Cost management is the activity of estimating, allocating, and controlling costs, typically after the base plan is developed and focuses on four key areas from planning, cost estimation, developing cost budgets and finally cost control.
The cost management process allows a business to predict future expenses to reduce the chances of budget overrun. Projected costs are calculated during the planning phase of a project and must be approved before work begins. These costs are often estimated based on current prices, previous data and experience. Poor cost estimating is commonly cited as the biggest factor in why so many mega projects overspend, often in a major way. This can be through a lack on investment in the process along with a desire to produce an attractive price for a client. Detailed focus on estimating will provide effective and meaningful budgets.
As the project plan is executed, expenses are documented and tracked, so things stay within the cost management plan. Throughout the project, budget costs and actual costs are compared, providing valuable data to analyse and enable positive changes to be made. This data also provides insightful benchmarks for future cost management plans and project budgets.
There are a variety of job disciplines that are involved in the cost management of projects. Typically Cost Managers, Commercial Managers and Quantity Surveyors will oversee the whole process with different types being deployed in specialist areas, from producing a bill of quantities, cost budgets, estimating, procurement of suppliers and resources, through to legal and contractual management of the supply chain, with all working under a chosen form of contract/ set of rules to follow, throughout the project or programme. Change forms a major part of any project, it is inevitable that change will occur, effectively managing this area is key to avoiding costly delays or claims situations. Cost Engineers are more involved in the collection, analysis and reporting of cost data. Typically, on a major scheme this important niche role provides valuable data and insight to where project management effort is required.
What are the Benefits of Cost Management?
Cost management is vital to an organisation’s planning process. An effective cost management system should be the heartbeat of an organisation and its operations.
In the project world, without detailed budgets you cannot effectively map out the resources needed for your project. For example, if you are renovating an office building, you need to hire an architect, a contractor, pay for building materials, and agree upon hourly rates for construction workers. To do this, you need to accurately estimate all costs and ensure you have the budget to cover them.
By allotting costs in the early planning stages, project managers ensure they don’t overspend on specific areas.
Identify Key Areas
By accurate cost budgeting you can identify the key cost areas that require more project management focus.
A good budget will have a risk allowance to ensure project success is not compromised when unforeseen costs arise.
Assist Future Planning
Cost reports can help with resource optimisation. This can lead to more accurate budgets in the future.