Cost management involves estimating, allocating, and controlling the costs of a project. A business can estimate how much a project will cost, reducing the chances of exceeding the budget. These costs are approved before the project begins.
During execution, all expenses are tracked to ensure that they align with the cost management plan. Once the project is over, the two figures, actual costs, and predicted costs are compared. The comparison serves as a benchmark for similar projects in the future.
Read on to find out what specific services are covered with cost management.
Steps Involved in Cost Management
Cost management is a continuous process but can be broken down into four services. Although these services are seemingly chronological, there is a possibility of overlapping, such as in cases where resource changes happen midway. Let’s explore the four services in detail.
1. Resource Planning
Resource planning is the first step in preparing a cost control plan. It involves identifying the resources a particular project requires from start to finish, including human resources and equipment.
Project managers need to have a work-breakdown structure ready to identify the resources. The work breakdown structure makes it easy for the project manager to determine which skills and equipment are needed for the successful completion of a given project.
2. Cost Estimation
Cost estimation involves quantifying the costs of resources outlined in step one. It includes a list of assumptions, potential risks, the price of each item, and industry benchmarks if any. Cost estimation is sometimes considered the most challenging service in cost management because it calls for utmost accuracy. There are also so many variables involved, such as inflation and the time value of money.
The good news is that many estimation models are available, which can help project managers minimize deviations between estimation and actual costs.
3. Cost Budgeting
Some people merge this service with cost estimation, but it can also be a function on its own. Ideally, budgeting refers to the process of allocating costs to parts of the project, such as individual tasks or modules. A budget should also include contingency funds to manage any unprecedented costs.
The budget is the baseline for evaluating the project cost performance. Budgeting is an important step since most projects rely on future cash flows for their funding.
4. Cost Control
Cost control involves checking whether there is a variation from the baseline. In case there is, the project manager takes action. The action could be allocating more money to the project or reducing the size of the project to remain within the predetermined budget.
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Benefits of Cost Management
Controlling costs is a way to expedite and streamline almost any project, regardless of its size. Let’s take a look at some of the benefits:
Preventing Overruns
Without a proper plan, you can easily spend more than your company can afford on a project. And even if the company might have the money, you might end up depleting resources for other projects or incur unnecessary debts. If done correctly, cost planning can even lower the expenses of a project. That is made possible by limiting how many various employees can spend, leaving you with enough money for other things.
Procurement Effectiveness
Part of cost management is looking at past project costs. Reviewing this data lets you quickly identify which vendors give you the most value for your money. You can then decide to work with those vendors and save the company some money.
Risk Handling
As we mentioned, a budget contains contingency funds. Therefore, with an effective plan, you can rest assured that your project will continue running even in unprecedented circumstances. That goes a long way in enabling you to complete the project on time.
Future Planning
Cost reports are a useful tool when it comes to future budgeting. Such a level of resource optimization immensely contributes to a company’s success with future plans and long-term results.
Using Tech for Cost Management
Technological advances have made it easier to prepare a good cost management plan. Project managers can use management software to manage numerical data and minimize the risk of human error.
Using management software also increases productivity since an artificially intelligent system can provide output in short amounts of time. That goes a long way in streamlining a company’s processes and allowing employees to focus on other aspects of the business.The use of technology also exposes a business to new risks. For instance, there is the risk of financial data leaking on the internet. Therefore, you have to incur the extra charges of ensuring information security. Cost management systems with cloud computing technology are more secure, giving you and your business more time to focus on completing projects rather than worrying about logistics and data security. Contact a cost management system today to begin making your projects more efficient.