The cost management plan summarizes the project’s cost estimation, resource allocation, and cost control for all project tasks.
The project’s cost plan configuration is one of the most critical aspects of the project’s planning stage. It successfully functions as a support system that guarantees project expenditures are budgeted.
According to Harvard Business Review, one in every six projects has a 200% cost overrun.
There can be various factors behind cost overruns, including unplanned modification orders, supply chain challenges, or adverse weather.
This can result in a variety of unfavorable outcomes. They affect the project’s success and the capacity to carry out future initiatives.
As a result, businesses rely heavily on their ability to monitor, manage efficiently, and control expenditures, often known as the cost management process, to keep the project on schedule and completed successfully.
Effective cost management enables you to make the most use of your current resources, track financial performance, and ensure a consistent cash flow from the appropriate sources at the right time to meet each project requirement.
This is why teams like to create an effective cost management plan document that addresses cost planning for the project budget and how costs will be effectively managed to the cost baseline and expenses will be controlled.
This post highlights everything there is to a cost management plan.
What is the Cost Management Plan?
The cost management plan configuration for the project is critical throughout the planning phase, acting as a safety net to ensure that all costs are controlled within the budget’s limitations.
It helps the project manager set up cost controls that limit the probability of the project going over budget. A cost management strategy, in general, assesses how project expenditures are planned, budgeted, and managed throughout the project management cycle.
The cost management plan will guide you through calculating expected costs for each project activity, deliverables, and overall project budget.
When creating a project budget, the cost baseline is taken into account. The cost baseline initially represents the whole project’s cost assumptions. If no accepted modification requests or adjustments are made to the project, the projected project budget is expected to be accurate.
What is the Purpose of the Cost Management Plan?
- It maintains the costs of multiple events, helping in the management of the total company budget
- If you have a comprehensive cost management strategy, you will be able to correctly forecast future expenses and hence focus your efforts on attaining the projected revenues
- The cost management plan also helps in the pre-definition of all project activities, which are then saved as business papers
- It maintains budget balance by limiting overspending on any one corporate component
- Cost management solutions assist you in prioritizing your project activities by strictly limiting the cash flow. You will be able to focus more on the tasks that are truly necessary for the project
- It prevents unnecessary spending since all expenses must be authorized by management before they are incurred.
What should be included in Cost Management Plan?
They describe how accurate measured values are to one another.
Specifying a degree of accuracy from the outset and ensuring that all stakeholders are aware of and respect is what eventually outlines the precision level.
Define the dimensions, quantity, capacity, and amount.
Since variations in measurement can result in significant increases in material and production costs, unit measurement standards are a crucial aspect that must be addressed, mainly when project resources or methods are distributed across many countries.
Establishing a typical frame of reference might assist in streamlining communication and reducing misunderstandings.
What are the requirements for minimum and maximum cost variation regulated? It is especially vital for anticipating a specific segment of a budget, based on the size of the project and its permitted budget, in case it has to be brought back on track or if a project goes off schedule or fails.
Performance Measurement Rule
Because all projects are expected to have specified targets and productivity is not always equal to performance, this is a method for measuring the extent of activity completion.
Because salaries and human resources frequently account for the bulk of a project’s budget, it is critical to establish how each activity will be evaluated beginning with the planning phase.
Establishing reporting protocols, format, and frequency across all project stages are vital, especially considering that most projects have more than two reporting periods and that reporting may be highly valuable in recognizing issues.
How Can I Create Cost Management Plan?
As a Project manager, in today’s competitive business world, you will probably be asked to create a cost management plan several times throughout your career. You must be prepared to respond appropriately and precisely to these scenario questions.
Here are 5 practical steps to create a successful cost management plan
1. Project Resources Allocation
Resource planning determines all the resources required to carry out and complete a project development process.
Individuals participating in the project development process, such as contractors or their employees, and equipment, such as specialized equipment in short supply, massive construction vehicles, and infrastructure, are examples of these resources.
Here are a few items to consider when you begin the project resource planning process.
When working on projects, you must consider all previous project data, such as the team’s effort and prior timetables.
Because this collaborative approach works incredibly effectively in projects with little prior data or experience, you must request comments from SMEs and other project cost management team members.
Even though this should be the first stage, project managers must account for all of the project’s ground realities from the start to guarantee that there are no money issues in the project development and cost management procedures in the future.
2. Estimating Project Cost
The primary purpose is to offer a fair estimate of the time necessary to complete the project. The cost management approach guides the cost estimation process.
It computes the expenses associated with the resources required to accomplish the project and the planning phase. Furthermore, while estimating expenses, project managers must consider several factors, such as fixed and variable costs, overheads, time value of money, and inflation.
3. Cost Budgeting
A budget is a financial strategy that professionals employ to control their money. Cost budgeting is a type of budget in which all anticipated expenditures for a specific period are tallied. Project managers commonly use cost budgeting while planning new initiatives. Moreover, developing a financial strategy and budget based on cost predictions.
Company executives and financial professionals may employ cost budgeting when preparing quarterly or yearly budgets. These specialists can utilize a cost budget to examine their project performance and spending habits.
A manager must do risk management tasks such as establishing a cost baseline, which indicates the finances that the project manager is capable of governing and managing while budgeting the entire expenditures for a project. Meeting the cost budget will determine the project’s success while minimizing expenses and the overall project.
4. Cost Control
Cost control identifies and reduces company expenses to increase profits; it begins with budgeting. Actual financial outcomes of a firm are compared to budgeted expectations, and if actual costs are higher than predicted, management gets the information it needs to take action.
Cost control is performed regularly throughout the project’s life cycle and can be performed more often when project expenses grow. A project control evaluates and actively controls the factors that lead to cost reduction and budget monitoring.
5. Establish Performance Measurement
Performance measurement refers to evaluating the efficiency and effectiveness of projects, programs, and initiatives. It is a systematic approach to gathering, assessing, and considering how effectively a project/program is on track to achieve its desired results, goals, and objectives.
An organization will frequently review performance to demonstrate accountability, aid decision-making, and improve operations. It should be noted that this is not a prescriptive strategy; firms must develop their success metrics based on their project objectives and circumstances.
From the start, performance measurement should be viewed as an essential component of the cost management plan. It should be included in every program or project with specified goals and objectives.
Performance metrics provide data that may assist companies in making strategic decisions about what they do and how they perform. Performance measurement frameworks are customizable and may be used to evaluate the effectiveness of a pilot project, a multi-year program, or a strategic planning process.
6. Reporting Formats
Implementing reporting methods, frequency, and format across all stages of a project cost management plan is crucial, mainly because the document is a significant component of the project management cycle. Reporting may be highly beneficial in spotting deviations from the original budget.
Things to Avoid While Making Cost Management Plan
When developing a cost-cutting strategy, understanding what not to do is just as crucial as knowing what to do. A cost-cutting approach is complicated, and mistakes are conceivable. The more conscious you are of your errors, the less likely they occur.
Here are some points to take into consideration.
- Project managers use reports to provide vital cost information to project stakeholders. Because they have a vested interest in the project’s success, stakeholders are keenly interested in its development
- Failure to Use a Work Breakdown Structure Failure to plan out every step required to complete the ultimate output of your project will influence your budget
- Spreadsheets are compelling and adaptable. They are, however, insufficient to carry out a cost-cutting plan. It is easy to make mistakes while inputting data, and things can quickly become highly convoluted, with few reporting and visual possibilities
How can nTask help you With Cost Management Plan?
nTask is a cloud-based project management software that manages all elements of project management, including expenditure tracking. It has many functions that may assist you in automating your operations and managing your budget.
In the following ways, you can use nTask to manage project finances and do advanced quantitative analyses:
nTask provides a versatile billing approach that includes both billable and non-billable aspects. You may specify all of your expenses and accurately estimate the costs of your project in any of them.
In this section, you can view your actual spending vs. planned costs, a percentage of the remaining estimated costs, and create alerts to get real-time updates.
The section allows you to manage all of your project’s resources. You can change jobs and increase weekly capacity.
The centralized interface allows you to view your costs and resources. It also helps to create outstanding billing reports.
Using nTask’s risk management tool, you can set different parameters to evaluate and manage risks appropriately.
Cost management plan is a constantly evolving phenomenon; it changes alongside each project and it’s respective variables. Feel free to improvise for the best results.