What’s project cost tracking and why is it crucial?
Tempo Team
Project success hinges on delivering within a defined timeframe and adhering to the estimated budget. Overspending can significantly lower the project’s return on investment (ROI), negatively impacting the organization’s profitability and credibility with shareholders.
To shoulder this responsibility, leaders employ project cost-tracking methodologies to monitor, measure, and communicate the work’s financial status to stakeholders, helping prevent budget overruns. This approach, along with proactive financial management, is vital for successful project outcomes and client satisfaction.
What’s project cost tracking?
Project expense tracking is the ongoing process of monitoring fund allocation and expenditure throughout a project’s life cycle. Tracking costs encompasses several critical stages:
Preplanning: Laying the groundwork for budgeting and financial management.
Estimating: Determining the initial financial project requirements.
Tracking: Continuously observing and recording actual expenditures.
Measuring: Evaluating spending against the planned budget.
Forecasting: Predicting future costs based on current spending trends
Why is project cost tracking so important?
Understanding how to keep track of expenses in project management goes beyond ensuring happy clients, high-quality deliverables, and well-resourced teams. Additional business advantages include:
Control: Project managers can regulate spending by estimating and allocating funds during the project planning phase, ensuring specific areas aren’t over-taxing the budget.
Mitigated risk: Forecasting your project’s budget through rigorous estimation processes and validated data significantly reduces financial risk, ensuring funds are available for responses to unexpected issues.
Improved processes: Regular cost-tracking reports encourage teams to optimize resource utilization. This enhances the current project’s efficiency and improves future budgeting practices, leading to more streamlined and cost-effective project management.
7 stages of cost tracking
Project management cost tracking encompasses several critical phases. Each stage, from initial planning to final evaluation, is crucial in ensuring financial accuracy and control throughout the project.
1. Preplanning
Initiated during the project planning phase, preplanning involves setting a realistic budget. Start by analyzing the project scope to identify necessary resources like labor, technology, and materials, supplementing this insight with historical and industry data.
2. Estimating budgets
Building on your preplanning data, prepare cost forecasts for each task and apply analogous or parametric estimation techniques to evaluate the costs of individual activities. Summing up these estimates produces the total project budget, which you should present to key stakeholders in detail for their approval. The more detailed your budget, the more likely you’ll secure their buy-in.
Your initial budget, established from these estimates, becomes a crucial benchmark. It guides your expense tracking and progress measuring, enabling you to compare actual spending against planned costs.
3. Establishing cost controls
Establishing cost control processes enables project managers to allocate funds according to need, ensuring each task receives adequate resources and can proceed without delay. Use your project control process to approve and manage elements such as:
Materials
Hardware
Software
Vendor invoices
Contractor timesheets
Unexpected expenses
4. Tracking costs
As the project progresses, document the costs incurred by the team and how they align with the budget’s baseline. Tracking these expenses clarifies how the actual spending aligns with planned budgets, aiding the team in understanding and adjusting to the project’s financial aspects.
5. Measuring results
At the end of each reporting period, calculate and compare the incurred costs with your forecasted budget. This assessment helps gauge the project’s overall financial health and determine your estimation method’s accuracy while identifying improvement areas.
6. Updating forecasts
Budget changes occur for various reasons beyond project management’s control, such as a price increase for raw materials taking effect after budgeting completion. Document and justify any fund allocation adjustments, promptly informing team members and other key stakeholders about these updates.
7. Continuously improving
Maintaining regular communication with stakeholders about any changes in the budget’s baseline fosters transparency across all project levels and enhances the overall estimation process. Since project costing isn’t an exact science, transparency and collaboration are essential, ensuring everyone understands project resource availability and the factors causing actual budget variations.
How to track project costs in 8 steps
Effective project cost tracking is a multi-step process that ensures financial discipline and accuracy throughout the project lifecycle. These steps guide project managers in creating, monitoring, and adjusting budgets to meet the project’s evolving needs and objectives.
1. Establish accurate estimates
Forecasting an accurate project budget extends beyond tallying equipment, materials, and staff costs. It’s crucial to include indirect costs and execution expenses, as well as allowances for contingencies or unforeseen risks that could impact the budget.
2. Consult team members
Project budget estimation should be a collaborative effort. Along with verifying your data’s accuracy, engage with team members, clients, and other stakeholders for their comprehensive project insights. Their input, particularly regarding best and worst-case scenarios, can prove invaluable in understanding potential costs and refining your estimates.
3. Allocate your budget
After gathering input from stakeholders and obtaining approval for the project’s forecasted expenses, finalize the overall budget and distribute funds accordingly across individual tasks.
Prioritize and allocate resources to high-priority areas, as these are critical for project success. After allocation, these figures set your baseline for tracking progress and results. Use these benchmarks to refine future budgets and improve the accuracy of your estimations.
4. Define a cost-control process
Develop and implement protocols that help prevent overspending and distribute the responsibility for budget maintenance and cost control across multiple team members to ensure checks and balances. Implementing a system where project leadership must approve items is an effective cost-control measure. This process ensures financial accountability while minimizing budget overrun risk. Key items requiring approval include:
Timesheets
Billable and hourly rates
Labor costs
Material purchases
Vendor invoices
Additional expenses
5. Integrate tracking tools
Instead of manually configuring project estimates and updating cost-tracking records, implement cost and time-tracking software to streamline resource allocation and management. Doing so not only simplifies monitoring billable hours, especially when managing multiple projects, but also makes data management less labor-intensive. By offering built-in expenditure visibility and immediate budget updates, automated estimation and cost-tracking software empower you to manage funds in real-time. Additionally, an online tracker can:
Break down projects into Gantt charts and roadmaps
Generate estimates
Forecast project timelines
Assign team members to specific tasks
Alert you when spending approaches a set limit
Track fixed costs, one-time fees, and ancillary expenses
Centralizing this information and making it accessible to all stakeholders simplifies workflows and promptly identifies deviations from the planned project course.
6. Track spending and measure results
Actively compare the project’s actual financial performance against the estimated budget to measure progress and profitability. Keeping the data in your tracking tool updated ensures you can provide stakeholders with real-time budget status reports.
7. Compare actual costs with budget estimates
Refer to the benchmarks set in your project plan to assess the proportion of the budget used against your initial projections. Actively review and report on these metrics to pinpoint if funds are diminishing more rapidly than planned. Doing so enables you to identify and address any emerging financial issues proactively.
8. Update and improve
Even with thorough planning, projects can exceed their budgets. When this happens, report the overrun and revise your current project phase’s budget forecasts. This approach not only maintains transparency but also provides valuable insights for enhancing future project estimations, helping you discover the best way to track expenses.
Effective project cost tracking with Tempo Strategic Roadmaps
Help the project tracking process run smoother by adding Jira-enabled Tempo Strategic Roadmaps to your project management toolbox. Project roadmapping allows you to visualize tasks, ensuring you haven’t missed a step during the estimation process. Combined with Tempo’s Financial Manager, you’ll have everything you need to establish and maintain accurate financial forecasts for your IT, product, or project management undertakings.
