Increase profitability with effective project cost management

What is cost management in project management

Cost management is the process of estimating, forecasting, allocating, tracking, and controlling all the costs involved in a project. The process allows financial planning and analysis (FP&A) teams to predict future costs, which will help to reduce the chances of project budget overruns.

Estimated costs are calculated during the project planning stage, and then, as the project work begins, costs are tracked and managed, so they stay within the plan. On project completion, estimated costs and actual costs can be analyzed to provide a benchmark for future similar project plans.

The benefits of cost management in project management

Risk avoidance

Well-planned project budgeting will have a risk allowance to ensure project success is not compromised if unforeseen costs arise.

Accountability

Cost management helps to improve the accountability of the people working on the project. Incomplete tasks and missed deadlines lead to additional costs. Scope creep and schedule slippage lead to additional costs. Accounting for billable hours can also have an impact on productivity.

Lowers expenses

By defining proper processes through project planning, cost forecasting, and budgeting, the organization can save on project expenses, lowering the overall project costs. Funds can then be used for more resources or to boost profits and can also help with procurement decisions to ensure value for money.

Reduced budget overruns

One of the main goals of cost management is disciplined spending. Project managers can create a better budget once resource requirements are set out and spending limits are determined. Project managers can ensure they don’t overspend on specific areas by allotting costs in the early planning stages.

Operational efficiency

Cost management provides visibility, so operational efficiency is enhanced by tracking activities, and those that are costly or time-consuming can be identified and changes made if efficiencies can be found.

Prioritization

If an organization has multiple projects on the go that take up time and resources, cost management can help determine where to prioritize funds, so cash flow is maintained.

Future planning

Cost reports can help with optimizing resource utilization so more accurate budgets can be created for future projects.

If your ERP is integrated with your CRM you can speed up project creation when prospects reach a certain stage of the sales funnel. A budget can be created using a template based on previous data. This improves client experience and speeds up project set-up so things can get moving more quickly.

Click to read How to win the service game with ERP Gated

The challenges of cost management in project management

While there are massive benefits, there are also some challenges in cost management to be aware of. If project managers or finance teams lack project scope information or a full understanding of requirements, this can lead to inaccurate forecasting, cost overruns, and, ultimately, less project profitability. 

Outdated technology can also have a hugely negative effect on project success and profitability. Project managers need access to smart, up-to-date technology, reliable real-time data, and the right tools to manage costs accurately.

When scope creep occurs, and changes need to be made, the comparable costs will change, too, and without the right systems in place to track and capture these changes, it becomes all too easy to lose track of costs, putting the whole project at risk. 

Accurate cost management requires a reliable schedule and cost integration. It also requires regular, accurate reporting to avoid costly surprises.

Effective cost forecasting

Cost forecasting considers all the resources and associated costs needed to successfully complete a project. It helps ensure the achievement of project objectives within the agreed time and budget. It is a finely honed discipline. Using standardized techniques and templates can improve forecasts.

Project costs can be grouped in several ways, but the simplest divides costs into two main categories: direct costs and indirect costs.

• Direct costs are generally those directly linked and billed exclusively to a single department or project. They can include salaries, equipment, and costs associated with any project-specific risks.
• Indirect costs are not associated with a specific cost center but are spread across the organization as a whole. They can include security, software, and utilities.

A cost forecast predicts each cost, allowing project and finance teams to analyze project costs and estimate how actual costs might differ from the forecast.

The usual expenses included in the forecast are labor, materials, equipment, external services, hardware and software, rent and rates, and contingency costs.

How to track project margins

Project-focused service firms need to measure the performance of their projects; however, they need to work with specific metrics. The best way to keep track of margins is with industry-specific software that integrates finances with other systems, such as procurement, HR, and payroll.

With the right software solution, service firms can track planned revenue, costs, and profit margins to determine project viability before it even starts. As the project progresses, reports can be pulled with detailed information about expenses, billable hours, and whether bills have been processed, sent, and paid.

Technology and cost forecasting

Every project or business process involves technology, and organizations that rely on outdated legacy systems, spreadsheets, and manual processes will struggle to keep track of their costs.

Effective forecasting entails gathering, accessing, and analyzing more data than ever before. Internal data covers an organization’s performance, and external data describes the business and economic environment. Much of this data is likely to be unstructured, such as emails, Word documents, audio files, videos, and presentations, and revenue forecasting methods must account for this variability.

New technology empowers FP&A teams to deliver forecasts that account for all this data. Organizations can better align revenue projections with corporate strategy and transform reports from historical measurements into more meaningful forecasts.

How Unit4 can help with cost forecasting

Unit4 Financial Planning & Analysis embodies the future of FP&A, which includes helping build more effective revenue forecasting models. It’s a modern, future-proofed solution. Teams are empowered with intuitive, self-service tools that deliver access to a single source of truth.

We have deep knowledge of professional services firms and their processes. With the right technology supporting you, you can focus on the People Experience to help free your professionals to do more of what matters: attracting, supporting, and retaining clients.

Our people-centric, project-focused solutions are purpose-built. Firms can better manage their businesses with industry-leading software for Enterprise Resource Planning (ERP), Human capital and payroll management (HCM), and Financial Planning and Analysis (FP&A).

Check out Unit4's People Experience suite. Our solutions support all types of service-based firms worldwide, offering purpose-built functionality.