What Is Project Cost Management? Why Use Software to Keep Budgets in Check?

Every company wants its projects to succeed and fulfill corporate goals and client expectations. But that’s not always how it works. According to a PMI analysis, 14% of the IT projects examined were considered unsuccessful. Only 57% of the total projects evaluated were completed within the estimated budget, while 43% exceeded the budget heavily.

 

When project costs exceed budget, it affects your business’s profit margins and makes it more difficult to carry out future projects. So, it is valuable to understand project cost management and how to use it effectively to stay on track. Also, implementing software solutions is vital in keeping budgets in check and ensuring project success.

Understanding Project Cost Management

If you want your project to succeed, it must be completed on time, under budget, and with high execution quality. It should also meet all specifications and scope.    

 

Therefore, one of the fundamental project management principles is project cost control, which applies to all project types, including retail, manufacturing, technology, and construction. 

 

Project cost management maintains expenses within the allocated budget by estimating, planning, and controlling costs throughout the project life cycle.

 

Establishing a financial baseline helps project managers assess the current state of their project expenses and adjust course as necessary. But sticking to a budget can be challenging.     

 

Project cost management requires:

• Adhering to cost estimation procedures to estimate the project’s overall cost precisely.
• Accounting for complex indirect expenses like overhead and direct costs like labor and materials for accurate forecasting.

The Process of Project Cost Management

 

 

While tracking expenditures is crucial, project cost management involves much more than adding up costs. Consider it a calculated method that tracks every possible expense to guarantee a project’s financial viability. 

 

Every manager approaches cost management slightly differently, but project cost management often serves the following main purposes:

 

• Cost estimation: Project managers can predict the cost of each task, employee, and other resource for the project using estimation methods. Managers frequently employ parametric, bottom-up, and comparable estimating methods to determine these figures.  
• Cost budgeting: Budgeting converts cost estimates into a manageable project budget by allocating funds to various project tasks. 
• Cost control: Although budgets are useful tools, they are useless if they are disregarded. When project managers practice cost control, the budgeted costs and actual spending are in line. To stay on track, it’s necessary to keep an eye on expenses, manage cost fluctuations, and take corrective action when necessary.   
• Reporting: During this phase, the project manager provides financial reports to the team members, higher management, and other stakeholders. These reports are essential for making well-informed decisions regarding the ongoing project and identifying areas where future efficiency can be improved.  

 

Budgeting is the most important element of project management. It significantly affects a project’s sustainability and the expected return on investment.

 

The Benefits of Project Cost Management

 

Without a predetermined budget, it is impossible to determine whether the project is moving in the right direction. So, cost control becomes very important for managing large-scale projects.

 

1. Determines Financial Feasibility

Cost management helps determine whether a project is financially viable by providing accurate cost estimates. This assessment helps organizations decide whether to proceed with the project.

 

2. Keeps Budget in Check 

Cost management helps with budget control by closely monitoring project expenses and comparing them against the budget. It allows project managers to take timely action to prevent the budget from exceeding.

 

3. Assists in Resource Allocation

Effective cost management ensures that resources are allocated efficiently, minimizing waste and ensuring that every dollar spent contributes to the project’s goals.

 

4. Transparency Between the Company and Stakeholders

Transparent and well-managed project costs increase stakeholder confidence, as they can see that the project is being managed responsibly and within financial constraints.

 

5. Supports Risk Management

Cost management involves identifying potential financial risks and establishing backup plans. This reduces the chances of cost-related issues hampering the project development.

 

The 4 Steps of Project Budget Management

 

 

Effective project cost management ensures a project stays within its allocated budget from start to finish. Despite its seemingly complex nature, it is actually an easy four-step method that provides complete financial transparency.  

1. Resource Planning

 

Determine the kinds and amounts of resources required for this project at the planning stage. This includes:

 

• Workforce required 
• Tools or hardware 
• Materials 
• Subscriptions for software

 

After that, create a plan for the distribution of these resources. The simplest approach is to create a Work Breakdown Structure (WBS) to categorize the project into smaller, more manageable pieces. Then, allocate resources to every section according to the project structure.

 

2. Estimation of Costs

 

Cost estimating is the process of calculating the expenses related to all the resources needed to complete the project. To calculate costs, project managers require the following data:

 

• Requirements for resources 
• Cost of each resource (e.g., hourly labor, vendor hiring expenses, server procurement costs, etc.)
• How long each resource is needed for
• A list of presumptions  
• Possible risks
• Any applicable industry standards

 

Since precision is important in this process, estimation is perhaps the most challenging step in cost control. 

 

Control account managers must also consider variables, overhead, price inflation, and the time value of money in addition to fixed and variable expenses. An increase in the difference between estimated and actual costs will reduce the chances of a project’s success.

3. Cost Budgeting

 

Cost budgeting can be seen as either an independent process or a part of estimating. Budgeting involves allocating expenses to a specific project element, such as individual tasks or modules, for a predetermined duration. Reserve funds are set aside in budgets to handle unforeseen expenses.

 

By creating a budget, project managers can establish a cost baseline. This baseline will assist in tracking and assessing the project’s cost performance going forward. Without the budget, the expected cost would continue to be an estimate and be challenging to determine halfway through. Evaluating the project’s performance provides the option to determine how much money needs to be released for the project’s future phases.    

 

Establishing budgets is also necessary because organizations rely on anticipated future financial flows for funding. The project manager must create goals in accordance with the limited funds available during the project’s early stages.

4. Cost Controlling

 

Even though it may seem that the hard work is done, managers still need to adjust the budget as the project progresses.

 

Managers should use real-time data, comments, and project advancements to keep project expenses as current as possible. Even if something is overlooked, managers can always use this information to improve future project cost predictions.

 

It is now time to implement project cost management strategies. Cost management becomes complicated when numerous factors are involved.

 

The procedure is complex, requiring a disciplined approach and close attention to detail. Rather than keeping track of everything in a laborious Excel spreadsheet, managers can use project cost management software to enter the budget and performance metrics. It’s the most straightforward method for tracking actual versus budgeted expenses and making the necessary adjustments in advance.

Optimizing Project Cost Management with Advanced Software Solutions

 

 

Advanced software like ProboData’s evData Pro is crucial to today’s project management. This technology enhances project cost management through automated workflows and real-time data analytics, offering substantial benefits like:

 

• Automated Cost Tracking: Streamlines the capture of both direct and indirect expenses, reducing manual errors and administrative overhead.
• Seamless Integration: Ensures a cohesive view of financial data by effortlessly connecting with existing project management systems.
• Real-Time Monitoring and Alerts: Provides ongoing financial health checks and predictive alerts for budget overruns, enabling proactive adjustments.
• Error Reduction in Estimation and Measurement: Automates calculations to prevent human errors during the budgeting and planning phases.
• Continuous Project Monitoring: Facilitates real-time adjustments and updates, allowing project managers to respond quickly to changes or discrepancies.
• Enhanced Reporting: Features intuitive dashboards and user interfaces for straightforward, transparent financial reporting.
• Multicurrency Management: Simplifies handling of projects across different regions with varying currencies, improving financial accuracy.
• Data Aggregation and Standardization: Supports third-party connectors for enhanced data integration, promoting consistency across multiple projects.

 

Integrating software solutions into your project management strategy ensures more accurate, efficient, and reliable financial oversight, crucial for the success of any project.

 

Elevate Your Project Management with ProboData’s Solutions

 

 

Are you struggling to keep project costs under control? evData Pro by ProboData can help. This powerful platform simplifies cost management by offering accurate cost estimation, real-time budget monitoring, and comprehensive reporting.

 

evData Pro ensures your projects stay on budget and deliver financial success every time. Are you ready to take your project management tasks to the next level?

 

Experience a new standard in project cost management. Schedule a demo today!