Cost control is an essential part of any financial strategy. When monitoring your company’s finances, how can you stay within budget?
Just like personal budgeting, you can do a variety of things, like categorize spending, determine areas where your team spends the most money, and find ways to limit spending in each area. Successfully doing all these things is what controls the budget and increases profits.
The basic principles of cost control are similar for corporate and personal budgets. In this article, we’ll explain what cost control is and how cost control fits into the cost management system.
Cost control involves identifying and reducing expenses to increase company profits. Cost control can occur at the project level or company wide. Here, we'll focus on how you can apply the cost control process to a project or group of projects.
As a project manager, you’ll use cost control to monitor your resource management plan and take action when you notice overspending.
A reporting tool can also be helpful to identify when you exceed your project budget. Say the freelance designer you brought on to a new project took much longer than expected to edit images. Once you identify this cost, you may decide to hire an in-house designer on your next project to reduce costs and drive efficiency.Create a project estimation template
Does your team have a hard time staying within scope or budget? This is where cost control comes into play. Even if your team does stay within budget, cost control can help you reduce your budget further, which will lead to an increase in income.
It provides insight into the company’s overall spending by showing what areas cost the most within the business and what expenses occur within those areas. Cost control may first occur at the project level to reduce individual project costs in hopes that the company can increase overall profits.Read: Project accounting: How to weight project cost-benefits
Cost control may initially happen at higher levels within the company, but it often moves forward at the project level. The project level is where you can assess actual costs per project and manage those costs effectively.
To become better at controlling costs within your company, try these five steps:
The first step is to plan your budget so you can get granular with your cost estimations and effectively allocate resources. Making a detailed project plan will result in lower cost variances—or fewer differences between your initial budget and actual spending.
As you plan your budget, include:
Number of team members needed for the project
Estimated time the project will take to complete
Materials needed for the project
When calculating the time and materials needed for the project, try to give your budget some room to expand if needed. There’s always a chance that unexpected project risks will occur and you’ll need to extend your project timeline or request additional resources.Read: How to create (and stick with) a project budget
The next step to project cost control is to monitor project expenditures as they occur. It’s easier to take corrective action if you notice cost variances in real time. If you don’t notice you’ve gone over budget until the project is complete, then you’ve already spent the money. At that point, all you can do is use the information as a lesson for future projects.
A good way to monitor your expenses during a project is to set project milestones. At each milestone, you can assess your spending and ensure the project is staying within scope. Then, if you notice cost overruns at any given milestone, you can determine how to reduce costs moving forward.Read: How an expense report template can improve cost control (with examples)
It's important to set clear project objectives during the project planning stage, but to ensure you hit those objectives, you may need a change control process.
Change control is a set of steps that manage any changes that come through from stakeholders while a project is in progress. This helps prevent scope creep because you can be prepared for changes as they occur and adjust the project accordingly.
Steps for setting up a change control system include:
Initiation: The change control process begins when a stakeholder requests a change to the project. The actual request might vary—they can range from timeline extensions to new project deliverables.
Assessment: The project manager or department lead reviews the request for basic information, such as the resources needed, the impact of the request, and who the request should be passed on to. If the change request passes the initial assessment, it moves on to the analysis phase.
Analysis: The analysis phase is where the appropriate project lead approves or denies the request. In some cases, there may be a change control board in control of any change approvals. The project lead approves or declines the request, and notifies the team. Depending on the size of the project, the project lead may also document the change on a change log to ensure all project stakeholders are aware.
Implementation: Implementing a change will look different depending on what stage the project is in, but it usually consists of updating project timelines and deliverables, as well as informing the project team. You should evaluate the project scope to ensure any timeline changes won’t have a huge impact on projected goals.
Closure: Once you’ve documented, disseminated, and implemented the request, it is ready to be closed. It’s helpful to have a formal closure plan in place so that all team members know where information is stored and can reference it in the future.
When you properly control changes to your projects, you have a better chance of controlling costs as well. Accurately forecasting a project’s budget and success requires careful management from start to finish. There will always be inevitable hiccups along the way, but having systems in place to prepare for these deviations can be crucial.
Time management is an important cost control method because when the total time of a project increases, the total cost of the project also increases. Staying within your estimated project schedule is one of the best ways to stay within project budget.
Implement time management strategies to increase productivity and help team members finish their work on time and on budget.
Some time management tips include:
Timeboxing: Timeboxing is a goal-oriented time management strategy where you complete work within “timeboxes.” For example, if you need to write a blog post, you might create a two-hour timebox to write an outline. Then after taking a break, you can create another three-hour timebox to begin the first draft.
Time blocking: Time blocking is similar to timeboxing, but instead of scheduling specific time for each individual task, you’ll practice blocking off set periods of your calendar for related work.
Pomodoro method: Similar to timeboxing and time blocking, the Pomodoro method helps you tackle work within short time frames and then take breaks between working sessions. Work for 25 minutes and then take a five minute break four times. Then, after the fourth working session, take a longer 20- or 30-minute break.
Eat the frog: Mark Twain famously said, “If it’s your job to eat a frog, it’s best to do it first thing in the morning.” The eat the frog time management strategy takes inspiration from this quote and encourages you to tackle big or complex tasks first before working on your less important or less urgent work.
Pareto principle: Often called the “80/20 rule,” the Pareto principle has one fundamental rule: Spend 20% of your time on 80% of your work. If you can get 80% of your tasks out of the way in relatively quick order, you free up your workday to tackle the 20% of your work that will take 80% of your time.
Getting things done (GTD): David Allen invented the Getting Things Done method in the early 2000s. According to Allen, the first step to getting things done is to write down everything you need to do. By freeing up brain power and instead relying on task management tools, you can focus on taking action—and not remembering what you need to do.
It may seem counterintuitive to focus your attention on productivity when thinking about cost control, but project performance is at the root of cash flow. If your team isn’t productive, your project won’t meet its deadlines. If your project doesn’t meet its deadlines, it costs more money. If your project costs more money, your company has less cash flow.
Keeping track of your earned value can help you predict the financial outcome of a project. This cost control method takes some cost accounting knowledge, but it can help you understand when variable costs will arise and ultimately prevent variances from occurring in future projects.
Earned value is the amount of work that’s actually been completed on a project. To track earned value and see whether you’re on pace, you’ll need to multiply the percentage of work completed by the project budget. You can use the following steps to track earned value:
Step 1: Determine how complete each task is in the form of a percentage.
Step 2: Determine Planned Value (PV), or your budgeted cost of work scheduled. This is the authorized budget assigned to accomplish the scheduled work.
Step 3: Determine Earned Value (EV), or your budgeted cost of work performed. This is the amount of the task that is actually complete.
Step 4: Obtain Actual Cost (AC), or your actual cost of work performed. This is how much money has been spent for the work already done.
Step 5: Calculate Cost Variance (CV) by subtracting earned value from actual cost (CV = EV – AC).
Step 6: Compile results.
The first three steps require gathering cost information from your project, while the last three steps require calculations and analysis. Cost variance represents the cost status of your project.
When controlling costs, your CV is the measurement that will notify you if your project is performing at a rate that meets its budget. A negative CV indicates the project is over budget.
People often confuse cost control with cost management, but these are distinct terms that should be properly defined and understood. Cost control is a smaller process within the larger cost management system.
While cost control involves identifying expenses and reducing those expenses to increase profits, cost management is the overall process of estimating, budgeting, and controlling project costs.
There are likely many people involved in your company’s cost management operation. Depending on how big your team is, you may have different people working on resource planning and budgeting.
To properly control costs, teams must monitor spending at various levels within the company. This allows each part of the company budget to receive thorough attention and analysis.
Monitoring cost data to reduce project expenses is a tedious process, but cost management is crucial for profitability.
The best way to manage costs is to view all the information you need in a customizable dashboard. That way, you can use automation to juggle project management and cost control—all in one place.Create a project estimation template