So it's vital to take them into account when estimating project costs.

Establish a resource planning plan

In this document, estimate the objectives to be reached, and how to achieve them: 

• Define your resource requirements
• Estimate the cost of each of them
• Identify your needs for specific durations

Use a dedicated tool

To carry out this planning work, a dedicated tool will prove to be your ally. 

Stafiz is an all-in-one solution that includes a resource planning function. 

This will help you to better estimate your needs and verify your resource capacities. You'll then be able to anticipate your recruitment plan and better dispatch your resources between your current and future projects.

Stage 2 of cost management: estimating project costs

Structuring a cost management plan

Preparing a Cost Management Plan allows you to determine : 

• Type of project expenditure: direct, indirect, fixed, variable, production, material, labor costs, etc.
• Expenditure for each resource
• Stakeholders in the project, who may have an impact on costs
• Tools used to manage costs

The budget is often different from the one foreseen at the start of the project. Anticipate unforeseen costs: leave a margin of 5 to 10%. 

Combine several methods to forecast project costs 

Estimating project costs is not an exact science. That said, you can gather a certain amount of information and combine forecasting techniques to try to arrive at the most accurate figure.

• The matrix method

This method consists of identifying the various project tasks and determining the costs per task. By adding up all the costs associated with each task, you obtain the overall cost.

• Bottom-up estimation

This method consists of obtaining information from teams in the field, whose role is operational. Their experience will give you a clearer picture of the time and costs associated with each task.

• Top-down estimation

Top-down estimation focuses on management's view. Management then defines a budget, based on available historical data, a benchmark of similar projects and alignment with strategic objectives.

• Use estimating tools

Using real-time expense tracking software such as Stafiz will also help you achieve your estimates. In fact, it offers a range of functions designed for project and portfolio management. For example, one of the features will enable you to analyze actual rather than anticipated sales rates, to make your forecasts as realistic as possible.

Use references

Access history of projects is an effective way of estimating your project budgets. However, this requires a reliable history of activity. Tools like Stafiz make this possible.

You can then seek to understand what has worked and what could be optimized. You can use estimation by analogy to compare projects of similar size, while being realistic in your projections.

Breaking down the project using the Work Breakdown Structure technique

The Work Breakdown Structure consists of cutting and hierarchizing a project into tasks and sub-tasks. Once these have been defined, you assign a collaborator to each of them.

By multiplying the hourly rate of each employee assigned to a task by the total estimated time, you can obtain an estimate of the salary cost of the whole.

Added to this are fixed costs such as premises, maintenance and service providers.

The Work Breakdown Structure is an effective method for estimating a project's budget. However, it requires a clear, well-defined project schedule and a precise list of expected deliverables. 

It should be noted that this solution is not easily compatible with an agile method, based on iteration and subject to change.

Stage 3 of cost management: controlling costs 

• The importance of cost control

Tracking costs is a crucial step in good cost management. You need to track and analyze expenses to avoid or at least limit any overruns.

However, there are regular discrepancies between forecast and actual without causing concern. In such cases, cost control should help you to understand the differences between actual costs and those originally forecast.

To rectify the situation, you need to find the cause of these discrepancies to get to the root of the problem.

• Use a tool to control costs

As with the previous steps, project cost management software will help you control costs. The dashboard, for example, highlights the various key indicators, enabling you to compare them and monitor progress.

Real-time monitoring

Stafiz offers a host of features for tracking costs, including real-time expense tracking. By regularly tracking variances between planned and target, you can fine-tune your budget and optimize your cost planning.

The progress curve is used to identify cost overruns:

The next step is to understand the reasons for deviations. Stafiz provides details by task, by team, by geography, by person, as well as a view by task and phase, making it easier to interpret the results.

Tracking landing costs

Landing cost tracking is one of the functions offered by Stafiz, which collects past and forecast costs in real time and automatically recalculates them.

Each time the data changes, the KPIs are recalculated in order to propose a version that meets your objectives. What's more, you can be alerted to potential deviations before they even occur.

• Track costs by project type

Cost management also depends on pricing implemented. This must be taken into account in the cost management plan.

We have identified two types of pricing.

Fixed-price project

Generally sold as a block, this type of project involves a fixed pricefor a precise expected result.

The risk is that production will exceed sales. This type of project therefore requires meticulous preparation and strong anticipation skills.

Project management

This type of project takes into account production billing. The risk here is of having to deal with a lot of customer relations, and of having to offer unbilled working days in order to maintain relations.

• Correcting the project's trajectory

Cost control alone is not enough: it must be accompanied by adjustment.

As the project progresses, so must the budget and costs. If the scope of the project changes, costs must be revised. You need to adjust the forecast expenditure schedule to take account of project contingencies. 

Stage 5 of cost management: closing and reporting costs

• Produce financial reports

The final step is to draw up financial reports. This provides a written record of the project's progress, facilitating decision-making and the preparation of future projects.

This involves reporting the most important elements in summary form. Using project cost management tools will make the task easier.

• Taking stock

Once the project is complete, draw up a balance sheet. This involves not only noting the differences between forecast and actual, but also studying profitability. 

Project cost management must enable productivity to be analyzed in order to determine the success of the project. 

The aim is to obtain a result close to those estimated at the start of the project: neither higher nor lower. An overestimate could jeopardize other company projects. On the other hand, an underestimate is a sign of incompetent estimating and can lead to a loss of credibility.

Last but not least, the assessment also provides the basis for future projects. A clear overview, with feedback and concrete proposals for optimization, is an important tool for preparing subsequent projects.