New to cost management? Start here.
Summary
Effectively estimate, budget, and manage project costs with cost management. In this article, we take a look at the 6 steps of cost management, as well as the pros and cons of this process. Use cost management on your next project to stay within your project budget every time.
Accurately estimating and monitoring your project budget is one of the best ways to set your project up for success from the very start. This process is known as cost management—six steps to help you define and stay on budget for the duration of your project. In this guide, we’ll go over the cost management process and how you can implement this process on your next project.
What is cost management?
Cost management is the process of estimating, budgeting, and controlling project costs. Typically the cost management process begins during the project initiation and planning phases . During the course of the project lifecycle, project managers review and monitor the project’s costs to ensure it doesn’t go over the approved budget.
Once the project is finished, the project manager evaluates the actual costs vs. the cost estimates to collect any lessons learned from the project. This can help with forecasting and benchmarking on future projects.
Why cost management matters
Cost management is a critical part of the project planning and project management process. With effective cost management, you can create more accurate project plans, develop a better understanding of project constraints, and prevent scope creep further down the line.
Create accurate project plans
Cost management helps with two critical parts of the project planning process : cost estimating and cost control. Knowing how to accurately estimate a project’s budget is a critical project management skill .
Typically, a project budget will be one of the first things you define. Depending on your organization, this may even be something you define during the project charter in order to pitch the project. That’s because without a project budget, you aren’t able to accurately allocate resources to confidently hit your project goals.
Understand project constraints
Cost is one of the three elements of the project management triangle (sometimes called the triple constraints or the iron triangle): cost, scope, and time. Just because cost is one of the three project constraints doesn’t mean you can’t increase cost—but it’s important to be aware that increasing cost impacts scope and time, and vice versa.
Prevent scope creep
Staying on budget is a key element of whether or not a project is on track. This prevents cost overruns, which can derail a project and lead to scope creep . Once the project begins, the cost control process can help you keep track of project budgets and ensure you don’t go over budget—or quickly course correct if you do.
Like many elements of project risk management , cost management is proactive instead of reactive. The goal isn’t to evaluate project performance after the fact, but rather to judge cost performance as the project is in flight.
6 steps to cost management
There are six steps to building your cost management plan:
1. Resourcing
Before you can identify project costs, you first need a sense of the resources you’ll need for the project. Understanding your project resourcing needs helps you estimate how much time, effort, and money you’ll spend during your project.
A is anything that helps you complete a project—including tools, money, time, equipment, and even team members. It’s okay if you don’t know exactly every detail during this first phase. The goal of the resourcing step in cost management is to get a ballpark estimate of the resources—and as a result, the costs—you’ll need for your project. Later, a clear resource management plan will help you with resource allocation once the project actually starts.
You’ll need:
Clearly defined project objectives
A high-level project roadmap or a work breakdown structure (WBS) , depending on the complexity of the project
A tentative resource management plan
A project scope statement
2. Estimating
During the cost estimation stage, you will estimate the costs associated with each resource in order to arrive at your eventual project budget. You can use a past project as a benchmark if you have one—or you can try to estimate costs based on your resource management plan.
Essentially, during the estimating phase you’re answering one key question: How much will it cost to achieve your project goals? Keep in mind that there may be unexpected costs, so expect to build in a 5-10% buffer for any estimations.
You’ll need everything from the previous step, along with a:
Project schedule (or a PERT chart for more complex projects)
List of your project deliverables
Clearly defined success metrics
Like the first stage of cost management, you will need to estimate costs before you’ve gotten approval for your project. Depending on the complexity of your project, you may want to create more than one project budget estimate with different resource costs or final deliverables, based on what you think your project sponsor and executive stakeholders will approve. Always keep in mind that these estimations may change.
Once you’ve estimated your costs, create a project charter or business case to pitch your project and get the ball rolling. Note that you haven’t finished the cost management process yet, but you don’t want to do all of this for nothing.
3. Budgeting
Now that you have general estimates for your project needs and resource requirements, you can begin to work on your project budget. Your project budget is a detailed plan of how much you plan to spend during the project, for what, and by when.
Depending on the complexity of your project, the “when” may significantly influence your cost management strategy. For multi-year projects, you may want to clarify that no more than 30% of your budget should be spent in the first year, etc. This can prevent cost overruns later down the road.
You’ll need everything from the previous steps, along with a:
Clear project budget
Project stakeholder analysis
4. Kicking off
While not directly part of the cost management process, this is the stage when you launch your project. Make sure you’ve finalized your project budget, and go into as much detail as you need to in order to be successful. Plan to share all of this information with your project stakeholders during your project kickoff meeting .
You’ll need everything from the previous steps, along with a:
Project timeline , along with any project milestones
5. Controlling costs
The bulk of the cost management process happens during step five—the cost control phase. Once your project has launched, cost accounting is critical to help you avoid overrunning your budget. Keep track of how you’re spending your project budget to ensure you don’t need to take any corrective action. This is the part where you control costs, if necessary, by adjusting the project mid-flight.
The frequency with which you review this will depend on your project. Sometimes you’ll want to review costs in real time. In other cases, you may check in monthly or even quarterly. Share cost updates as necessary through project status reports so the entire project team is on the same page.
Keep in mind that any changes to the project scope will impact the project budget and costs, so keep a close eye on scope creep. If the project cost deviates too much from what you budgeted, let your stakeholders know so you can proactively come up with an action plan.
You’ll need everything from the previous steps, along with a:
Universal reporting tool
6. Identifying cost variance
Once the project is over, it’s time to evaluate how you did. What were the project’s total costs? How did your actual costs compare to your estimated costs?
Keep in mind—you don’t want to be too far off in either direction. A successful project ends close to (but under) the forecasted project budget. If you spent too much money, you either underestimated your project budget or had too many unforeseen expenses. If this happens, hold a project post mortem meeting to evaluate why that happened and prevent it from happening in the future.
On the flipside, spending too little of your budget is also not ideal. You estimated these costs for a reason, and if you came in significantly under budget, your cost budgeting process was inaccurate. Log this information as historical data and keep it in mind for future projects, so you can increase your accuracy during the cost estimation phase.
The benefits and challenges of cost management
When done correctly, cost management can help you improve your project planning process and prevent project risks further down the road. There are some key benefits of effective cost management—as well as major drawbacks to watch out for.
Benefits of cost management
Some of the benefits of cost management include:
Prevent cost overrun. The most obvious benefit of cost management is that it helps you manage project costs. Use this process to ensure you aren’t spending too much of your budget. This level of preparation and visibility gives you a clear sense of the budget you have available and how you’ll be spending it.
Level set stakeholder expectations. If everyone understands the budget, it can help prevent scope creep. Stakeholders will be less likely to ask for project changes because they’ll have a clearer sense of how those changes impact the budget. If you do need to make significant changes, you can incorporate your cost management plan into the change control process to mitigate any negative effects to the project’s overall timeline.
Prevent project risk : Part of the cost management process is building risk allowance into your project budget. This is typically 5-10% of your project budget, which you can use to deal with any unforeseen or unexpected costs. If you’re new to cost management, aim for about 10% risk allowance—as you improve your cost management practice, your baseline will become more accurate, so you can reduce to 5% risk allowance.
Simplify future planning: Once you go through the cost management process a few times on a few different projects, you’ll get better at resource planning in the future. Getting experience with the cost management process gives you a sense for how budgeting and resource optimization influence one another, making the process easier (and more accurate) over time.
Common cost management challenges (and how to overcome them)
Cost management isn’t without its downsides. Take a look at the two major downsides of cost management—and how to prevent them.
Not having a large enough project budget can make it hard to accurately staff the project and complete the deliverables.
Solution: Make sure your budget is realistic. If necessary, build your project budget proposal into your project charter or business case, and pitch for the budget you need. Clearly explain why the budget is important, and what resources are critical for project success.
Getting cost estimates wrong can set your project off track before it even begins.
Solution: Make sure you understand the scope of your project before beginning the cost estimation process. Keep in mind that the three project constraints are connected: time, scope, and cost. If you want to decrease costs, you may need to increase the timeline, or reduce the scope. If you don’t want to do that, you’ll need to increase the costs to confidently achieve the full project scope.
Stay within your project budget with cost management
Cost management has a lot of moving parts. As a result, your team needs visibility to prevent cost overrun and ensure you’re finishing your project under budget, every time. To keep track of all of your project’s information, use a work management platform like UDN Task Manager . From project costing and kickoff to post-mortem, UDN Task Manager helps you stay in sync with your project team members and stakeholders during the entire project process.
