What is project cost management?

When it comes to project management, there are few things more important than keeping costs under control. Especially when a project is complicated, expenses can send your costs skyrocketing more quickly than you expect. Project managers need to take a proactive approach to cost management in order to keep their budgets on track.

Cost management, defined

Cost management is the process of estimating, budgeting, and controlling project costs. The cost management process begins during the planning phase and continues throughout the duration of the project as managers continuously review, monitor, and adjust expenditures to ensure the project doesn't go over the approved budget.

4 functions of cost management

Cost management is a continuous, fluid process. However, there are four main elements or functions that can be found in any cost management plan:

1. Resource planning

2. Cost estimating

3. Cost budgeting

4. Cost control

Because new expenses can appear and project scope can be adjusted, cost managers need to be prepared to perform all four functions at any time throughout the project life cycle. Your workflow will vary according to the project’s needs.

Here, we'll break down each of the four elements in greater detail and explain what is required from the cost manager at each stage.

Resource planning

The very first step in any cost management process is resource planning, which is when the cost manager reviews the project's scope and specs to figure out what resources the project will require.

A resource is anything that helps you complete a project—including tools, money, time, equipment, and even team members. To create the most accurate resource plan as possible, consult directly with team leads and stakeholders about what resources they will need during the project. People with hands-on experience in each project department will have a better understanding of what resources will be required. 

For this step, 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

Cost estimating

Once you have a list of necessary resources, the next step is to estimate what it will cost to procure them. The key to this step is to gather as much pricing information as possible so that you can make informed cost estimates.

For tangible resources like tools, supplies, and equipment, get real price quotes from sellers to inform your cost estimate. For labor costs, get multiple price quotes from potential contractors to help give you a realistic idea of what the work you require will actually cost. Keep in mind that some time may pass between when you make your estimate and when these items will be purchased, so you should build in some room in case prices rise. 

In addition to building in cushion on each individual cost, you'll also need to add a buffer of 5-10% on your cost total to account for unexpected expenses. If this is your first time working with this project team, find out if the previous cost manager generated budget reports at the end of past projects. 

You can take a look at how much previous projects' final costs deviated from their initial estimates and use this cost data as a benchmark to estimate how much of a margin you need to build into your estimation report.

In the estimation stage, you'll need:

• Project schedule or a PERT chart, depending on the complexity of the project

• A list of your project deliverables

• Clearly defined success metrics

Cost 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 specify cost allocations so 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.

In this stage, you'll need:

• A project budget document 

• A project stakeholder analysis

Cost control

The bulk of the cost management process is made up of cost control. This is the process of recording and accounting costs as the project progresses, and making adjustments and alerting stakeholders to problems when they occur. The goal of the cost control step is to compare actual project costs with original budgets and estimates and take steps to make sure the project stays as close to plan as possible.

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.

In this stage, you'll need:

• Project management tool

• Universal reporting tool

Post-project cost accounting

Once the project is over, it’s time to calculate cost variance and evaluate how far your project deviated from your original budget and estimates. What were the project’s total costs? How did your actual costs compare to your estimated costs? 

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.

Improve your project performance with cost management

Cost management has a lot of moving parts. But as long as your team has visibility into project costs, you can prevent cost overrun and ensure you’re finishing your project under budget, every time.