Cost Management explained in 4 steps

by Cost Engineering

Cost management is concerned with the process of planning and controlling the budget of a project or business. It includes activities such as planning, estimating, budgeting, financing, funding, managing, and controlling costs so that the project can be completed within the approved budget. Cost management covers the full life cycle of a project from the initial planning phase towards measuring the actual cost performance and project completion. This article will explain the different steps or processes in Project Cost Management, in line with methods such as the PMBOK.

Step 1: Resource planning

In the initial phase of a project the required resources to complete the project activities need to be defined. Work Breakdown Structures (WBS) and historical information of comparable projects can be used to define which physical resources are needed. You can think of the required time, material, labor, equipment, etc. Once the resource types and quantities are known the associated costs can be determined. 

Step 2: Cost estimating

Several cost estimating methods can be applied to predict how much it will cost to perform the project activities. The choice for the estimation method depends on the level of information available. Analogous estimating using the actual cost of previous, similar projects can serve as a basis for estimating the current project. Another option is to use parametric models in which the project characteristics are mathematically represented. Estimates can be refined when more information becomes available during the course of a project. Eventually this results in a detailed unit cost estimate with a high accuracy. Remaining uncertainties in estimates that will likely result in additional cost can be covered by reserving cost (e.g. using escalation and contingencies). 

Step 3: Cost budgeting

The cost estimate forms together with a project schedule the input for cost budgeting. The budget gives an overview of the periodic and total costs of the project. The cost estimates define the cost of each work package or activity, whereas the budget allocates the costs over the time period when the cost will be incurred. A cost baseline is an approved time-phased budget that is used as a starting point to measure actual performance progress. 

Step 4: Cost control

Cost control is concerned with measuring variances from the cost baseline and taking effective corrective action to achieve minimum costs. Procedures are applied to monitor expenditures and performance against the progress of a project. All changes to the cost baseline need to be recorded and the expected final total costs are continuously forecasted. When actual cost information becomes available an important part of cost control is to explain what is causing the variance from the cost baseline. Based on this analysis, corrective action might be required to avoid cost overruns.

Dedicated cost control software tools can be valuable to define cost control procedures, track and approve changes and apply analysis. Furthermore, reporting can be enhanced and simplified which makes it easier to inform all stakeholders involved in the project.  

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Tags: Basis , Financieelmanagement
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