Regardless of the size or scope, starting a new project is an activity that symbolizes a new beginning in any business. Whether it’s designing a new product or improving upon an existing work process, nothing matters more than how much it will cost the company in the end. This is where project cost management comes into play.
While it may sound complicated, project cost management is simply a fancy way of describing how much of an effect the process will have on the company’s bottom line. The cost of every resource used, down to project team members salaries, directly affects the project’s budget and must be carefully allocated.
Chances are the company does not have unlimited funds to spend on a whim. For this reason, a budget must be determined to ensure that the allocated project costs stay in line. After all, what good is a completed project if it depletes the funds necessary for the company to stay in business?
Types of Project Costs
Planning the project budget can seem like a daunting experience. As a rule of thumb, here are some main elements to include in project cost estimates.
- Pre-project Planning
These costs can vary significantly in each industry and is reliant on the use of outside consultants. However, this cost generally includes conducting market research, securing materials, setting up the workspace, and selecting managers and employees.
Every material related to the completion of the project falls in this category. For example, if the company is rolling out a new publication, the printing costs, including ink and paper, would have to be accounted for in the budget.
- Personnel Costs
Projects are not completed without human resources. This could include everyone from the project manager to the cleaning people. Benefits and insurance are also a consideration of these costs. Any contributions by part-time staff are also considered in personnel costs.
- Operating and Non-Operating Expenses
Any fees associated with the project, such as permitting costs, inspections, delivery of supplies, marketing, advertising, and technology costs, are classified as operating expenses.
Non-operating expenses include costs that don’t involve customary activities or are related to production. These would consist of relocation costs, interest payments, and other costs from financial obligations and not related to the business’s primary operations.
The above costs are also grouped into labor and non-labor costs.
Labor costs comprise the effort hours of each personnel resource multiplied by their hourly cost. Consulting or contract services are external labor costs that are estimated with their hourly rate. If this cannot be precisely accounted for, estimates can be used based on a standard cost range. This personnel can include accountants, programmers, and administrators.
Internal labor costs may already be accounted for in the department’s budget, so additional costs would be zero. However, any further costs above what is included would be budgeted as well.
Non-labor costs include everything outside the above-described salary and outside contractor costs. These can consist of hardware, software, equipment, travel expenses, and supplies.
Key Project Cost Metrics
Now that the project is well underway, how do you determine everything is staying within budget? Several metrics are used to ensure how the project is coming along cost-wise.
- Estimate to Complete (ETC)
The ETC is a measurement of the forecast of the costs remaining for project completion. This figure is calculated by adding estimated labor and non-labor costs required to complete the project.
- Estimate at Completion (EAC)
The EAC metric is calculated by combining the present cost with ETC Cost. Comparing EAC with other metrics can determine if the project is running within budget and on time. Since project statuses can experience fluctuations over time, managing EAC is an essential process.
- Cost Variance
This metric measures the budgeted amount minus the money spent. If the value is positive, then the project is within budget. However, a negative result means that you’ve spent more than was initially allocated. This metric is used to assess overall progress. It goes without saying that if you have used up 30% of your budget in the first two months of a one-year project, there may be an issue.
Additional reading: What is Project Cost?
In the case of billable projects, every manager hopes their project turns a profit for the company. Analyzing how profitable the work is can be arrived by calculating the net profit and net profit margin.
Project profit is measured with the following formula:
Project Profit = Project Revenue – Project Costs
The net profit margin is the ratio of net profits to revenues. This result is a percentage that shows how much of the revenue translates to profit. The formula for net profit margins is as follows:
Net Profit Margin = Total Revenue – Total Costs/Revenue x 100
The net profit margin reveals the accurate profit generated after accounting for all expenses. This metric can be tracked over time to help forecast profits.
Additional reading: What is Project Billing (Revenue)?
Best Practices For Managing Project Costs and Expenses
Managing costs during the course of the project is a crucial responsibility of management. The following are some best practices for managing project costs.
- Establish Clear Cost Controls During Planning
Controlling project costs means establishing controls for each expenditure. Even though unexpected expenses may arise, proper preparation for them ahead of time can reduce risks. Making a to-do list of costs should be considered as a first step. This should include fixed costs, such as permits and taxes, as well as other industry-related fees. Plan on who will oversee, approve, and sign off on expense elements.
- Plan Labor Costs
Personnel costs, including salaries and overtime, are essential aspects to consider when planning and managing project costs. How many employees are needed, their roles, and pay ranges should be included in labor cost estimates.
- Track Cost Metrics Regularly
Calculating metrics at the end of each reporting period can ensure the project stays within budget. Doing this regularly can keep expenses down since action can be taken sooner to control unexpected costs.
- Continually Track Project Scope
New client requirements and other changes can quickly arise, which can mean added costs and more work. Regularly tracking the scope will avoid losing track of these issues.
Additional reading: Time and Cost Tracking
Automating Project Cost Management Tasks
Tracking project costs and expenses are often traditionally done in spreadsheet programs such as Excel. However, this approach has proved to be very tedious and time-consuming, especially if multiple projects are being tracked. Thanks to advances in project management software, this task is accomplished more efficiently.
Today’s Project Budget Management Software tools help manage budgeting, forecasting, and other tasks that can help managers keep on top of all project elements. This software can also assist managers in collaboration and communication with project stakeholders.
At Birdview PSA, our solutions can assist with cost management by setting and tracking budgets and continually monitoring expenses. Our powerful software can accurately monitor project parameters, budgets, and schedule statuses, in addition to producing comprehensive reports for executives and team members.
Contact us today to schedule a guided tour and see how Birdview PSA can efficiently manage your cost management tasks.