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7 min read

Project cost management: Keeping your budget on track

Don’t let skyrocketing expenses come between you and project success. Learn fundamental project cost management to create realistic estimates and budgets.
From Team '23

Tempo Team

Cost management is one of the most challenging pillars of project management. It’s also one of the most essential. Without proactive expenditure control, the costs of a project can balloon, putting your budget (and your client relationship) at risk.

Effective project cost management safeguards profitability and the organization’s ability to execute future projects. 

What is project cost management?

Cost management in project management is the ongoing process of estimating, budgeting, and controlling costs. During the planning phase and throughout the project life cycle, the project manager reviews, monitors, and adjusts spending to ensure it complies with the approved budget. 

The importance of project cost management

Failing to manage your project’s budget can be catastrophic. Consequences range from damaged client relationships to financial losses.

Cost control allows project managers to identify the source of runaway expenses so team leadership can streamline processes and prioritize essential features. If that’s not enough to shore up the budget, the project manager can renegotiate with subcontractors and suppliers to further reduce costs.

Cost management can transform a potentially damaging situation into a success, maintaining the customer’s trust.

Steps in a cost management plan

Team leaders control costs throughout the project life cycle, from planning until delivery. Although it’s a fluid process, building a cost management plan requires four elements.

1. Resource planning

The first step in managing expenses is determining what resources the project requires to deliver its outcomes, including:

  • Tools

  • Money

  • Time

  • Equipment

  • Technology

  • Staff

Review the project scope and consult with team leads and stakeholders to determine requirements. Team members with hands-on experience know what resources they need and are better qualified to guide you. 

To establish a resource plan, you’ll need the following:

  • Clearly outlined project scope statement, goals, and objectives

  • A work breakdown structure (WBS), Gantt chart, or project roadmap

  • A preliminary resource management plan

2. Cost estimating

Once you’ve established the project’s resourcing needs, you can estimate procurement. Gather as much pricing information as possible to inform cost estimates.  

Break the resource list into tangible and intangible items. Tangible supplies are direct costs like tools, hardware, and equipment. Quotes for these supplies come from suppliers. For intangible resources, such as labor, seek cost estimates from multiple potential contractors. Consider additional indirect costs, like administration fees, rentals, and other overhead expenses. 

You also want to build some cushioning into your budget. You must account for price fluctuations, especially if there’s a lag between the estimate and the contract signing. An extra 5–10% in your budgeting accommodates unexpected expenses and cost overruns. 

Estimating costs can be tricky, especially without previous experience. Review financial reports from similar projects to see how much the final cost deviated from the initial estimate. Use that information to benchmark the margin for a more accurate estimate. 

Additional required documentation includes:

  • A project schedule or PERT chart, depending on the complexity of the project

  • A list of project deliverables

  • Defined success metrics 

3. Cost budgeting

Once you’ve established resource requirements and completed the estimation, it’s time to calculate the budget. Budgeting details the amount you expect to spend during the project, on what, and when. 

The “when” is essential for multi-year projects. Consider specifying a budgetary allocation for each phase – for example, no more than 25% over the first stage of a five-year project. Budget limitations like this prevent cost overruns down the line.

At this point, you’ll need:

  • Project stakeholder analysis

  • Project budget document

4. Cost control

As the project manager, ensure the actual costs stay as close as possible to your estimates. Once the project launches, cost control will consume a substantial amount of your time. Record expenditures, adjust the budget, and raise the alarm with stakeholders if expenses skyrocket.

You must also carefully curtail scope creep. Any change in scope affects the budget. This doesn’t mean you can’t be flexible, but you should implement a rigorous change management system to assess impact and keep costs in check.  

The frequency of budget reviews depends on the nature of the project. Some require real-time monitoring, while others only need monthly or quarterly check-ins. Keep team members and stakeholders updated by including budget status in regular progress reports. 

At this stage, the process requires the following:

Cost management best practices

Scope and cost management are the two most effective ways to prevent budget overruns and ensure positive outcomes. Here are four tips to maintain project control, plus tools you can incorporate into the management process.  

1. Collaborate to describe and manage scope

Be proactive regarding change management. Instead of making a list of deliverables, collaborate with the project team and client to describe each feature in detail. By clearly defining scope and requirements during project planning, you avoid future misinterpretations.

Once you’ve established the scope, communicate and track any changes to resource allocation using centralized project management software. If requirements must change due to shifting market environments or user needs, you can enlist project sponsors or a change management committee to analyze the request and decide how to proceed.   

Helpful tools for controlling project scope creep include:

  • User stories

  • Product descriptions

  • A requirements traceability matrix

  • Work management software

  • A change log and change management system

2. Ask for a pre-project phase

Speed up the requirements and capacity analysis by asking the client to cover the cost of a pre-project phase. During this stage, the project team will detail all aspects of the project and create a prototype. This process comes with several benefits:

  • Everyone from the suppliers to the contractors will better understand the project’s scope

  • Reduced risk

  • Improved cost estimate accuracy

  • Creation of a realistic project baseline

Methods to support the pre-project include:

  • Collaborative workshops

  • Business process mapping

  • Client interviews

  • Mock-ups and prototypes

3. Produce a realistic cost estimate

With a contractually binding budget, your cost estimates must be as accurate as possible. As the supplier, your organization is responsible for absorbing budget risk, so review each project phase to account for:

  • Fixed costs

  • Variable costs

  • Sunk costs

Work with your project team to define each feature in detail and produce best- and worst-case estimates. 

Along with the PERT estimation technique, use:

4. Implement rigorous cost controls

Only a few lead team members should have the authority to sign off on project expenditures, timesheets, and vendor invoices. Establish weekly or monthly reporting processes for these members. The reports should track project disbursements using a budget monitoring sheet to compare current expenditures against the established plan. 

If you spot an unhealthy trend, you have the necessary information to bring spending under control again.

What are the challenges of project cost management?

Cost management is highly demanding. Keep your eyes out for the following challenges:

  1. Lack of resources: A small budget limits the project manager’s ability to secure and allocate necessary resources. 

  2. Inaccurate estimates: A poor budget forecast can lead to cost overruns and negatively impact the project’s return on investment. 

  3. Outmoded tools: As the project manager, you need technology that delivers real-time and accurate budget accounting.

Cost management made simple with Tempo

Take some of the stress out of cost management with Jira-enabled applications from Tempo. 

Strategic Roadmaps, Tempo’s best-in-class project road-mapping application, lets you visualize every step of your project plan, assuring you accurately allocate resources to each task. The platform helps you prioritize high-value tasks and identify potential dependencies and blockers, improving your workflow and maximizing resource use. 

Timesheets, a time-tracking and resource-allocation platform, allows you to monitor expenditures by comparing the total costs and expenses against your planned budget in real time. You can also use the application to manage staffing levels, reducing overtime costs.

Tempo software fully integrates with Jira to create valuable reports for you and your fellow project managers. These reports inform future cost estimations and resource planning. When it comes to cost management, Tempo is all you need.