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Cost control 101: Optimize your project expenses

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3 июня 2024 г.
12 мин. на чтение
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Summary

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. 

What is cost control?

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

Why is cost control important?

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

Key factors in cost control

Understanding the key factors that influence project costs is essential for effective cost control. By implementing a robust cost management system and deploying cost control methods, project expenses can be optimized and workflows can be streamlined.

Let's take a closer look at some of the most critical cost factors:

Cost of labor

Labor costs are a significant expense in most projects. This includes salaries, benefits, and other associated costs of the workforce involved in the project. Controlling labor costs involves ensuring that the right number of people with the appropriate skills are assigned to the project and that their time is used efficiently.

Cost of materials

Material costs can also be a major factor in project expenses. This includes raw materials, components, and any other physical items needed for the project. Effective cost control requires careful planning and monitoring of material purchases and usage to minimize waste and overspending.

Implementing a procurement management system and negotiating with suppliers can lead to significant cost savings.

Actual cost

Actual cost refers to the real amount spent on a project, as opposed to the estimated or budgeted cost. Tracking actual costs in real-time is key for identifying variances from the project budget and making necessary adjustments to keep the project on track financially.

Using cost accounting metrics and a cost control system can help monitor actual costs and prevent cost overruns.

Cost variance

Cost variance is the difference between the actual cost and the budgeted cost for a project or task. Analyzing cost variances helps project managers identify areas where costs are higher or lower than expected, so they can investigate the reasons and take corrective actions.

Regularly reviewing cost performance indicators and comparing them to the baseline can help keep the project within budget.

Return on investment (ROI)

ROI is a measure of the profitability of a project or investment. It compares the amount of money gained or lost relative to the amount initially invested. In cost control, considering ROI can help prioritize spending and ensure that the project delivers a positive financial outcome.

Effective cost control measures and initiatives can improve the project's bottom line and overall financial performance.

Effective cost control techniques

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.

[inline illustration] techniques for cost control (infographic)

To become better at controlling costs within your company, try these five steps:

1. Plan your budget

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 

2. Monitor all expenses

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)

3. Use change control systems

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 charge 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. 

4. Manage your time

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 your 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.  

5. Track earned value

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.

[inline illustration] How to track earned value (infographic)
Create a project estimation template

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 completed. 

  • 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.

Cost control methods

There are various cost control methods and techniques used to estimate, monitor, and manage project expenses. Here are some of the most common cost control methods:

Factor estimation

This method involves estimating costs based on historical data from similar projects. It uses factors like the size, complexity, and duration of the project to calculate the expected costs. Factor estimation is a quick way to get a rough idea of project costs, but it may not be as accurate as other methods.

Using cost estimation templates and tools can help streamline the factor estimation process.

Parametric estimation

Parametric estimation uses statistical modeling to estimate costs based on key project parameters. This method involves identifying the main cost drivers and creating a mathematical model that relates them to total costs. While more complex than factor estimation, parametric estimation can be more accurate, especially for larger projects.

Incorporating parametric estimation into the cost control process can help improve forecasting accuracy.

Quantitative factor

Quantitative factors are measurable aspects of a project that can impact fixed costs, such as the number of team members, the volume of materials needed, or the duration of specific tasks. Analyzing these quantitative factors can help in estimating and controlling costs more precisely.

Using cost control software and accounting systems can automate the tracking and analysis of quantitative factors, leading to more effective cost control.

Resource-based estimation

This approach estimates costs by breaking down the project into individual tasks and the resources needed for each task. It involves estimating the quantity of each resource (e.g., labor hours, materials, production costs) and multiplying by the unit cost of that resource.

Resource-based estimation can be very accurate but requires detailed project planning. Integrating resource-based estimation into the project management life cycle can help optimize resource allocation and control costs.

Unit rate

The unit rate method calculates production costs based on the cost per unit of work, such as the cost per hour of labor or the cost per unit of material. This method is straightforward and can be useful for projects with repetitive tasks or well-defined unit costs.

Incorporating unit-rate cost control strategies can help monitor and control variable costs associated with production and other business expenses.

Examples of cost control

Real-world examples of effective cost control demonstrate how companies can successfully manage expenses and maintain profitability in their projects. By studying these cases, we can learn valuable lessons and best practices that can be applied across various industries and project types.

Example 1: Streamlining production costs

A large construction company was faced with the challenge of completing a multimillion-dollar building project within a tight budget. To ensure they were managing costs effectively, the team:

  • Used resource-based estimation to create a highly detailed project budget.

  • Assigned a dedicated cost controller to monitor project expenses daily.

  • Held weekly cost review meetings to analyze financial performance and make data-driven decisions.

The results were impressive:

  • The project was completed 5% under the original budget.

  • Detailed cost tracking allowed the team to quickly identify and address issues.

  • Regular communication and collaboration kept everyone aligned and accountable.

Example 2: Managing regular project overspending 

A mid-sized software development company was struggling with frequent cost overruns on their projects. To address this, they:

  • Adopted agile methodologies, breaking projects into smaller, manageable "sprints."

  • Instituted regular sprint review meetings to track progress, discuss challenges, and review financial performance.

  • Invested in training project managers on agile financial management processes.

The impact was significant:

  • Within the first year, the company reduced their average cost overrun from 20% to less than 5%.

  • Projects became more predictable and easier to manage, improving client satisfaction.

  • The team became more adaptable and responsive to changes.

These cost control examples illustrate that managing costs requires detailed planning, regular monitoring, clear communication, and a willingness to adapt as needed. By embedding these practices into their project management processes, companies can improve their financial performance and deliver more value to their clients.

How to improve cost control in your business

Improving cost control in your business requires a multi-faceted approach that involves planning, monitoring, communication, and continuous improvement. Here are some steps you can take to enhance cost control in your organization:

  • Establish a clear project scope and objectives to avoid scope creep and unnecessary costs. Ensure that all stakeholders agree on what's included in the project and what's not.

  • Create detailed, accurate project budgets using appropriate estimation methods. Take into account all potential costs and build in contingencies for unexpected expenses.

  • Assign responsibility for cost control to specific team members and hold them accountable. Make sure everyone understands their role in managing costs.

  • Implement systems to track and monitor actual costs against the budget regularly. Use this data to identify variances early and take corrective action promptly.

  • Use project management software to automate and streamline cost control processes. This can help reduce errors, save time, and provide real-time visibility into project financials.

  • Conduct post-project reviews to identify lessons learned and areas for improvement in cost control. Share these insights across the organization to continuously refine your cost management practices.

  • Provide training for project managers and team members on cost control techniques and best practices. Invest in developing the financial management skills of your team.

  • Foster a culture of cost awareness and responsibility across the organization. Encourage everyone to think about how their actions impact project costs and reward cost-saving initiatives.

Remember, effective cost control is not a one-time event but an ongoing process. It requires consistent attention, discipline, and a willingness to adapt as circumstances change. By embedding cost control into your organizational culture and processes, you can improve project profitability, competitiveness, and overall financial performance.

Cost control vs. cost management

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.

[inline illustration] cost management process (infographic)
Read: New to cost management? Start here.

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's budget to receive thorough attention and analysis. 

Monitor and reduce project expenses with cost control

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

FAQ: Importance of cost control

What is the difference between cost control and cost reduction?

Cost control involves managing expenses to keep a project within budget, while cost reduction focuses on actively cutting costs. Cost control is about spending wisely, whereas cost reduction is about spending less overall.

How does cost control relate to project quality?

Effective cost control contributes to better project quality by ensuring sufficient resources are available for critical quality-related activities. However, cutting costs in ways that directly undermine quality should be avoided.

What role does communication play in cost control?

Clear and regular communication is vital for effective cost control. Project managers must communicate budget information and cost performance to team members, stakeholders, and clients. Team members need to communicate potential cost issues or changes that could impact the project.

Can you have too much cost control?

Excessive or rigid cost control can be counterproductive, leading to shortsighted decisions that undermine project quality, delay necessary work, or demotivate the team. Effective cost control strikes a balance between being rigorous enough to keep the project financially on track and flexible enough to adapt to changing circumstances.

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