Mistaken project costing isn’t just about the money, but also reputation- whether overspending or overdue- not delivering to clients can be a costly mistake in more ways than one. Due to the importance of budgets- project costing is an essential part of any project management planning.
To improve project cost management, you will need to understand the types of costs associated with a project and the steps you can take to accurately estimate the budget to create a successful cost management plan.
What is Project Cost?
Project cost refers to the amount of money needed to secure all necessary resources to initiate, execute, and complete a project. The project cost, or budget, will need to consider all factors that directly and indirectly affect the project.
Project cost management is part and parcel of overseeing any project. Without the proper finances, a project cannot run. Therefore, project cost management is the process that most significantly impacts project performance.
For example, if a company decided on an expansion project of their home office, the project budget must cover all materials, labour, products, and licenses needed to execute and complete this growth opportunity.
Multiple expenses must factor into the project budget when estimating costs, such as:
- Fixed Costs: Costs that do not change throughout a project’s lifecycle, fixed in relation to the project’s timeline, not fixed indefinitely
- Variable Costs: Costs that fluctuate or change throughout the project lifecycle in direct relation to the products or services produced from the project
- Sunk Costs: Costs that have already been spent in the project without seeing any return on the value. These are costs that are permanently lost
- Direct Costs: Costs directly related to realizing the project’s objectives
- Indirect Costs: Costs that indirectly contribute to the project, which can be fixed or variable
- Total Project Costs: Factoring in all other cost types to determine the total cost of the project. If inaccurate cost estimates happen at this level, there can be serious consequences for the project.
Why Project Cost Management is Important
Estimating costs of a project means factoring in all internal and external variables that dictate all aspects of the project. One of the most important aspects of a business project is its budget. Typically a project manager, or Project Management Professional (PMP), would be in charge of overseeing projects- this individual would have the experience and skills to complete a project within the stated budget.
Many PMPs are judged on their cost management or how well they have previously delivered a project within the stated financial means without overspending. Therefore, good cost control results in greater client retention, as clients must trust the project manager to deliver all project objectives without incurring extra costs.
The project cost and the project profit are intimately entwined. Overspending and cost overruns can significantly affect the project’s bottom line. If the cost exceeds the profitability, then the project is considered a failure and can cause repercussions for all involved.
How Inaccurate Project Costing Affects Your Business
Inaccurate costing – whether quoting too low with inaccurate project cost estimation, overspending due to carelessness, or situations outside of your control- can still result in diminished reputation, customer dissatisfaction, and even debt.
Thanks to search engines and local SEO– any bad reviews or unhappy customers can write about your services, which can easily be found online. If many negative reviews discuss overspending on projects or grossly underestimating the project budget, then inaccurate project costing can negatively impact your small business as a whole. These reviews can make you lose out on future clients and earnings, making it harder to secure jobs and gain positive reviews to outweigh the bad.
Mismanagement of project funds can also cause the business to go into debt if they or the client cannot pay for the higher expenses than initially planned. Lack of project profitability can cause companies to lose out on revenue during the project and for a long while afterwards, as they pay off any debt incurred.
How to Accurately Project Cost
Before the project begins, you will want to take into account all aspects of the project to ensure a successful cost estimate and budget management throughout. This includes planning for all possible setbacks and opportunities that could directly or indirectly affect the project’s bottom line.
To accurately budget for project performance and use cost tracking throughout, consider the following steps to help your business plan for its next big project.
Implement work breakdown management
Project managers use something called the work breakdown structure to help them plan the workflow and stages of a project. Managers use this tool to construct a hierarchical breakdown of each phase of the project, including all deliverables and team members needed in each phase.
Creating this work breakdown structure at the start of a project will make it easier to visualize what is needed, including the necessary budget for each phase in order to realize the actual cost of the project.
Understand the project scope
To accurately estimate project costs, you will need to create a detailed and well-thought-out budget before the project even begins. To do this well, you will need to understand the project’s scope, meaning listing out all aspects of the project, from objectives and actionables to the resources required and the timeline in which everything must be completed.
Without a detailed project scope and budget, scope creep can set in. This is when the scope of the project gets out of control from the original outlines. A small amount of scope creep is inevitable in most cases, but it’s essential to continuously check in on the project’s progression to ensure that scope creep does not get out of hand. If it does, it can greatly impact project costing.
Estimate how long it will take
Part of understanding the project’s scope is accounting for the scheduling requirements of the project. Constructing a timeline and accounting for deadlines is a key part of project cost planning.
Cost estimates hinge on the timeline of the project. Time constraints can cause overspending to offset the short schedule. An overdue project can also cause issues, spiking costs of labour, resources, and other costs as the timeline drags on and on. As a result, managing costs means successfully managing the project schedule.
Add up all other resources and costs
Whether you have the resources in-house or need to purchase additional materials, services, or labour, now is the time to tally up all requirements with their corresponding costs. This list will help you with your cost estimates, and should also include all direct costs like labour and payroll and indirect costs like utilities and rent for the space needed.
Give yourself leeway
Always budget extra finances in case of emergencies or unforeseen circumstances. Managing costs successfully is about planning for the unexpected and ensuring that whatever setbacks the project experiences, there is enough room in the budget to account for extra expenses.
This also includes giving yourself leeway for scheduling requirements. Overall, giving yourself enough budget wiggle room will hold you in good stead when realizing the actual costs of the project overall.
Create a cost management plan
A cost management plan is a must-have tool to ensure proper project spending and cost performance throughout the project’s life cycle. This management plan helps project managers map out all aspects of a budget, including how expenses are recorded and reported on.
Items to include in a cost management plan:
- Units of measure
- Level of precision
- Control thresholds
- Rules governing performance measurement
- Reporting formats and cost recording procedures
- Funding and financing details
Cost tracking should be done throughout the project- from its conception to its completion.
Keeping track of ongoing tasks and expenses helps ensure that the project is progressing within the confines of the budget.
Keeping a detailed eye on the spending habits of the project is one of the only ways to ensure that the costs are in line with the forecasted budget and finances. It also allows you to catch any issues before they can hugely impact the project and its bottom line.
Use the data to help estimate for the next project
Part of successful project completion is ensuring that the closeout phase in project management is achieved. The project closeout brings the project to an orderly end. All documents are reviewed and archived, and a detailed report is generated with the overall findings. Such historical data can then be used for similar projects and future estimations to ensure accurate spending. By having an archive of past project data at your fingertips, you can use the insights to help improve cost management for all future projects.
Many project managers look to software to help with cost tracking. Such software can also help with scheduling needs of tasks and project team members. Such comprehensive tools like QuickBooks Time and QuickBooks Online can work seamlessly together to improve the cost estimate of every project.
Use time tracking management software alongside accounting software to ensure your project costing is as accurate as can be. Improve your cost management right away when you sign up for a free trial of QuickBooks Time today.