Solved: Project Cost Management Like A Pro

Solved: Project Cost Management Like A Pro

Effective cost management is a prime determinant of project outcome.

Since project success is measured in part by its cost performance, cost management is at the heart of enterprise performance management, as it represents the bottom line.

So what is project cost management?

What is project cost management?

Project cost management is a series of activities covering the full life cycle of a project from the initial planning and estimation to the managing and controlling of costs in order to deliver the output within the approved budget.

When done well, project cost management propels business performance by determining drivers of cost and profitability, and improving resource alignment.

Yet, according to a 2016 report by the Project Management Institute (PMI), companies completed only 53 percent of projects within their original budget.

In this article, we will delve into the essential components of project cost management. 

Throughout our five step discussion, we will cover the three key components, Project Cost Estimating, Project Cost Budgeting and Project Cost Control, while also linking the overall discussion to profitability.​


1

Setting up Your Project Budget for Success

Cost Estimating, the estimating techniques used to determine the total cost of completing a project, can be done in numerous ways. Methodologies range from conceptual techniques which rely heavily on historical experience and expert judgment to determinative techniques which derive estimations on a component-by-component basis.

Regardless of the process, setting up your project budget cannot be done in a vacuum. It is a multifaceted endeavour that considers factors such as time allocation, human capital, available technology and historical data.

It is virtually impossible to consider all aspects of the project without using past data that is available to you through past planning and captured processes. Therefore, information is gold!

Data enhances the calculation of the financial parameters by helping you determine appropriate, achievable goals, while also giving you a fair idea of how much of the unexpected you should be prepared for.

Allocation management tools take the guesswork out of setting up your project budget by including data on factors such as budget and time burndown, leverage and accuracy of resources and allocations over time. These tools often provide detailed project reports to help you address common concerns like:

  • How to determine the right resources that are available on your team
  • How to streamline process times spent on any one task 
  • How to use previous project data to create accurate budgets

Using such a tool equips you with the necessary information to most efficiently implement the project by identifying phases, concepts, and factors which play into the progress of the project and thus the costs associated with these processes. Using these methods and tools can identify faults and identify evolving issues that may delay the project and therefore increase the cost of implementation.

In some situations, predictive analytics can provide enough information to minimize the resources necessary to complete the project allowing for its completion on time and below budget.

Having the ability to identify inefficiencies, leverage data and plan for the unknown is easier when you can use historical information to budget properly which, in turn, increases profitability.

2

Set Goals Up front and Get Total Team Buy-in

For companies, project cost management success relies heavily on the ability to manage team member expectations, while also pursuing a calibrated approach to all projects within the portfolio.


Having established the budget, it’s a good idea to begin the project with a kickoff meeting so that the entire team has a clear idea of their individual roles and responsibilities from the start.

During this time, you will define the deliverables, i.e. the product or service that will be delivered to your client. Depending on the type of organization and client, the deliverable may be a finished product, a written report, a streamlined program or another function required by the project plan.


Not only is this kickoff meeting a time for goal-setting and defining expectations, it is a chance to foster a sense of self-governance, self-organization and accountability. Given that teamwork is a vital component of project success, ensuring that your staff are motivated to collaborate is essential.

So, how can you establish employee buy-in?

First, you clearly identify why each individual was specifically chosen to be a part of the team. By informing each person of the specific contributions he or she brings to the table, you instill a sense of pride and purpose which is a necessary component of encouraging employee buy-in.

Keep in mind that there might be some barriers to generating buy-in. Perhaps there are individuals on the team who prefer to work by themselves. Others may have experienced difficulties in previous group-based settings. Others may find the social aspect to be a distraction.

Considering these factors, it would serve you well to make the following points known:

  • Emphasize open-mindedness. It is not uncommon for individuals in group settings to have belief, attitudes and communication styles that are in conflict with each other. Advise them to respect differing perspectives while reminding them not to make snap judgments.
  • Emphasize the importance of the task at hand. Suggest ways they can prioritize it within their current project schedule while also clearly identifying ways they can seek further assistance should they need it. 
  • Emphasize team goals and individual actions that can be taken to contribute to that goal. Do this by briefing them as much as is possible on their teammates, the assignment and ways to maximize the experience.

Why is this stage particularly important?

Goal-setting and team buy-in facilitates the completion of the project within the allocated time-frame, an important factor in billable organizations where the adage “time is money” rings true.

3

Set Up A Work Breakdown Structure and a Reporting Schedule

To further the adherence to the established goals, managers can utilize a Work Breakdown Structure (WBS) to divide the project into smaller, more manageable tasks.

According to the Project Management Body of Knowledge (PMBOK 5), the work breakdown structure is a stratified division of the total scope of work to be done by the team to reach the project targets and produce the required deliverables.

Not only does a WBS provide a framework for schedule development and control, it also lays the foundation for detailed cost estimating and control as projects are reduced into constituent parts to which time, cost, risk, and other values can be assigned. As these project resources are designated, project accounting can track the project’s income and expenses so that at each step, the project manager will be aware of the project’s profitability.

After breaking down the project into more manageable tasks, your next step is to set up a reporting schedule. This ensures the timeliness of production by using established due dates to systematize the frequency and character of reports to be submitted for review by management.

A standard reporting schedule delineates:

  • Which reports should be generated during the project’s life (titles and purposes)
  • Who is responsible for generating specific reports
  • Due dates for when each report should be generated
  • Whom the reports should be sent to
  • Specified formats in which the reports should be developed
  • Breadth of knowledge and issues to be addressed in each report

The reporting schedule can be devised during the goal-setting phase and must be clearly communicated to all team members so that they are well aware of how the project progress should be reported. This system is crucial to project governance and the project controlling process as it ensures the project targets are being met by regularly tracking and gauging progress to identify variances from the plan.​

4

Monitor Project Data to Ensure Productivity

As the project progresses, it is imperative that management monitor development by analyzing data on factors such as:

  • Project Team Productivity Data
  • Resources and Materials Consumption Data
  • Accuracy of planning
  • Utilization of workforce (related to project)Time Tracking data of people working on the project
  • Project burndown data (real-time burn analysis)

By doing so, you will be able to recognize any deviations from the plan and put systems in place to rectify the situation.

Project Team Productivity Data

In order to measure team member productivity, you must have access to data on individual employee productivity for tasks similar to those required by the current project. This goes beyond general time estimates of how long it takes to accomplish certain tasks and requires continuous, unobtrusive observations of the rate of task completion. With this data, managers can estimate average productivity, as well as minimum and maximum productivity levels.

Allocable’s Productivity Analytics software enables you to measure team progress, estimate time-to-completion of team assignments using the cumulative productivity of each employee, and calculate completion time for the entire project.

One thing to recognize is the potential discomfort employees may feel towards the detailed monitoring of their task progress. Reassure them of the benefits of time-tracking while reminding them that this measure enables you to set reasonable goals for future projects, which in turn leads to higher success rates, and fewer project cancellations.

Resources and Materials Consumption Data

Perhaps the easiest set of data to track is the rate of resources and material consumption. Using information from previous projects will help you determine costs associated with anticipated, requested, used and leftover resources and materials.

By tracking and monitoring this data, you can identify which areas are prone to overspending and take corrective action. Whether it be a particular resource, labor, or tool, knowing this will give you a clearer idea of which areas require better planning.

5

Identify Issues and Complete a Risk Assessment

Even the most meticulously planned projects are prone to error and failure. As such, project managers must be prepared to adjust course when there are any deviances from the budget, available resources and/or expected execution of deliverables.

This is known as cost control, a series of activities concerned with comparing budget expectations to actual results in the hopes of identifying and reducing business expenses to increase profitability.

The importance of cost control provides visibility into the state of a project, and in doing so, they make it easier for decision-makers to uncover issues before they lead to overruns that cut into profits.

This entails the following:

  • Monitoring Cost Performance: generating performance reports that outline current performance and forecast whether or not the project will be completed on budget.
  • Reviewing Changes: Amending the cost baseline to reflect all cost-related changes, and informing the project shareholders about said changes.
  • Actual Costs versus Budgeted Costs: Upon milestone and entire project completion, examining the variances between actual costs and budgeted costs. Responses to the cost management plan will depend on the magnitude of the variance and the stage of the plan - this could range from a discussion to changes in the project scope that reduce costs.
  • Reserve Analysis: Depending on the likelihood and magnitudes of risk, project managers may need to conduct a reserve analysis to apportion contingency funds to the necessary areas.

Project Cost Management Conclusion


While factors such as time and available resources are significant, a project’s ultimate success or failure depends on the team’s ability to optimize outputs within the allocated budget and stay knowledgeable about relevant key project data in real-time.

In short, proper cost management enables project managers to preserve margins and ensure profitability by evaluating, optimizing, and controlling all aspects of project cost management including:

    • Planning task-based and team-based costs
    • Monitoring all project costs to ensure their alignment with the forecasted budget
    • Tracking actual project team productivity to accurately estimate billable hours

It is essential to find the best tool to help you plan, track, and manage project costs.

    Project Cost Management Software

    Allocable Business Intelligence Software enables organizations and teams to work better by incorporating time tracking data with people and projects to visualize the past, present and future health of a single project or the whole business in minutes.

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Allocable is a cloud-based automated time tracking and business intelligence (BI) software platform that provides  a complete visualization of your workforce and project productivity data empowering you to turn information into actionable insight to optimize and forecast performance with more certainty.

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