What is Project Management Cost?

One of the most crucial aspects of Project Management is ensuring the costs are within the limits. The costs should initially be within the project budget framed. Nevertheless, even people taking Project Manager roles regularly struggle with effective project cost management. Right from the project planning phase, the project management faces hardships in resource allocation and ensuring the right cost control.

Definition of Project Cost Management

Are you wondering what cost management is in Project Management? If so, you should understand that project cost management is estimating, budgeting, and controlling costs throughout the project life cycle. The goal of a Project Manager should be to keep the project expenses within the approved budget. For a project to be called successful, it is essential that:

• Its quality of execution is of a high standard.
• It delivers on the scope and requirements of the project.
• It is completed within the budget and schedule.

So, project management costs are one of the pillars of project management. They are relevant regardless of the domain, be it construction, technology, retail, production, etc. They aid with the creation of a monetary foundation upon which project representatives can standardize the present status of their project's cost. Further, they can also reorganize the movement if required.

Objectives of Project Cost Management:

Now, you know what Project Management cost is. It is better to understand its objectives so that you can arrive at an informed decision:

• To evaluate the money required to perform duties and tasks associated with the project.
• To create a budget for the project and allocate funds based on the cost estimation results.
• To identify how much is spent on activities related to the project
• To motivate compliance to the budget created.
• To collect statistical data on real project expenses to inform decision-making.

When these objectives are achieved rightly, you can increase the chances of taking project costs under control. In turn, you can bring down the risk of loss and increase your employer's profit.

How Can Your Project Benefit from Cautious Cost Management?

Managing costs is an essential part of any project. The budget framed for the project can considerably affect the overall project goals. It will affect crucial decisions all through the project life cycle. It will also identify whether it is possible to meet the quality, delays, and scope of a project. If the expenses associated with the project are not consistent with these goals, the probability of deliverables failing will be higher. It can either underperform or overachieve what is expected by the client.

Controlling the cost will generate some crucial metrics. These metrics are referred to as Key Performance Indicators. They will help with keeping track of project progress and performance. In turn, communication with stakeholders will become easier. Even, it will aid with making sure that you and your team are moving in the right direction. 

In short, with Project Cost Management, you can:

• Ensure that your project sponsors and stakeholders clearly understand the key project requirements. 
• Ensure their consent to quality standards and requirements
• Keep an eye on the project's progress in real-time for better decision-making.
• Communicate clearly with stakeholders about the project's progress. This will ensure that the project moves according to their expectations.
• Track Key Performance Indicators like Return on Investment to evaluate and record the success of your decisions for forthcoming projects.

Know about Project Planning and the Triple Constraints:

The fundamental objective of any Project Manager is to attain the formulated project goals. He will also be particular about achieving the set goals within the budget, scope, and time frame of the project. These three restrictive parameters in any project are explained within the concept of the Triple Constraint Model. 

Based on this model, these three constraints are dependent on each other. A modification in any one of them can change the other two. For instance, let us consider that the scope of a project expands. When this happens, the effort and resources required for completing the project will increase. There will even be a resulting change in the overall cost and deadline of the project. 

This model has been used by Project Managers worldwide for more than half a century. Due to its many years of usage, it has become a practice standard in the long run. As fundamental as it is, the triangle schematically denotes the project boundaries that serve as the base for resource planning.

Also, check:Project Planning Steps

In the present competitive business world, it is crucial to remember the interdependence between project scope, cost, and time frame. The modern environment is quickly improving and turning out to be highly competitive. This makes managers jeopardize at each step and select between quality and affordability, profitability and stakeholder satisfaction, and speed and effectiveness. 

With this knowledge, you should remember one thing when completing the project quickly. You should bring down the overall volume of the tasks related to the project. Otherwise, you will have to invest more money in technology or in hiring skilled people. When you do not do one of these, the likelihood of not meeting the project deadline will be more. Even, it can affect the overall quality of the work.

Steps in Project Cost Management:

As a Project Manager, you should be aware of the steps involved in the project cost management process. Experts recommend that this process encompasses four steps. They are resource planning, estimation of cost, budgeting cost and controlling cost. Let us gather more details about these steps here:

1. Resource Planning:

You might be aware that resource management is all about planning, allocating, and scheduling the resources required for each stage of the project. It places high importance on the costs connected with each resource. 

Due to the complexity associated with this step, it is better to use a Work Breakdown Structure or WBS. It will provide clarity by simplifying the process. When you have WBS in place, you can identify what resources will be used to complete each item on the list. Even, it will help you identify the associated costs. You can also perform a cost-and-benefit analysis with it. When you engage in resource planning in project management, the tips given below can come in handy:

• You can consider historical data for reference like past efforts and schedules. 
• You can take feedback from team members and SMEs. A combined approach will work particularly in projects without past data.
• Evaluate the effect of time on resource requirements. For instance, a resource may be available only for a few months. When he goes away, there is a chance of the project being dragged away. In turn, it can affect cost estimation in project management.

2. Cost Estimation:

This step in the project cost management process involves quantifying the costs connected with all the required resources. You can estimate the cost only when you have the information given below:

• Data on the financial health of your company and reporting structures
• Industry benchmarks if any on project cost
• Past project costs
• Probable risks
• List of assumptions
• Duration for which each resource is required
• The cost involved with each resource can be anything from material cost per unit to the cost of procuring servers, the cost of hiring vendors, and staffing cost per hour.
• Resource requirements as identified in the previous step.

The thing to remember here is that estimation is undoubtedly the hardest step in the project cost management process. The reason is that you should do it accurately. Further, as a Project Manager, you must consider factors like the time value of money, inflation, overheads and variable and fixed costs. When there is a greater difference between the cost estimation and actual cost, the chances of project failure will be more. 

When discussing project cost estimation, you can follow one of the many available approaches. For instance, let us consider that you have a lot of historical data. In this case, you can choose the method called Analogous estimation. Even you have other options like Parametric Modeling or program evaluation and review techniques. These are mathematical techniques.

3. Cost Budgeting:

You can see cost budgeting as a portion of cost estimation. Even, you have the option to consider it as a separate process by itself. Budgeting is the process of allocation of costs to a particular chunk of the project. It can be anything like individual modules or tasks for a particular period of time. Budgets encompass contingency reserves allocated for the management of unexpected costs.

You can understand this concept better with an example. Let us consider that the total cost estimate for a project is $2 million. This project will run for three years. In this case, the Project Manager considers budgeting only for the first two quarters initially. He does it as budget allocation is a function of time. For this period, he estimates that it would cost around $35,000 with the help of WBS and some estimation methods discussed above.

The good thing about budgeting is that it can function as a project's baseline cost. Based on it, you can measure and judge project cost performance on an ongoing basis.

4. Cost Control:

This step involves measuring cost differences from the baseline. The Project Manager does not stop with measuring but will take suitable actions like reducing the work scope, increasing the budget, etc.  This step is an ongoing process, and as a project manager, you should do it throughout the project lifecycle. The focus here is much on clear and timely reporting.

Now that you understand project cost management and its importance, and you are aware of the process involved in doing it, you can start planning accordingly. 

Conclusion:

In conclusion, effective project cost management is crucial for ensuring the success of any project. It involves estimating, budgeting, and controlling costs throughout the project life cycle. Project managers can ensure that projects stay within approved budgets and timelines by evaluating expenses, creating budgets, and monitoring spending. Moreover, managing costs allows for better decision-making, risk reduction, and stakeholder satisfaction. Through careful resource planning, cost estimation, budgeting, and ongoing cost control, project managers can mitigate financial risks and increase the likelihood of project success. With a solid understanding of project cost management principles and processes, project managers can navigate complex projects with confidence and achieve their desired outcomes. Simpliaxis offers Project Management Courses, providing individuals with the necessary skills and knowledge to excel in managing project costs effectively and efficiently.