What Is Project Cost Management?

Project cost management is the process of organizing, analyzing, budgeting, and managing project costs. Cost management practices are in place to assist project teams in budget planning and control throughout the project life cycle. Cost management results in improved planning and Financial management, as well as increased security and budget visibility, allowing decisions to be taken before incurring debt. In brief, expenses are significant in business since they are what drain a company’s profits and make the difference between a successful and a poor net profit. You can utilize the provided project management cost analysis template so you can have a format at the ready.

Types of Project Cost Management

There are different types of project cost management that you will need to be aware of before jumping right into the action of preparing the document. Give this curated list a read to be knowledgeable on the various types. Keep in mind that the goal is to make the project scheduling and Cost management be easier to deal with.

Direct Expenses: Everything you do to produce certain product results in direct expenditures. As an example, consider a hardware development project. In this situation, direct expenses will comprise raw materials for completed goods manufacture, direct labor, and production Equipment. Any expenditure that has a direct impact on your production volume falls under the category of direct expenses. Any change in the scale of production will result in an increase or decrease in the number of individual items required to reach the output objective. These are your immediate costs.Indirect Expenses: In contrast, indirect expenditures include anything that isn’t directly related to major project activities but must be supported. Indirect costs include administrative, personnel, and security expenses. Some indirect expenditures may be considered overhead. Some overhead expenditures, however, may be directly ascribed to a project and are considered direct costs. They are necessary for the overall viability of the firm but are unrelated to the Manufacturing process.Fixed Expenses: Fixed costs are expenses that never fluctuate in amount regardless of changes in production amounts. Fixed costs are the costs of assets that are essential for the project and do not fluctuate from month to month. These are typically not included in the budget of a small project. These are fixed costs if you have a five-year project that requires warehouse space and a vehicle. Rent payment is an excellent example of a fixed expenditure. This fee stays constant regardless of how many things the company produces throughout the rental time.Variable Expenses: Variable expenses are continually changing when the firm expands or reduces its output. Variable costs are expenses that vary according to how much a firm produces and sells. This means that variable costs rise as output rises and fall as output falls. Some of the most common types of variable expenses are labor, electricity charges, incentives, and raw materials.Product Expenses: Product Costs are the expenses incurred in the production of a product. Materials, labor, production supplies, and factory overhead are all included in these prices. A product cost includes the cost of labor necessary to provide a service to a consumer. Product expenses include direct materials, direct labor, and allocated production overhead. General and administrative expenditures, including rent, office expenditures, office equipment, and utilities, are examples of period costs.Period Expenses: Period expenditures are incurred by time rather than the acquisition or production of goods or services. Period costs are often expensed in the period in which they are incurred, such as selling costs or general and administrative expenditures incurred as a result of everyday company activities. For example, because product promotion efforts, administrative personnel compensation, and corporate office rents are often time-bound and have no direct relationship to the fundamental process of production, they should be considered period expenses.Pre-Operating Expenses: Pre-operating costs are incurred prior to the actual start of the project and all relevant operations. Before beginning project implementation, you may need to do an Environmental study, create a strategic plan, and educate new employees. All these preliminary activities fall under the category of pre-operating costs. Since they serve to guarantee the successful completion of the project, pre-operating expenses are an essential part of the initial investment. As a result, they must be recognized as an expense in the financial records as intangible assets.Operating Expenses: After the formal commencement of project activities, operating expenditures are accrued. This category includes everything needed to keep the firm running, such as inventory, employee salary, technology, intellectual property, rent, and cash devoted to critical operations such as marketing, sales, and manufacturing. It means that both direct and indirect project expenses are considered operating costs as long as they are included in the project’s daily maintenance and administration. After determining this sort of spending based on your project’s requirements, you may utilize the figures to compute its operational income.Cost of Risk: Since risks usually bring financial harm to enterprises, the cost of risk largely refers to the loss of money as a result of failing to anticipate certain environmental threats. Nonetheless, charges made while mitigating hazards are sometimes seen as risk costs as well. Thus, in addition to direct financial losses caused by external factors, the total cost of risk includes risk analysis, risk mitigation, risk control, and any necessary administrative expenditures. As a result, by comparing different risk costs, you may not only forecast the magnitude of a potential loss due to changes in the market environment but also determine how successful and efficient your risk management plan is.

Tips for Managing Project Costs

Before you jump right into making an estimate, you have to meet up with your team and get a clear understanding of what specific numbers would go into the document. As you create a reasonable estimate with your team, make certain that it covers all phases and activities of the project and includes adequate contingency. Include all personnel expenditures, as well as materials, hardware, and software. Reading this curated list of tips will help to inform you as you start the project cost management processes.

Improve Your Budgeting: Project managers are accustomed to budgeting product costs, and they should pay more attention to their money. A project manager should review their revenue and check to see whether the project is on budget throughout the project’s life cycle. You may do so by creating a monthly budget. Based on your understanding of the project’s resource plan and timeline, estimate the Monthly operating expenses. Create a spreadsheet with the monthly projected expenditures for the whole project.Tasks Should Be Automated: Regardless of the scope of their responsibilities, the most recent computerization technologies provide a lifeline to project managers. The top application automates many mundane and administrative project management duties. This improves workflow and reduces labor expenses. If your company hasn’t utilized automated systems or software before, then you would need to utilize them now rather than later. You may not right away be aware of the advantages of setting the tasks automatically, then you will be spending more time on something that could have instead been done efficiently.Accept Your Fear: Every Project Manager should be aware that, despite their best efforts, things might go wrong from time to time. Managers attempt to preserve a failing project due to a fear of failure, resulting in extreme actions that cause further harm and expenditures. Rather, they should take a step back, review their stance, and make any necessary changes. You will have to be brave in handling and managing the project’s costs as being fearful of the responsibility won’t do anyone or your company good. Remember that as a team, you are not alone in the business. You can always ask for assistance or feedback from others if you are unsure of the numbers.Continue to Improve: The more we study, the better you are at problem-solving and being receptive to solutions. Look for webinars, networking events, and seminars that educate you on how to save money and be a more successful project spender. This also goes for the process of writing the document. If you have noticed faults the first time you submitted the project cost management, then you will be more aware of how to improve on the quality before you are able to let the higher-ups review the contents.Communicate: Include your cost metrics and critical data in your project reports and steering committee presentations to provide transparency for senior management about the project’s expenses. If your costs are not on the schedule for any reason, take it as an important problem that must be evaluated, rectified, and shared with the steering committee. Without communication, the project may not operate as smoothly.

How to Write a Project Cost Management

While cost management is a complex process and a vital project management knowledge area in general, this article may reduce it down into four steps that you can use to guarantee each of these parts is adequately completed. As you view the available project cost management example, you can utilize it when you are writing the project cost management plan. Keep in mind that you will need to edit out the already made templates available in this article as the contents may not apply directly to your project.

1. Project Resource Planning

Outlining the resources required to execute all project tasks is the first stage in cost control. A good place to start is by noting previous information and similar initiatives that will help you calculate the resources needed. Make careful to account for additional resources such as labor and time necessary to complete the work. People such as employees and contractors are examples of resources, as are infrastructure, huge construction trucks, and other specialized equipment in short supply. By using this task-level method, project managers may create a precise and full inventory of all resources, which is then used as an input in the following phase of estimating costs.

2. Cost Estimation

The process of estimating the costs associated with each of the resources necessary for all scheduled activities is known as the cost estimate. The cost of executing a project within a specific scope is forecasted through cost estimation. Cost estimating is not a one-time exercise since the scope of a project changes over time. Project managers must iterate on cost estimates whenever scope modifications or change requests are authorized for effective cost management. These estimates represent a total of all expenses associated with effectively completing a project, from start to finish.

3. Cost Budget

Cost estimates directly lead to cost budgets. In this stage, you will calculate the project’s cost baseline and financial requirements. A strong project budget can assist you in making critical decisions regarding the project timeline and resource allocation limits. Combine individual activity cost estimates into a total project cost, determine cost timing, and track project progress against the estimated baseline costs. This includes everything from direct labor expenses to material costs, manufacturing costs, equipment costs, administrative expenses, and software costs.

4. Cost Control

To avoid scope creep, good project managers will closely monitor project costs. This involves keeping an eye on where the actual cost differs from the predicted cost. Cost control also entails advising stakeholders of cost anomalies that differ significantly from the anticipated cost. Budget control necessitates knowledge of the initial budget, authorized expenses, predicted costs, actual costs, and committed costs. If the scope adjustments or unanticipated risks have an impact on the agreed budgets, the project manager must assess the amount of impact and take remedial action as necessary.


What is the primary objective of project cost management?

Cost project management is critical to the project planning process of any firm. Accenture, a global services firm, thinks that sustainable cost management should be part of the company’s structure. Without a specific budget, you cannot adequately plan out the resources necessary for your project. If you are remodeling an office building, for example, you must engage an architect, pay for building supplies, and agree on hourly rates for construction workers. To do so, you must precisely estimate all expenditures and guarantee that you have the funds to cover them.

What is cost management in project management?

Cost management is the process that involves estimating, allocating, and controlling project spending. The cost management method enables a company to forecast future expenditures and so limit the likelihood of budget overruns. Cost estimates are created throughout the project planning phase and must be approved before work can begin. As the Project Plan is carried out, expenses are documented and tracked to ensure that costs are kept within the budget. When the project is finished, the expected and actual costs are compared, giving standards for future cost management specifications of the project budgets.

Who is in charge of project cost management?

Cost project management is the responsibility of project managers. As part of their employment, they must estimate overall expenses, create a budget, track spending, and plan for potential dangers. To stay within budget and enhance profitability, a project manager must be watchful throughout the cost management process. Project managers are in high demand. According to the Project Management Institute, there will be 22 million new project management job positions by 2027. Project leadership is necessary for a variety of industries. Being a project manager entails more than just academic credentials. While there are several qualifications available, having a degree is not essential.

You have reached the end of the article which marks you as ready to dig into writing the project cost management. Keep in mind that the cost control in project cost management is important so that your company does not exceed the necessary amount that has been set for the project.