Project management isn’t for the faint of heart. As a PM, you’re in charge of managing everything: people, resources, timelines, and (of course) budgets. Project cost management is a must-have skill for managing both direct costs and indirect costs for new projects. After all, profitability keeps your doors open.
However, cost control isn’t without its challenges. Effective cost management requires proper resource leveling , staying within project scope, and generating accurate budgets in the first place.
If you cringe at the thought of over- or underestimating the cost of a project, we’ve got you covered. In this guide, we’ll break down the ins and outs of project cost management, share cost control methodologies, and show you how to control project budgets.
What Is Project Cost Management ?
Project cost management is the process of planning, estimating, budgeting, and controlling costs. The goal of cost management is simple: end a project within its approved budget. This includes keeping expenses low and striking a balance between scope, time, and cost . 💰
However, staying on budget is easier said than done. Project cost management requires following meticulous cost estimation processes to accurately predict the total cost of the project. Not only that, but you need to calculate direct costs, like labor and materials, and trickier indirect costs, like overhead, for the most accurate forecasting possible.
Fortunately, effective cost management comes with a host of benefits for your business, including:
- Budget adherence: One of the biggest challenges of project management is keeping costs under control. Project cost management helps you avoid overages that would otherwise jeopardize your profitability
- Better resource allocation : Need help allocating resources? Project cost management ensures every dollar spent contributes to project success. Stop paying for unused subscriptions or inefficient hardware with proper project planning
- Smarter decision-making: Accurate cost estimation in project management and regular monitoring will help you make informed decisions. Foresee financial risks .
Goals of Project Cost Management
Any project manager worth their salt needs to understand the underlying goals of project cost management, which include:
- Controlling budgets: The first goal of cost management is making sure the project ends on budget. In practice, this means you’re in charge of constant monitoring to avoid cost overruns
- Optimizing resources: Get the most value for your money by efficiently using labor, materials, and equipment
- Minimizing risk: Projects that bleed money are a tremendous liability. Cost management minimizes risk by identifying financial risks early in the project lifecycle and helping you develop strategies to mitigate them
Different Cost Management Methodologies
Project managers have a lot on their plates, but budget control is one of the most important tasks on your to-do list. You don’t have to manage this alone, though. Just choose an estimation method as a framework for budget control.
Finances will differ depending on the project, so choose from these popular cost management methodologies to find the right approach for your types of projects.
Earned value management (EVM)
Earned value management is a technique that assesses your project scope, schedule, and cost to show the objective value that a project returned to your business. 🙌
For example, say you have a $100,000 budget for 10 months. After five months, the project should be 50% complete, with $50,000 spent. If the actual cost is $60,000 and the project is only 30% complete, EVM will highlight that variance to show that you’re both over budget and behind on project progress.
Analogous estimating
This cost management methodology involves estimating project costs based on historical data from similar projects. It’s the quickest way to estimate costs, but it’s less accurate because it relies so heavily on past data, which doesn’t account for today’s conditions.
Parametric estimating
Parametric estimates look for statistical relationships between historical data and other financial factors. Parametric is more accurate than analogous estimating because it can identify relationships, although you need a lot of data for it to work properly.
Bottom-up estimating
With bottom-up estimating, you create a more accurate cost estimate based on individual work breakdown structure (WBS) components. Once you have a total for each component, you add them up to get the total project cost.
Three-point estimating
With three-point estimates, you create three estimates for each project. You look at estimates on a best-case, worst-case, and most likely scenarios. This is ideal if there’s a lot of uncertainty in your business. When in doubt, budget for the worst-case scenario to ensure your projects are viable, even if everything goes off the rails.
4 Steps to Effective Project Cost Management
Effective project cost management is a multi-step process that ensures a project stays on budget from inception to completion. While it might sound complicated, it follows a simple four-step process to give you total financial clarity.
Step 1: Planning resources
In the planning phase, determine the types and quantities of resources needed for this project. That includes:
- Labor
- Equipment or hardware
- Materials
- Software subscriptions
Next, make a plan for how you’ll allocate these resources. The easiest way to do this is to create a work breakdown structure to divide the project into smaller, manageable parts. From there, you assign resources to each part of the project. 🛠️
Step 2: Estimating the cost of resources
Once you have an idea of the resources you need, it’s time to estimate their costs. Everyone has their own approach here; what matters is that you use an effective cost estimation technique, like analogous estimating or parametric estimating, to guide your reasoning.
It’s hard to see into the future, but try to anticipate all types of costs here. Direct costs, like labor and software subscriptions, are pretty easy, but indirect costs, like your monthly rent, are a little trickier to estimate. Even so, both types of costs affect your profits, so don’t overlook the sneaky influence of indirect costs.
Step 3: Determining the cost budget
With costs in hand, it’s time to determine your actual project budget . If you made multiple estimates, average them to get a more comprehensive project budget. It’s also good to establish expense baselines during this step, which you can use as reference points throughout the project. For example, if you have a total budget of $20,000 for a two-month project, you would expect to see a baseline of $10,000 in costs after the first month.
Of course, the unexpected will always happen. As a project manager, it’s up to you to plan for the unknowns. Always include a 10% contingency reserve to account for surprise expenses.
Step 4: Controlling the costs and project cost estimation
Plan, organize, and execute projects using ClickUp’s all-in-one project management tool to achieve shared goals
Once you have a budget and controls established, it’s time to execute project cost management techniques . Instead of tracking everything in a time-consuming Excel spreadsheet, plug your budget and performance figures into project management software like ClickUp . It’s the easiest way to track actual costs against budget costs—and course-correct before it’s too late.
It might feel like the hard work is over, but you have to continually refine the budget as the project progresses. Use real-time data, feedback, and project developments to keep your project costs as up-to-date as possible. Even if you miss something, you can always use this data to improve cost estimates for future projects.
Project Cost Management Tools and Techniques
Project cost management doesn’t have to take hours. With the right project management tools and techniques, you’ll be able to create, manage, and optimize project budgets in just a few clicks. Try out these tricks to simplify project cost management.
Plug everything into ClickUp
Organize, sort, and filter tasks in the ClickUp 3.0 Table View to gain insights faster across all your work
Who’s got time to manage costs in slow spreadsheets or sticky notes? Not you. ClickUp is the universe’s favorite all-in-one project management tool. Let us do the heavy lifting for data visualization, collaboration, and, of course, budgeting. ✨
Rely on ClickUp’s robust features to keep project schedules on track:
- Dashboards: Whether you need to see financial or performance KPIs, there’s a ClickUp Dashboard .
Frequently Asked Questions
1. What is meant by cost management in a project?
Cost management is the process of planning, estimating, budgeting, and controlling costs in a project. The ultimate goal of cost management is to make sure a project stays on budget.
2. What are the four components of project cost management ?
Project cost management requires:
- Cost estimation
- Cost budgeting
- Cost control
- Reporting 3. Why is project cost management important?
Project cost management matters because it determines the viability of projects and an organization’s overall profitability. Effective cost management ensures projects are completed within budget, but it’s also crucial for risk management.