A vital skill for project managers is controlling project costs and budget management. This involves the estimating, allocating, monitoring and controlling of all of the financial resources of a project. The aim being to deliver the expected value of the project within the agreed budget. Read on as we take a look at some techniques and practical tools to help with forecasting and controlling project costs.
Forecasting project costs
The process of forecasting project costs requires the prediction of the total amount of money that is likely to be spent on a project. Knowing this amount can help you to plan ahead, avoid any nasty surprises, and also communicate with stakeholders about the financial performance of your project.
In order to forecast costs, you may wish to use bottom-up estimating. This involves breaking the project down into smaller tasks or work packages and then adding them up in order to arrive at the total forecast cost. This is a detailed way to achieve an accurate forecast but can be complex and time-consuming on larger projects.
You may prefer to use analogous estimating. This involves using historical data from other projects that have been completed in a similar way in order to estimate the costs of your current project. This method is both quick and easy. However, it can be unreliable if the projects you are comparing are not similar enough or if the data is outdated.
Finally, you may want to consider using parametric estimating. This uses a mathematical formula to calculate the cost of the project and is based on one or more variables. This method is reliable and consistent. However, it requires a verified and valid formula as well as accurate data.
It is always a good idea to outline the entire project in detail to delineate central tasks and expenses for every section. This method will help you to understand the costs of your project across the spectrum from the bare minimum that it might cost to the maximum potential expenses. You will have all of the information you can gather in this way will play a key role in forming your decision making.
Controlling project costs
It is essential to be able to control your project costs in order to make sure that the actual spending on the project is kept within the approved budget. This will allow you to take corrective measures for any variances or deviations. It helps you to identify and resolve issues and will also optimise your usage of resources.
There are tools and techniques you can use to control costs such as creating a budget baseline by adding reserves to your estimated costs. You may also wish to consider employing earned value management (EVM) and also conducting variance analysis.
EVM integrates scope, time and cost in order to measure progress and also performance, using three key indicators. These are planned value (PV), earned value (EV) and actual cost (AC). It also uses two metrics: cost variance (CV) and cost performance index (CPI).
Variance analysis on the other hand compares the actual costs with the budget baseline or planned value in order to identify, and then explain, any deviations or variances. This assists in the evaluation of the cost performance of the project, determines the root causes of variances, and then takes corrective or preventive actions to overcome this.
There are many methods of controlling project costs. However, it is important to look at the elements of project ROI and consider it at various stages during the project life cycle. If the project ROI at any given point in time is not positive, it may be an indication that you should review the spend. You can then control the future cost or even realign the costs of your project in order to ensure that the ROI is positive. With this approach your project costs are monitored and controlled in a dynamic fashion. Perhaps the project leaders on the UK infrastructure projects that have gone massively over-budget (for heavily reduced benefits) should have taken this advice on board.
Tracking project costs
Tracking your project costs is a crucial step within the project life cycle. It helps you to monitor your progress and provides transparency and accountability to your stakeholders. In order to track your project costs, you can use a cost accounting system. This will help you by collecting, organising, and reporting on the financial information related to your project.
This can also be a document that summarises and then communicates the cost performance of the project you are working on to the project stakeholders. Typically, this will include the budget baseline, actual cost, earned value, cost performance index and cost variance. It will also show you what the forecasted cost at completion might be.
When it comes to tracking costs, change requests are also important, these are any formal requests that propose changes to the scope of the project, the schedule, quality or resources. Before implementing any change requests, they must be evaluated and approved from a practical and financial perspective.
Managing project costs
The process of managing the costs of your project is a continuous and iterative one to which there are 4 main steps.
The first of these is planning cost management, this is how the project costs are going to be estimated, budgeted, tracked, controlled and then reported. To do this you will need a cost management plan that documents all of your policies and procedures and any tools that you are using.
You should also estimate the costs by approximating the amount of money that each complete project task will require. To do this you need to analyse cost factors such as resources, risks and assumptions and then apply estimating methods to them.
You should then determine your budget by aggregating your estimated costs and creating a budget baseline for measuring and controlling the performance of your costs. You should ensure that you add any contingency reserves for any risks and uncertainties and also obtain approval from the stakeholders for this.
Finally, you should control the costs of your project by monitoring the spending and comparing it to the budget baseline. This will allow you to take any corrective or preventative measures when necessary, in order to manage your cost performance.
Improving project costs
Improving your project costs can help you to deliver your project within budget whilst also increasing the value and quality of the project itself, and also satisfying the expectations of your stakeholders. Useful techniques such as cost/benefit analysis, value engineering and benchmarking can help you to achieve this.
You may also want to consider looking at past projects of a similar nature to see how project costs were improved and if these are methods that may help your project.
