Project Cost Planning and Management
By Todd Fleming
Cost management on projects ranges from the sophisticated to the non-existent. The value to managing costs on projects is pretty obvious. By knowing the true cost of project work, you can make decisions on the value of taking on certain work, and you can ensure that the work you have decided to take on is not costing more than it’s worth.
While most people would agree with the value of project cost management, some organizations do not effectively manage project costs. The approach can even differ within a single company. One business unit may be very disciplined, while another may not. This article is intended for companies or business units who do not comprehensively or routinely manage project costs.
Four Components to Cost Management
When you boil down all of the cost related activities on a project, there are really four key components:
- Estimating costs – accurately determining what costs will be before the project work is started
Tracking costs – keeping track of all costs on a project, and being able to review cost information in a timely fashion
Controlling costs – being able to influence the spend on a project while it is in progress
Maintaining cost data – archiving cost information in such a way that it can be used for future projects
There are a lot of ways to estimate costs. You can look at industry data to determine what your competitors are spending for similar work, use in-house experts to size up the costs, review cost history of similar projects, or plan the project and determine costs for all of the tasks and activities individually. There is a significant amount of literature on cost estimation.
One alternate approach to establishing the costs for a project is to determine the cost per unit that you are willing to spend, and then back into the allocations for the different tasks from there. This can also be used for projects like training, communications, marketing and the like. You may establish a target of $500 per person for a training program, as an example. From there you can determine the overall budget.
The gap that I see here most often is companies not looking at all of the costs related to the project. Some organizations, for example, only look at the vendor costs and consider their full time employees as “free” labor. Some companies only look at certain employee groups, but not include support from other functions. Some companies do not estimate costs at all.
It is virtually impossible to make any cost/benefit or ROI decisions or to make any comparisons of project performance if all of the costs are not included. If the company does not have a mechanism to support estimating full time employee costs, then the project leaders can use basic assumptions and spreadsheets to take on this task. It won’t be 100% accurate, but it will generally be close enough for comparative purposes.
Once the project starts, you will need a way to track costs as they are incurred. This includes labor, parts, and vendor costs. It may also include overhead and support costs if you are going that far. Companies that are project-based, meaning that they operate almost 100% on project work, typically have sophisticated and efficient methods for tracking and allocating costs. Many other organizations do not. This should not be a reason not to track costs on a project. You may have to have employees enter time in a spreadsheet, or to have vendors send cost information ahead of invoicing. You need to plan to track costs with whatever tools you have available.
This is not just a responsibility of the project manager. Everyone on the project should have a cost awareness and management mentality. If you have Joe working on the project, he should know how many hours he has to spend per task. He should be responsible and accountable to complete his work within the allocated time and level of effort, but he can’t be accountable if he does not know.
Cost control is critical. I see a lot of projects where budgets are established, but the costs are not controlled. If you don’t manage the costs on a project, they will almost never end up in line with the original budget.
Vendor spend is fairly straightforward. You establish a contract outlining requirements and deliverables, and the vendor spend should be constant, assuming that there have been no changes to that scope. Materials costs are also reasonably straightforward. If the scope of the work changes, or the requirements change, you will end up with higher costs. There are a number of ways to deal with that, but you should have a process defined to deal with these types of changes.
The bigger issue in my mind is labor cost. Levels of productivity for the same task can vary greatly. What might take someone 5 hours may take someone else 7 or 10. If you have a project that is based primarily on labor cost, your budget can easily run away from you.
When you estimated the work, hopefully you planned on an average level of productivity, and across all tasks, the productivity differences will even out. Still, you will need to ensure that all team members understand how much time they have to complete their tasks.
The biggest issue that I run into is not productivity, but the level of effort that an individual feels is required to complete a task. You may have planned for 40 hours to develop a web page. One person may read the requirements and create a very basic page within the time allotted. One person may read the same requirements and create a fairly complex page that takes twice the time. Some people just can’t seem to help taking a task one step further than it needs to go.
It is very much a management function to sit down with project team members before they start a task, and review the requirements, discuss the level of effort and time allotted, and get their commitment to work within the guidelines. Managing individual time to a fixed budget and level of effort is a skill that often requires coaching.
Maintaining Cost Data
Once you are done with the project, it is important to archive the cost data as part of your closing processes. This cost data should be used for future projects during estimation and planning. The more projects you manage in this way, the better the organization will become at overall cost control.
Todd Fleming, PMP, is currently a program manager and senior consultant for VisionCor Inc., a consulting firm that provides resources and solutions to help design, develop, implement, and deliver blended training programs. You can read more from Todd on his blog.