You know how it goes—you’re a few months out from a deadline, and your team isn’t anywhere close to finishing the project. You’re quickly running out of budget and time, and you’re starting to stress. Should you tell the stakeholders, or wait a little bit longer?
Well, you’re not alone at least, as this situation happens to more than 45 percent of all large-scale IT projects. For many, this comes both as a detriment to a project’s timeline and to the final product, with 56 percent of projects delivering less value than anticipated. Yikes. How can you stop this from happening? A cost management plan can help.
What is a Cost Management Plan?
A cost management plan is a method of strategizing the planning and execution of a project’s budget. Of course, this is done in order to complete your project on time and on budget. However, without a proper cost management plan in place, both of those things will falter—costing you and your organization immensely.
What’s more, project success hinges on cost management, as cost is the primary determining factor for the success or failure of the venture overall.
How Do You Create a Cost Management Plan?
Cost management is sometimes also known by its more specific sub-task names, like spend management, cost transparency and cost accounting. It is typically made up of four processes: resource planning, cost estimation, budgeting and cost control.
1. Resource Planning
Starting with the resource plan, project managers will typically use a work breakdown structure to show the project and its deliverables in a hierarchy from most important to least. This piece helps project managers to understand where the bulk of the costs will funnel towards, and which components of the project will require the least expenditure.
2. Cost Estimation
The second stage, cost estimation, is a process that’s iterative—meaning that it’s designed to change as the project changes. This stage uses many different estimation techniques that are determined by conceptual goals, historical knowledge, expert judgement, determinative techniques or a component-by-component basis.
Historically-speaking, determinative techniques have been shown to be the most accurate. However, this process only makes sense to use once every last project detail has been mapped out—including the scope and deliverables. For projects that are lacking fine print, less accurate cost estimation techniques will still be valuable during this stage.
Now, the cost estimation phase might have felt like you mapped out your budget already, but really you just mapped out the blueprints for your budget. Your project budget will be a little more precise by this measure, and will enable the project to truly succeed.
Budgets are formed and approved after the estimation phase, and are typically released for the project in a series of phases depending on the project’s progress. This will help the project reach its milestones within each budgetary phase, rather than trying to match an overall project budget.
4. Cost Control
This one is simple—you’ll measure your project’s dollar value performance against your total cost and timeline. This will help provide a benchmark throughout the project process.
First, your requirements are established well in advance, during the project planning phase. Then, they are used as a method to challenge reasons for changes in cost. This will help to course-correct should a cost increase out of budgetary range and keep the project from ballooning out of control.
Ultimately, your cost management plan will help you to both plan for the project cost, and manage your project cost throughout the course of the project’s life cycle. As your project is underway, your project expenses will be thoroughly documented throughout the project so that your project can stay within budget.
Cost Management Plan Terms and Formulas, Defined
In mapping out your cost management plan, you’ll need to do a lot of different calculations, practice many formulas and triple check your math when you’re done. But that being said, these actions go by many specific names. Let’s define them.
- Work Breakdown Structure: Similar in style to the waterfall method or a simple hierarchical flow chart, this is a product-oriented layout of work, tasks and activities to be done by the team members.
- Cost Baseline: This is created by estimating your costs against the general time period that your project will take place. Your cost baseline is ultimately what you’ll use to compare your performance, usually illustrated on an S-curve.
- Control Threshold: Just as you set your baseline, your cost threshold is the highest or lowest spend your project is allowed to go. Anything above or below that is deemed unacceptable.
- Level of Precision: This unit of measurement will show how steep your cost estimates will be rounded down or up. Your level of precision will additionally be defined by the scope and total size of your project.
- Earned Value Measurement: This equation helps project managers to better measure the amount of work that has already been performed on said project as accurately as possible.
- Three-Point Estimation: Using this formula, you’ll get three figures. The first would be your best guess (BG) on the amount of work an activity would take if it was performed 100 times. The second would be your pessimistic (P) estimate, which is how long the project would take and how much it would cost if all the negative risks occurred. And your third is your optimistic (O) estimate if all of the positive risks occurred.
- Bottom-Up Estimation: This formula involves using the smaller estimates of your project, and then aggregating those into a sum total to determine your overall project cost estimate.
- Analogous Estimation: This estimate is calculated by comparing all past projects cost estimates and measuring them against your current project’s time and cost. This is typically done when there are few project details available.
- Parametric Estimation: This estimate is calculated by tying a cost to each task and mapping that cost against the projects timeline. However many tasks there are will help you find your total cost estimate. This can be done in ProjectManager.com by using our online Gantt chart. Here, you can assign a cost to each task, and as the project is completed, the total cost is automatically calculated and compared to the budget.
How to Properly Track Results
Half of your cost management plan is, well, managing your cost throughout the project lifecycle.
When monitoring your project’s cost, use your benchmarks, as they’ll be the key to decoding whether your project is on track, behind or over budget. Because of this, you’ll want to be able to see your planned progress against your realized progress to ensure you’re still on track. Many people use their project management workflow (whether that’s via the waterfall methodology, a Gantt chart or a kanban tool) to gauge this metric.
How ProjectManager.com Helps with Cost Planning and Tracking
Whether your next project is large or small, you’ll need to make sure your cost estimation is as accurate as possible, and easy to manage long-term.
With ProjectManager.com, you’ll have the power to customize your project reporting to get only the data you need, plus you’ll be able to see actual project progress on team members and their tasks.
And whether you’re using determinative techniques, historical data, analogous estimation or three-point estimation to gauge your project cost estimates, you’ll have a tool that can plug in your project data and calculate your estimates for you. Additionally, with our real-time dashboards, you’ll be able to get a visual on the estimated benchmarks of your project, so you can see if you’re ahead or behind schedule with the click of a button.
Estimating your costs and getting an accurate reading before project kickoff is one of the most important components to ensure project success. That’s why ProjectManager.com is dedicated to giving teams the software they need to plan cost estimates, employ a management plan and collaborate effectively no matter where they’re located. Sign up for a free 30-day trial of ProjectManager.com today.