Everything You Need to Know About Project Cost Management in 2022

Everything You Need to Know About Project Cost Management in 2022

One of the most essential qualities of successful organizations that operate in the organizational paradigm is the ones that aim to be successful in everything they do by meeting all of the clients’ expectations and the internal objectives sent for the company.

That’s all well and good in theory, but what are the actual statistics that these internal objectives and the client expectations are met?

According to a report generated by PMI, 14% of the IT projects surveyed and started by companies in the organizational paradigm are deemed failures.

Furthermore, only 57% of the projects started by companies around the world finish in their initial budgets that were set by the project manager or the upper management people, with many exceeding the target budget that they had set for themselves in the beginning.

This is a terrible image for all the enterprises out there as cost overruns or neglecting the budgets not only impact the margins that the company has set for itself and its team but also makes sure that the company can’t create or execute any new projects in the future, because there will be no money.

This is why, for the long-lasting success of your company, you need to understand what project cost management or cost control in project management is and how it can be helpful to you while you are working for your organization to stay on course.

If you are in a similar conundrum, then this article is for you. Today, we will discuss project cost management, the benefits associated with it, and the steps involved in the overall cost management process. So, let’s begin.

Project Cost Management

Project cost management is the process of budgeting, estimating, and controlling the costs associated with the overall project lifecycle. This whole process aims to make sure that the expenditures related to the project are within the approved budget.

As we know that a project in the organizational paradigm is successful when:

  • The execution quality of the whole project lifecycle is of a high standard
  • The project delivers on the scope and requirements that were promised at the very beginning
  • The entire project lifecycle is completed within the budget that was agreed upon between the company and the client
  • The whole project lifecycle is completed within the schedule that was agreed upon between the company and the client

Hence, we can deduce that the project cost management process is one of the most essential elements of the whole project management process and is relevant to every single project regardless of the project’s domain.

One of the best things about project cost management is that it creates an effective financial baseline against which the project managers of the companies can benchmark the current status of the project costs and change the whole direction of the project management process if necessary.

Importance of Project Cost Management

Understanding the importance of cost management is one of the easiest things you can do in the organizational paradigm. Let’s take a very simple real-life example to understand it.

One of the most instinctive traits of a human is to have a roof over their head. You will need a house for that. What will be the first thing you will have in your mind to do that? Of course, your budget in which you want to get your house built.

When you have a clear sense of the budget you have for your house, you will need to divide that budget up into expenses for all of the sub-tasks connected to the house building process and all the other smaller line items on the list.

This budget will help you have a clear idea of what designer to get, whether it will be a high-end one that will construct the entire building from start to end or will it be someone that will help with a few elements of the construction process, but they will do it for a much smaller budget.

The budget will also determine whether the house will have a single story or multiple ones and what type of materials will be used in the construction process, whether they will be domestic or imported.

You can see that you can’t make a clear decision about anything unless you have a budget defined in your mind. And mind you, this example was of a much smaller project with only a couple of variables.

In large organizations, things are way crazier. This is because large organizations always have multiple projects running simultaneously with all kinds of changes in the initial assumptions and unexpected costs.

This is where cost management comes into the scene.

Here are some of the benefits that project managers can enjoy if they implement efficient cost management practices.

  • They get to set some obvious expectations about the whole project development process with the stakeholders associated with it
  • They can easily control all of the scope creeps and bugs associated with the project through the transparencies that are established with the end-user or customer associated with the company, project, or product
  • They can easily track the progress of all of the tasks and processes quickly and respond with the corrective action at an excellent pace
  • They can also maintain the expected margin, avoid losing any kind of money on the project development process and also increase ROI by a lot
  • They can also generate data or information to benchmark it for all of the future projects that the company will develop and also track long-term cost trends for the market

Let’s now look at the steps of the project cost management process and find out how you can develop a cost management strategy for your projects.

4 Steps of Project Cost Management

While you might be thinking about the cost management process as a continuous process, it has four different parts to split its function. These 4 parts are primarily sequential, but some of the resources may change midway, and the budgets must be adjusted.

So, let’s look at all of these steps in the project cost management process and see what we find.

1. Project Resource Planning

Resource planning is identifying all of the resources required to execute a project development process and take it to completion.

These resources can be the people working on the project development process, such as the contractors or their employees, and the equipment such as the specialized equipment available in limited supply, large construction vehicles, and infrastructure.

Here are a few things you should keep in mind while performing the project resource planning process.

  • You need to consider all of the historical data that you have stored from all of the previous projects, like, the effort and the past schedules that the team had while working on other projects
  • You need to take feedback from SMEs and all of the team members associated with the project cost management process because this type of collaborative approach works exceptionally well in projects that do not have the past data or information to use
  • Although this step should be at the start, project managers need to account for all of the ground realities associated with the project from the beginning so that there are no issues regarding money in the future of the project development process and the cost management process

2. Cost Estimation

Cost estimation is the process of quantifying all of the costs associated with the resources required to make sure that the project development process is executed from start to end.

To perform all of the cost calculations associated with the cost management process, we are going to need the following information:

  • Price of every single resource that is going to be associated with  the project development process and the cost management process
  • The resource requirements that are going to be provided by the project resource planning step
  • List of all of the assumptions about the cost management process and the project overall
  • The time duration that each resource is required to work for
  • Insight into the reporting structures of the company and the company’s overall financial health

3. Cost Budgeting

The cost budgeting process can be viewed as part of the cost estimation or viewed as a separate process altogether. For a specific period of time, this cost budgeting is allocating costs to a particular part of the project, like modules or individual tasks related to the project.

4. Cost Control

Cost control is the process of calculating all of the cost variances that will happen throughout the project development process and taking action about them. If there are any ups and down regarding money, the project manager can adjust the scope of work to correct the gap.

Conclusion

This was our guide on project cost management, its benefits, and how can you make a process of your own in 2022. If you think that we missed something important to mention, feel free to email us, and we will review the information ASAP.

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