Within any kind of significant business project or collaboration, one of the single most important areas to keep an eye on throughout the process is cost management. From laying out planned costs to adjusting based on needs and much more, cost management is absolutely vital for the ultimate success of any project.
At Iris Systems, our project and team and collaboration software allows for strong communication and connections between people on any project, whether it’s for secured communications like police or government projects or any other type. What exactly is cost management, what are some of its key tenets, and what should you be including in your cost management plan for any upcoming project? Here’s a layout.
What is Cost Management?
As the name indicates, cost management is all about managing the costs associated with a project. This can include anything from the initial estimation of how much a project will cost to on-the-fly adjustments as different aspects of the project come up.
There are many factors that go into cost management, but at its core, cost management is about making sure that a project stays within its budget. This means not only estimating costs correctly in the first place, but also being able to track and manage costs as the project progresses.
There are many different approaches to cost management, but one of the most popular is known as earned value management (EVM). EVM is a process that uses earned value data to help assess whether a project is on track, over budget, or under budget.
EVM is a great tool for cost management because it allows you to see not only where you are in terms of costs, but also how your costs compare to the original estimates. This can help you make decisions about whether or not to continue with a project, and if so, how to adjust the budget.
Key Tenets of Cost Management
There are a few key tenets of cost management that you should keep in mind when planning and executing any project:
- Resource planning: Generally the first phase of any project, resource planning is all about estimating how many people, materials, and other resources will be required to complete the project. This is a vital step in cost management because it sets the foundation for the rest of the budget. Resource planning will include broad elements like the scope of work, as well as more specific elements like the number of man-hours required.
- Cost estimating: Next up, cost estimating is the process of putting a price tag on all of the resources that have been identified in the resource planning phase. This step is important because it allows you to understand how much each element of the project will cost, and also identify any potential areas where costs could increase.
- Budgeting: Once you have an understanding of the costs associated with the project, you can begin to create a budget. The budget is a key tool in cost management because it provides a way to track and control costs. A well-crafted budget will include all of the estimated costs from the cost estimating phase, as well as contingency plans for unexpected costs.
- Cost control: The job is not finished when you’ve completed your initial budget. In fact, cost control is an ongoing process that should be monitored throughout the life of the project. Cost control involves tracking actual costs against the budget, and taking action to keep the project on track. This may include making adjustments to the budget, as well as re-negotiating contracts or changing scope.
What to Include in Your Cost Management Plan
Here are some important elements that should be included in most cost management plans:
- The estimation method: There are a few different methods that can be used to estimate project costs. The most important thing is to be consistent with the method you use, and to document the method in your cost management plan.
- Units of measurement: This may sound simple, but you’d be surprised by how often units of measurement are forgotten in cost management plans. Make sure to include the units of measurement that will be used for all costs, so that there is no confusion later on.
- Cost categories: Cost management plans should also include a list of all the different cost categories that will be used. This should include everything from direct costs (like materials and labor) to indirect costs (like overhead).
- Cost baseline: Another term for the spending limit or budget, the cost baseline is a key element of any cost management plan. The cost baseline should be approved by all stakeholders before the project begins, and should be used as a reference point throughout the project.
- Cost variances: Another important part of cost management is tracking variances. A variance is simply the difference between the actual costs and the budgeted costs. Variances should be tracked and reported on a regular basis, so that corrective action can be taken if necessary.
- Cost control thresholds: You should also include cost control thresholds in your cost management plan. A cost control threshold is the point at which the variance between actual and budgeted costs becomes unacceptable. This will vary from project to project, but should be clearly defined upfront.
- Reporting: Finally, don’t forget to include a reporting schedule in your cost management plan. This will ensure that all stakeholders are kept up to date on the project’s progress, and can take action if necessary.
There you have it! These are the basics of cost management for any project. By following these steps, you can ensure that your project stays on track and within budget.
For more on this, or to learn about any of our project collaboration solutions, speak to the team at Iris Systems today.