In project management, we can say that we have an essential tripod for the success of any initiative: scope, time and costs. Any variation in scope or time affects cost management, generating additional expenses for project completion.
Read also: How to ensure deadlines are met in projects?
The correct management of processes involving planning, estimates, financing, investments, and acquisitions necessary for the project guarantees its completion within the expected budget.
But what do you need to know to manage project costs effectively?
Cost planning
The planning phase is the most important in cost management. It's where you will determine the policies and procedures to control all project expenses. It's also the time to create approval workflows and methods for recording all costs involved in the initiative.
It is during the planning phase that you align with the team regarding the terms and units of measure to be used. For example, in building a house, you can buy bricks by unit or by square meter; you can buy wires by length or by weight.
These definitions are essential so that the project's execution is not compromised by Misinterpretation of data at the time of acquiring inputs.
Cost estimate
With the planning done, it's time to check how much the project will cost the client. Obviously, this calculation is not 100%% exact, which is why we talk about estimates.
Based on the WBS created during scope planning, you and your team will determine which resources are necessary for each project activity. It is important to get into the smallest details so that nothing is left out of your budget.
This calculation includes man-hour cost, technologies to be used, supplies, material types, software licenses, among others. Regardless, it is during the execution that you will be able to achieve greater accuracy of the costs involved in developing the solution.
Among the techniques used for cost estimation, we can mention expert opinion, which is the consultancy of a professional with vast experience in the type of project in question; the analogous estimate, which is the comparison of your project with similar projects; Parametric estimation, based on statistical calculations; and the three-point estimate, which predicts three distinct scenarios: most likely, optimistic, and pessimistic.
And
With all projections ready, it's possible to determine the necessary budget to take the project to completion and generate added value for the client. Many companies start planning project cost management at this point, which can be risky. The budget you have available isn't always enough to carry out your initiative.
The most effective method for budgeting a project is to link costs to each work package listed in the WBS, with the goal of identifying the cost of each project phase.
You may notice that at some point the budget will be insufficient to fully develop the solution. In this case, it's possible to negotiate with the client, modify the initial scope, and thus ensure a basic, but functional and profitable product.
Cost control
The final step is to monitor the planned vs. actual, in order to know if the budget is being met. To do this, you must establish KPIs that allow for such an assessment.
One way to know how cost management is performing is to use the Cost Performance Index (CPI): CPI = BC / AC
Where VA is the Value Added generated by each activity in relation to the total cost of the activity and CR is the Actual Cost of each activity. An IDC less than 1 represents that the activity is costing more than it should. An IDC greater than 1 indicates that you are making good use of available resources.
Did you find it difficult to do so many calculations and controls? Rest assured, there are various tools that can assist in project cost management. You just need to know how to choose yours!
