Project cost management

Managing project costs can often feel like an uphill battle. Unexpected expenses, budget overruns and lack of financial visibility are common issues that can derail even the most well-planned projects. These challenges not only cause stress but also jeopardize the project's success and client satisfaction.

The frustration of dealing with these financial hurdles can be time-consuming but there is a solution. Project cost management is a critical aspect of project management that ensures projects are completed within the approved budget. By implementing effective processes and techniques to estimate, budget and monitor costs throughout the project lifecycle, project managers can achieve project success.

Let’s assume you have won a large contract against three other respectable competitors, now as the project manager you need to ensure the project is delivered on time and on budget so you implement project planning.

The importance of cost control in project management

The first rule of project management is cost control. This includes monitoring and regulating the use of funds to ensure that project costs remain within the approved budget. It involves tracking actual costs against the budget, identifying variances, and taking corrective actions to address any deviations. Effective cost control helps project managers maintain financial discipline and avoid cost overruns.

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Cost estimation helps decide the next move to make

Cost estimation is the process of predicting the costs required to complete a project. It involves identifying all the resources needed, such as labor, materials and equipment then estimating their costs. Accurate cost estimation is possible using Phocas Budgets and Forecasts and the software helps determine whether the project is financially viable. The project budget is a financial plan that outlines the estimated costs for all project activities. It serves as a baseline for measuring actual costs and managing project finances.

The project budget includes direct costs, indirect costs and contingencies. It is essential to develop a detailed and realistic budget to ensure the project's financial success and that all team members are working understand the project scope and ongoing project progress. Project cost management brings cost control and the budget process together to ensure that project resources are used efficiently and that financial objectives are met.

Cost management planning

A cost management plan outlines how project costs will be managed, controlled and monitored. It includes procedures for cost estimation, budgeting, cost control and reporting. The cost management plan provides a framework for managing project finances and ensures that all stakeholders are aware of how the project is fairing.

Dashboards can be set-up to monitor the plan and the people involved. By clicking on parts of the graphs within the dashboard you can compare two sets of data such as a) contract versus billed for labor costs or b) estimate versus actual costs. These come from separate parts of the ERP system but can be brought together in the Phocas Budgets and Forecasts tool to provide a good overview of where the total costs are sitting at that point in time.

Interactive dashboards provide real-time visualizations of project data, allowing project managers to monitor key performance indicators (KPIs) and to benchmark cost performance across past projects. Dashboards can display various metrics and help project managers stay informed and take proactive measures to address any cost variance issues.

Cost budgeting

Cost budgeting allocates the estimated costs to individual project activities. It involves distributing the total project budget across different phases and tasks to ensure that funds are available when needed. Cost budgeting helps project managers track expenditures and manage cash flow effectively while always being up-to-date with the cash position.

Resource planning is also part of the budget by allocating the resources needed to complete a project. It involves determining the quantity and type of resources required, such as specialist labor, materials and equipment. Effective resource planning ensures that the right resources are available at the right time and helps prevent delays and cost overruns. Many management tools allow you to manage the work breakdown structure of these resources and do bottom-up estimating based on historical data.

Cost management process

The cost management process involves several steps, including resource planning, cost estimation, cost budgeting and cost control. Each step is essential for managing project costs and ensuring that the project stays within budget. The process is iterative and requires continuous monitoring and adjustments to address any changes or budget overruns.

Earned value management

Earned value management (EVM) or change management is a project management technique that integrates estimate, committed cost and contract to assess project performance and progress. EVM provides a comprehensive view of project health by comparing planned work with actual work completed and the associated costs. It helps project managers identify variances, forecast future work and informs decision-making.

Phocas budgets and forecasts for project management

Phocas is a powerful tool designed for construction companies. It integrates with ERPs like Sage and Deltek to provide comprehensive project management capabilities from the planning phase through to completion. Phocas helps construction companies manage their projects more effectively by providing real-time insights into project performance, costs, and progress via budgets, forecasts, and analysis.

Types of project costs

Understanding the different types of costs is essential for effective cost management and procurement. Typical project management costs for a construction project can vary widely based on factors such as the project's size, complexity, location, similar projects and scope. Project management fees are generally calculated as a percentage of the total project cost or as a fixed fee plus other variable costs.

• Percentage of Total Project Cost Range: Project management fees often range from 5% to 15% of the total construction cost.
• Smaller projects: Higher percentage (10-15%) due to fixed overheads and complexity relative to size.
• Larger projects: Lower percentage (5-10%) due to economies of scale.

Fixed fees

For some projects, especially small or well-defined ones, project managers might charge a fixed fee based on the cost baseline. Typical range: $5,000 to $50,000 or more, depending on project size.

Costs can move around so within the analytics engine that drives Phocas Budgets and Forecasts tool they can be classified a certain way such as:

• Original contract costs: The initial costs agreed upon in the project contract
• Contract changes: Costs associated with changes or modifications to the original contract
• Revised costs: The updated costs after incorporating contract changes.

Work-in-progress (WIP) schedules are used to track the progress and costs of ongoing projects. These templates provide a snapshot of the project's financial status and help the project team monitor expenditures, timelines, identify variances like overspending and adjust as needed. Project schedules are essential to avoid scope creep and that projects stay on track and within budget.

Self-serve analytics empowers project managers and stakeholders to access and analyze project data independently. It enables them to generate custom reports, explore data trends, and gain insights into project performance by each client, by job or cost. Self-serve analytics helps ensure that project deadlines are met and effective project cost management occurs by providing timely and accurate information.

Project cost management is a vital aspect of project management that ensures projects are completed within the approved budget. Budgeting and planning software that integrates seamlessly with common ERPs in the construction industry provides valuable insights and help construction companies manage their projects more efficiently. Understanding the different types of costs from past projects, using interactive dashboards, and leveraging self-serve analytics are essential for successful project cost management and winning future projects.