6 Best Practices for Project Cost Management

Project managers need the most flexibility when dealing with project cost management.  Some may never have budget responsibilities, while others may have full responsibility.  Those with some duties will also need to navigate many organizational practices about preparing and presenting budgets.

Here are six best practices that will help and apply over a wide range of cost management practices.

Cost Management is a Weakness

It's essential to recognize a weakness in cost management.  A project manager we know recognized this weakness.  While without budget responsibilities, he studied accounting and finance and learned more about how his organization operated for budgets.  A day came when his project management expertise was needed, along with budgeting skills.  Had he not been prepared, he might not have been given the assignment, which became a gateway to managing an extensive program.

Make learning about cost management a priority for this year.  Of course, you won't need all the knowledge at once, so map out a learning plan that spans a year or more.

Your Budget is Only an Estimate

Keep in mind that your budget is only an estimate - it does not need to be precise.  You will probably revise your budget a few times before project execution.  Even then, a usual expectation is you will only need to be within 5-10% of that amount.

Where budget items are calculable, do the math and use the result.  Also, be sure to include all the expenses.  After that, good estimating processes will guide you to an achievable budget.

Your budget is only an estimate also means that when discussing and presenting the budget, you can drop the "cents."  The application of good rounding rules is also critical.

You Don't Always Get What You Want

Keep in mind that the budget amount given in the project charter is a constraint for many organizations.  Therefore, you will need to work with the team to fit the project within that amount. 

Remember our project manager that skilled up in cost management?  When management considered the amount needed for the project, they called vendors and were provided quotes of a million dollars and up.  They had not initially allocated anything for the project, so they decided to go in-house.

The first task for the newly assigned project manager was to develop a budget.  Working with a consultant that helped with the design, he managed to get it to $300k.  Management was pleased but challenged him to reduce it to $250k. 

So the project manager went back to the team and asked them for alternative designs and ways to do the work.  They found they could achieve $250k comfortably but not go any lower.  So with that new budget, the project manager got the green light to continue, along with a promotion to program management.

Integrate with Other Project Management Processes

Cost management processes need to be integrated into other project management processes.  To develop a successful budget, at a minimum, work on scope management, schedule management, quality management, and risk management is required.  These management areas will give time frames and costs to be factored into cost estimates and budgets.  In addition, risk management will provide data needed to develop contingency reserves appropriately.

While these are the most common touchpoints, there may be more.  For example, if project communications need a public relations campaign, communications management needs to be included.  As part of the budgeting process, go over each knowledge area carefully to see if there might not be additional costs.

Your New Best Friend

As a project manager, you are managing by influence and not authority.  When it comes to working out some costs, this creates some challenges.  For example, the HR department will not provide you with anyone's salary, but you may be expected to use some internal resources for your project.  Some material costs may also be challenging to estimate.

This is where your organization's cost accountant can become your new best friend.   Their job is to study costs, and they can often answer questions that others will not.  For example, they may not tell you the exact salary of that programmer or electrician your project needs, but they can tell you what they are paid on average.  When you complete your budget, they will also be one of the best experts to review it.

Check Variance Weekly

Some organizations may only require a status report semimonthly or monthly.  Don't wait for the status report to review your budget variance - do it weekly.  Checking at this frequency will reduce the time it takes to identify an issue and a solution and confirm the solution worked.  The interval will often also help to reduce the severity of the adjustments needed to get back in line with the budget.

In addition, you will need to monitor any variance trends.  For example, is the amount you are over budget increasing week after week?  Or perhaps there was a big spike?  These conditions signal a need to analyze the situation carefully and determine if any corrective actions are required.

 Do you have other cost management best practices or tips to share?  Let us know in the comments below!