Staying on budget, meeting deadlines, and delivering high-quality outcomes determine project success. Whether it is a project in the energy sector, engineering or construction, cost management is essential to keeping your project’s financial performance on the right track.
Not managing costs properly can lead to going over budget, which can cause projects to fail in extreme cases. Wellingtone’s 2021 report highlighted that only 34% of organisations ‘mostly’ or ‘always’ completed projects within their budget.
Project managers must ensure the total costs of their project are as close to the agreed budget as possible. This requires constant monitoring and it can be challenging and exhausting for project managers. Project management tools such as Proteus supply project managers with greater visibility and control over their projects and makes cost management processes easier and more efficient.
What is Project Cost Management?
Cost management involves planning, budgeting, and controlling costs throughout the duration of a project. The first step is to establish a baseline for judging the project’s progress. Controlling project costs involves monitoring and adjusting the budget accordingly against the baseline. For example, in an engineering project you may be overspending on a particular piece of equipment, cost management enables this to be identified and corrected, reducing the negative impact on the project.
Project cost management is essential to reducing the difference between the planned costs and actual costs of the project. A lack of efficient cost management can result in cost overruns that impact profit margins and overall project success.
For example, the energy project of the Three Gorges Dam exceeded its budget by 163%. The hydroelectric dam ended up costing $25.96 billion as opposed to its original budget of $9.85. This example shows the need for efficient cost management and prioritisation of cost control to avoid such significant overspending.
Benefits of Cost Management
- Sets Clear Expectations: By using cost management procedures, project teams and stakeholders know what is expected of the project and its budget. This is particularly important in capital projects where often the project is delivered by a series of suppliers all working together with a project consultancy.
- Increased efficiency: Cost management processes demand a clear understanding of costs, resource allocation and scheduling. The consistent monitoring prompted by cost management can assist project managersoptimise their projects’ efficiency.
- Benchmarking for future projects: Project consultancies can use cost management information from projects to improve procedures for future projects.
- Decreasing expenses: Project managers can eliminate unnecessary costs and reduce overall spending by actively monitoring costs as areas of overspending may become apparent throughout the project.
- Prevents Scope Creep: Tracking costs as the project progresses enables project managers to intervene before scope creep negatively impacts project performance.
Key Components of Cost Management
Before beginning a project, a project manager must determine the resources required throughout the life cycle of the project. Across many types of projects, this step is generally included in the creation of the work breakdown structure. The WBS clearly details every task within the project all the way through to completion. The two key resources to consider are 1) the materials and equipment are needed at each phase, and 2) the team members that will carry out this work.
A WBS crucially helps define the project scope and sets realistic deadlines, preventing cost overruns. Resource planning provides the foundation for cost estimation.
Cost Estimation
Cost estimation involves quantifying the project’s costs by using the resource allocation determined in the resource planning stage including costs of labour, equipment and materials. Arguably, this is the most difficult step of cost management as accuracy is crucial. Without accurate estimations and appropriate allocation of resources, the project’s success can be undermined before it has even begun as it increases the likelihood of cost overruns.
- Key information required for this stage includes:
- Resource requirements
- Price per resource and the amount of time it is needed for
- Any potential risks
- Historical data of previous projects or industry benchmarks.
Cost Budgeting
Remaining on budget is one of the most important contributors to project success. Project managers create a detailed budget for the project, assigning funds to different parts and following the agreed timeline.
Agreeing upon a budget is crucial as it makes the project costs more tangible to project teams and provides them with a benchmark to measure and track the progress of the project.
Cost Control
This cost management step compares actual costs to the budget and makes changes if needed to stay within budget. The project manager may change the project’s scope to fit the budget or allocate more money to a specific part. This stage requires constant monitoring to reduce the difference between the planned budget and actual costs.
Having access to real-time data is invaluable to this stage of cost management. It promotes early action to fix problems and prevent major budget deviations. Moreover, the existence of a robust project change management plan can help minimise the impact of any changes in scope on the project’s financial performance.
Another key factor in cost control is how the project performance is measured. Cost management plans typically include what measure will be used, the threshold for deviations and the procedure for if any changes or decisions must be made.
Earned value management is one of the best and most popular measures. It integrates costs, schedule and scope to measure a project’s progress. It enables project management professionals to identify variances from the baseline and take corrective measures quickly and before issues progress.
How can Project Management Software Help Manage Costs?
Project management software simplifies cost management processes like estimation, budgeting, and tracking progress. Proteus simplifies project controls and offers project teams with a single source of truth, helping track project performance by providing full visibility and control every step of the way.
Some beneficial features of project management software for cost management include:
- Access to real-time data: Cost control requires access to the right data at the right time. Real-time data can reveal opportunities to reduce expenses and increase productivity. Or it can flag potential risks or issues before they become more problematic, preventing negative consequences such as cost overruns. With Proteus, project managers can use real-time data to closely monitor project progress and be proactive throughout the project to ensure they are using their resources and money in the most efficient way.
- Improved cost estimations: Project management software can ensure zero-errors in cost estimations. Proteus ensures accurate cost estimates by using the pre-approved rates and agreed charge-out rates set up in the work breakdown structure. Project managers can easily search and access historic project data making this phase quicker and more efficient.
- Manage earned value: automated project dashboards enable full visibility and control to monitor your project’s performance. Proteus shows your earned value in S-curves alongside budget, actual costs and planned costs to immediately show cost variances so that you can act then and there as opposed to weeks after the event preventing costly delays.
Conclusion
Cost management can dramatically Increase the likelihood of a successful project outcome. It is a demanding process, however project management software can make things a lot easier for project teams. Proteus supports your project from start to finish making sure you remain on budget, on schedule and produce high-quality project results.
About Proteus Project Software
Xergy Group’s Proteus project management software works with your existing systems and scales as your business grows. Created by project management leaders, for the diversified engineering consultancy sector, Proteus delivers an end-to-end work management software platform with detailed workflows from the early opportunity stage through to project delivery.
Proteus’ end-to-end project management software is a cloud-based system designed for businesses of all sizes to handle projects of unlimited complexity. Proteus is compliant with common project management frameworks and ISO standards. Each feature aims to make bottom-line improvements by improving utilisation, streamlining workflows, providing quick and efficient access to resources, and reducing overheads. Check out some of our client case studies to learn more about how Proteus makes a tangible difference.
How to get Proteus
We recommend getting setup on a free trial. Proteus operates under a software-as-a-service (SaaS) model. We offer Enterprise packages and flexible pricing solutions: contact our team to learn more.
We designed Proteus to be simple, and that means you can get up and running on Proteus without an IT team or support from a programmer. You will want to spend a bit of time configuring the admin console so that you have everything set up to suit your company structure, but it’s very intuitive and you don’t need a PhD in IT. However, we want you to get the best out of what is a brilliantly powerful tool, so don’t hesitate to ask for our support. We have a team of product experts who are ready to help you with the configuration process, so get in touch today by filling out the form below:
