What are the Benefits of Project Cost Management?

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What are the Benefits of Project Cost Management?

The benefits of Project Cost Management are:

1. Accountability

2. Lowers Expenses leads to lower project costs

3. Enhanced Efficiency

4. Financial Planning

5. Savings

6. Stress Relief

7. Operational Efficiency

8. Procurement Value

9. Systematize Technology

10. Prioritization

Project Cost Management

According to PMBOK® Guide – Sixth Edition Project cost management is defined as Project cost management includes the processes involved in planning, estimating, budgeting, financing, funding, managing, and controlling costs so the project can be completed within the approved budget.

Cost management is the process of estimating, apportioning, and controlling the costs in a project.  A project manager should possess a strong sense of anticipation – even in cost estimation. Any change translates to cost and obviously out of scope. It is a matter of discretion to entertain the change at no cost or ‘at cost’ and a project manager is expected to have a sixth sense to see it coming. Usually what appears as cosmetics with little impact on scope and cost are the ones that derail the project slipping on schedule, resulting in cost overrun and scope creep. So, Predicting and preempting costs to factor during estimation and budgeting will prove critical to the project making a profit or bleed red.

Project cost management is used to forecast costs and manage them effectively. Projects can be challenging and if unchecked and uncontrolled, go over the budget.  A good Project Cost Management can keep the project under check and well within budget.

For all the project costs, it is the Project cost management that determines the baseline. Effective and efficient cost management makes sure the project runs on track within budget and as per planned scope. Without Cost Management, the project can bleed, costs can go above project profit and result in a loss.

The project manager must have a strong grip on the cost, hence cost control is one of the most crucial aspects of project management. Time, scope and resource management are as important in achieving the goal, but cost management will have the ultimate bearing on a project’s outcome. The project manager’s prowess lies in organizing tasks with an eye on the cost to stay within the estimates.

Cost Management

Cost Management helps the project manager in foreseeing expenses and prepare to act accordingly by putting in place precautionary measures. To reduce the overall costs of a project, Cost Management is assigned the highest priority. Cost Management starts right from the initial planning phase and goes all the way to project completion and handover.

A project manager must exercise strict control over the cost to manage the project budget. The project manager at all times should be conscious about the costs incurred and the funds allocated to maintain and manage the project’s cost-expense within budget. There can be no lapse as it will lead to stretching the project estimate and consequently the project goes over the budget. To effectively control the cost, the project manager must recognize the needs for which funds have to be allocated. This is required for estimation and also study the allocated versus actual cost. The balance in the allocated and actuals costs will determine the cost overrun.  These are the aspects a project manager must always focus on: the estimated cost, approved cost, the budget sanctioned, allocated versus actual cost.

What is Project cost?

It is during the project planning phase, cost estimation is done and the estimation needs approval from the stakeholders - the client or customer or upper management. It is only after the approval, the project execution begins.

The project manager records all the expenses incurred as the project moves in phases and keeps track of all the expenditures to monitor and control so that the project is maintained within the estimate. All the expenses are documented to study for any deviations during the project. The study becomes useful references while estimating costs and preparing cost management plans for other or future projects.

The project cost is the sum of the costs incurred to procure the necessary resources and services required to execute the project successfully to completion.

There is no project without a budget. Time, Scope and cost are the critical components of project management, and directly proportionate. Impact on anyone will affect the other two. If the project cannot be completed within the project cost, it’s a failure. There are tolerance levels set but if the costs climb higher and exceed the estimation, the project is set for failure.  Therefore, it is imperative to get the cost estimation correct. To work out the accurate estimation, it is essential to understand the different types of project costs. By strategically reducing the cost spending in acquiring the required resources will result in significant benefits.

What are the Types of Project Costs?

There are 5 types of project costs incurred in any project. They are

• Fixed Cost - any Cost which is fixed throughout the project and does not fluctuate.
• Variable Cost – any cost which changes in proportion to a product or has a high tendency to variate
• Direct Costs - Costs that are directly linked to the budget of the project.
• Indirect Costs - costs that are not particularly connected to the project but shared across multiple projects.
• Sunk Cost - Sunk Costs are costs which are already spent, but have failed to generate any business value for the project.

Total Project Cost:

The Total Project Cost (TPC) is calculated by putting together the fixed cost and variable cost and Other Project Costs (OPC). It is important to get the total project cost accurate or close to the accurate figure with minimal tolerance as it would severely impact the project scope and schedule resulting in cost overrun.

The Benefits Of Project Cost Management

Some of the benefits of cost control management are compiled below.

1. Accountability

Cost management leads to the accountability of the people engaged in a project. The people or team are assigned tasks with a definite deadline and any delay in completion would become an additional cost. Slippage in the schedule is actually cost accrued which is not healthy for the project’s profit.  Thus accounting for billable hours leads to impacts productivity. The person or team member completing on time accounts for the billable hours scheduled.

2. Lowers Expenses leads to lower project costs

Effective cost management lowers the overall expenses.  By defining proper procedures, the company can save on spending, thus lowering the expenses and use the saved funds for procuring other resources or services. This, in turn, contributes to the overall growth of the company.

3. Enhanced Efficiency

Cost management helps to identify the tasks that are running as scheduled within the budget and those tasks that are exceeding the allocated budget. The project manager can take a call about the contingency plans to control keep the cost breach.

4. Financial Planning

One of the main objectives of cost management is organized spending through a disciplined approach in financial planning and accounting. The project manager can create a better budget once the requirement on the various resource is known,  so as to invest in the right resources at the right hour. The plan also sets up boundaries as upper limits on spending.

5. Savings

A dollar saved is a dollar earned. By savings, the funds that sometimes get spent on the unresourceful tasks can be identified and redirected to other activities purposeful. This can be achieved by carefully defining the cost control procedures to close the plug on leaking money, which positively reflects on the fiscal goals.

6. Stress Relief

When managed well, cost and time management reduces stress. Effective cost control enhances the discipline in spending that lessens the worries about the expenses that may have to be met. It provides a buffer and eases the pressure on payments.

7. Operational Efficiency

Cost Management helps in enhancing Operational Efficiency by tracking the activities that have breakdowns and consumes funds far more than allocated. It provides visibility to the project manager to focus on those activities in line with the budget and act upon those that exceed the estimated amount.

8. Procurement Value

 Cost management helps in the review of goods and services offered by vendors and empowers the project manager the width to bargain and arrive at a figure that’s an advantage to the company. It is about getting the value for the money invested.

9. Systematize Technology

Every project or business process involves technology and companies need to invest, like automation or tools,  sometimes the choice of technology can be questionable as companies overspend or invest in technology that’s not necessary.  Cost management imposes  budget constraints which makes the project manager more conscious about making the right choice: either step-up technology or just simplify.

10. Prioritization

If there are multiple projects that mostly engage in time and cost management, not all the projects can be engaged as proposed. So, which project to fund first? Cost management helps in prioritizing the projects that deserve the funds.

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