Project cost management – what it is, how to do it well
Last updated on
January 3, 2020
Project cost management (PCM) is framework teams use to determine all sorts of money-related data, from building a budget to breaking down project cost variables. Acting as a powerful budgeting lens, it helps project managers check stock throughout a project’s lifecycle and control costs effectively. Essentially, if you’re interested in improving your profitability – setting better rates and running more economical projects – you’ll want to get on PCM. Here’s what you need to know.
Why you need project cost management
PCM is key to staying on budget, and not putting it in place can be potentially harmful for business. Research from the Project Management Institute showed that companies only completed 53% of projects within their original budget in 2016. When you zoom into just the IT sector, the picture’s even bleaker – 1 in 6 projects see a budget overrun of 200%. Clearly, something about our budgeting isn’t working.
While not necessarily the entire solution, PCM can do a great deal to keep projects on-budget. It can help businesses understand:
Which areas of the project generate the most ROI
Which tasks are limit project profits
How different tasks eat into your budget
Whether projects are actually profitable or unprofitable
Where to charge more for your work
What different clients cost you
When scoping out budgets, project managers will estimate costs. Expenses against these will then be tracked once a project is live to stay within the cost management plan. Once the project is finished, predicted vs actual costs can be gauged, and you can cross-reference where and why any overspending happened. This analysis can then help you create more precise benchmarks for future cost management plans.
Understanding project costs
Before diving into how project cost management actually works, you first need to identify the different kinds of costs associated with your project – remembering that a good project rate will need to cover all of them. There are different metrics for the kinds of costs incurred in a project, and it’s important to substantiate them when relaying budgeting data to project stakeholders and quoting them in your PCM plan. These include:
The type of costs that are static and don’t fluctuate throughout a project’s lifecycle, such as buying a one-time software license or a fixed tool subscription.
These are the opposite of fixed costs and are dependent on how long your project runs for. Renting a space for your project and travel expenses to meet the client will accumulate for as long as the project goes on for, and so are listed as ‘variable’.
Direct costs are the type of expenses which are directly linked to the project budget. If you’ve outsourced some of your work to a contractor, they’ll put in a specific amount of time, which is then billed for. Those salaries are then cited as direct costs.
Indirect costs go beyond the expenses associated with a particular project to include the price of maintaining the entire company. These overhead costs are the ones remaining after direct costs have been computed, and are sometimes referred to as the ‘real’ costs of doing business – like office supplies, internal coordination, overhead spent on essential admin and client communication.
It’s vital you remember not all costs are created equal: most rely on good timekeeping and team communication to ultimately avoid going over-budget.
Project cost management has three essential stages: estimating, budgeting and control. Together, these steps help you build out a robust and self-referential plan for managing project profitability.
Step 1: Estimating
Before you start a new project, you need to estimate how much it will cost you. Take into account all the resources needed to fulfil the project, from obvious requirements like people and hours, to less definite ones like ad-hoc problem-solving. We recommend using analogous estimates – reviewing previous project spending to understand potential costs, rather than blindly predicting them. As long as you have a realistic and accounted-for understanding of costs, you’ll be able to draw up an accurate budget.
Once you have an estimate for the costs involved, you can create your project's cost baseline, which creates the grounds for your budget. The cost baseline for your project is made by combining the cost estimates of the individual activities over your project’s lifecycle. Then, your project's overall expenditures will be measured against this baseline.
Step 3: Control
With an approved budget and baseline, you can move onto execution. Here, you’ll need to monitor task direction and check if there’s any deviation to the plan or scope of work, as it’ll likely create cost impacts. For example, if there’s a delay in obtaining an in-house designer due to resource planning issues, you may need to bide time by hiring a freelancer short-term to get design work started. This is why it’s especially important to stay in the loop with traffic managers, external agencies and senior managers – keeping project communication above water will help curb diversions and prevent budget inflation.
Cost management might seem a bit hard to digest at first, but it’s made a lot simpler using a tool that can extract and display project budget data for you. Automatic project trackers – like Timely’s project management tool – are a good place to start.
They highlight where project hours are being absorbed to help you ensure nothing is deviating from your original project scope – like spending more time on development or testing than anticipated. Real-time budget tracking is also extremely useful, especially for keeping on top of important budget milestones, like when you’re halfway through your budget. You can even assign tracked project work with specific tags to help quantify all your different “real” costs, like the time spent on client email, meetings, internal coordination and project management itself.