In order to understand cost control, you must first understand why it is used: monitoring expenses and identifying risks in order to increase profits. Not to be confused with cost management, cost control has its own set of objectives that can save businesses money.
What Is Cost Control?
Cost control is the process of estimating costs in order to plan and adjust a budget. To make accurate cost estimates, all expenses must be monitored, and spending controlled, to accommodate for any changes.
Predicting risks is another key factor in cost control. When you accurately analyze risks before they happen, you can modify the project budget before any change occurs. This decreases the likelihood of exceeding the budget. Construction projects are especially prone to going over budget, but proper cost control prevents this from happening and provides information to make future predictions.
Project cost control begins with monitoring and tracking changes to expenses. These changes are called variations, and they can be either “favorable” or “unfavorable.” These variations can be used to make more accurate predictions in the future.
What Is Expense Control?
Expense control is the process of making direct changes to spending. Ideally, these changes are informed by cost control data. Where cost control focuses on both the big picture and the smaller details, expense control makes immediate changes to spending habits in order to keep projects on track.
In order to track and control expenses, they must be identified and sorted into one of two categories: direct expenses and indirect expenses.
Direct expenses go directly toward a project’s tangible needs. Three of the most common examples of direct expense are materials, labor and equipment. These expenses will be specific to the project and “create” something tangible. Our free estimate template can help you predict and manage your direct expenses.
Indirect expenses are costs that are constantly accumulating in the background. A few common examples of indirect expenses are employee salaries, employee benefits and office/facility rental. Controlling indirect expenses can be the difference between project success and project failure.
Seven Tips for Better Cost Control
All projects have risks and, more likely than not, experience changes. That doesn’t mean they have to go over budget. These best practices for cost control set your process up for success:
1. Define Important KPIs
For each task or process, a project manager should decide on key performance indicators. These KPIs are predetermined metrics a team establishes before beginning a project, and are referred to throughout the project to check progress.
2. Anticipate Inflation
The cost of goods and services fluctuates depending on market factors. This can result in increased expenses. These price changes necessitate adjustments to budgets and spending. In terms of cost control, you must take these changes into account when preparing for risks and variances.
3. Create Contingency Plans
No matter how well a project is planned, there is still a chance something will go awry. You need to anticipate these financial risks and create strategies for adapting to them without incurring unfavorable variances. Think of these contingencies as backup plans. The more you can imagine the unexpected, the more prepared you are for the worst-case scenario.
4. Track Expenses in Real Time
A crucial aspect of cost control is tracking and documenting expenses. This is the only way to spot variances and correct them going forward. When you track expenses in real-time, you can spot variances and make the appropriate changes. In this way, even unfavorable variances can inform how you control costs for the remainder of the project.
5. Collect Data on a Regular Basis
Consistency is the name of the game. When the project appears to be running smoothly, collecting data can seem a low priority. But when we allow this to happen, the data becomes skewed and less useful going forward. After all, cost control should be about spotting favorable variances as much as it should unfavorable ones.
How often you collect data will differ depending on the size and scope of the project, but a schedule for doing the collection must be set—whether it be weekly, biweekly, monthly, etc.
6. Document all Variations
Even the smallest variations should be documented. They may seem insignificant at the time, but odds are they will come in handy later on. If hourly employees need a few hours of overtime to complete a task, this is an unexpected indirect expense. Little variations like these can seem like flukes, but they can be used to make more accurate budgets in the future.
7. Communicate with the Team
Cost control is not a one-man show. In order to create smarter budgets, you must convey variations and their causes to the entire team. This keeps everyone on the same page and aware of setbacks and successes. Never make the mistake of thinking data isn’t relevant to team members. Cost control is largely about collecting data, but if no one is using it the data becomes useless.
Things to Avoid When Controlling Costs and Expenses
Cost control is a nuanced process, but there are ways to make it a bit less tricky. Here are three common cost management mistakes even the best project managers make. Luckily, they are avoidable when you know what to watch out for:
Neglecting to Consider Indirect Expenses
Indirect expenses are overlooked often. These expenses lurk in the background of any project, but the costs add up. Additionally, when you don’t consistently track indirect expenses, you won’t notice costs like an increase in rent, employee benefits and other forms of inflation. In a perfect world, these expenses would be static, but not accounting for their constant changes can easily send you over budget.
Undervaluing Contractor and Supplier Relationships
A good relationship with a contractor or supplier can make controlling direct expenses much simpler. When you have a strong relationship with a supplier, they may be more likely to inform you of price increases ahead of time. Keeping these relationships healthy can make it easier to renegotiate contracts if need be.
Favorable variances may mean you can buy more supplies or contract more help. Unfavorable variances may mean you need to cut back. Either way, a good relationship makes the process painless.
Not Using Automated Tools
The secret to effective cost control is staying on top of expenses, risks and other factors that affect the budget. In order to do so, you must use tools to manage data, track expenses and resources, create reports and make adjustments to budget in real-time.
When executing these tasks is a long process, the data may have already changed and you can’t document every variation. Instead, use automated solutions that allow you to see all the information you need at once and make the necessary adjustments and reports.
How ProjectManager Helps With Cost Control
ProjectManager is a cloud-based project management solution that allows you to manage every aspect of your project from anywhere you get work done. Cost control requires current data and fast reporting in order to make the most accurate estimates. When you cannot access and update this information on the go, the cost control process is stalled.
Our resource management software allows you to track exactly how resources are being used, then allows you to create reports and spot exactly where these resources could be used more efficiently in order to decrease expenses.
Real-Time Cost Tracking
ProjectManager gives you the power to view all the information you need on one real-time dashboard that reflects any project changes. This means spotting variations before they negatively impact your budget.
Cost and expense control is a data-driven process that requires robust project management software to digest and distribute the information. ProjectManager is a cloud-based project management software with tools, such as a real-time dashboard, that can collect, filter and share your results in scannable graphs and charts. Try it today with this free 30-day trial.