A cost management plan in project management establishes a framework for managing and controlling project costs, ensuring budget adherence, and risk mitigation. So, in this article, we’ll discuss what is cost management plan, why is a cost management plan important, the seven elements, and five steps for creating an effective cost management plan.
Table of Contents
What Is a Cost Management Plan in Project Management?
According to the PMBOK (Project Management Body of Knowledge) 6th edition, the cost management plan is a component of the project management plan that explains how the project costs will be planned, structured, and controlled. As well as the cost management processes and their associated tools and techniques should be documented in the cost management plan.
Related: Cost management in project management
Pro tip💡 The cost management plan is an output in the plan cost management process. Furthermore, the cost management plan should include detailed budgeting, cost estimation methods, risk analysis, and contingency because they are needed for effective cost management in project management. However, as a project manager, you should regularly monitor, report, and build effective communication with stakeholders. Through that, you can ensure effective cost control throughout the project.
Why Is a Cost Management Plan Important?
The cost management plan in project management is crucial because it provides a framework for managing and controlling project costs, ensuring budget adherence, risk mitigation, project resource allocation, and effective communication among stakeholders. This plan also guides cost estimation, performance measurement, and change management, and ultimately, it facilitates cost-effective project execution and continuous improvements. So, here are some importance of creating an effective cost management plan.
- To accurately estimate future expenditures, which helps generate expected revenues.
- To help pre-define the costs of all the project activities
- To prevent the over expenditure, which helps maintain the budget balance
- The cost management plan helps reduce the extra expenses because all the expenses need to be approved by the appropriate manager before they are actually made
- An effective cost management plan helps prioritize your project activities by strictly limiting the financial flow. Therefore, you should focus more on the activities that are needed in the project
07 Elements of a Cost Management Plan
The following are the essential elements of a successful cost management plan.
- Units of measurement – Units of measurement are the standards project managers can use to measure budget and variations in project scope. So, they should decide what units want to measure project aspects such as quantities and monetary amounts. However, establishing units of measurement is crucial if they’re working with multiple currencies or calculations. On the other hand, this reference point can make communication easier.
- Level of accuracy – This element is similar to the level of precision but involves percentages and the degree to which they can vary before the project manager responds to them. Furthermore, the level of accuracy can help you control costs while allowing for inevitable variations.
- Level of precision – This element lists the standards to measure. Therefore, you and your team members have more insight into the project. Setting consistent levels of precision and ensuring your team members understand them will help you maintain an accurate cost estimation.
- Control thresholds – This element helps you manage the control costs of the project. As well as these figures depend on the project budget and size and help you stay within the deadlines and budget.
- Organizational procedures links – The WBS (Work Breakdown Structure) provides the framework for the cost management plan and allows for consistency with the project budget, estimates, and control of costs. The work breakdown structure component used for the project cost accounting is called the control account. Each control account is assigned a unique code number that links directly to the performing organization’s accounting system.
- Rules of performance measurement – This element helps project managers to the practice of analyzing project progress. Therefore, they can use one or more methods for measurement to determine how close they are to meeting project objectives.
- Report formats – This element helps project managers determine how and when they plan to report project progress and that they can identify potential variations. Therefore, it’s crucial to use a consistent format for every report. Then, your team members know what they’re looking for each time. So, identify which details you want to include in each report and set milestones or deadlines to create them.
05 Steps for Creating a Cost Management Plan
The following are some vital steps for creating an effective cost management plan.
Plan Resources
Before starting any project, the project manager should determine the resources required to complete the project. Typically, it may include materials, equipment, tools, people, skills, and funds. So, you can use a WBS (Work Breakdown Structure) to determine the project and assign individuals and resources to each task or activity. On the other hand, this outline also allows you to visualize the costs associated with each phase in the project.
Pro tip💡 Here are some vital steps needed to better resource allocation.
- Identify resources – List needed project resources such as people, materials, equipment, and tools.
- Prioritize tasks – Determine project task priorities and focus on critical ones.
- Allocate resources – Assign the right resources to tasks or activities based on availability.
- Monitor and adjust – Keep track of resource usage and make adjustments as necessary.
- Resolve conflicts – Identify resource conflicts.
- Communicate and report – Keep the project team informed of resource assignments and changes.
- Optimize resource use – Continuously seek ways to use resources more efficiently.
- Document and learn – Maintain records and learn from each project for improvements.
However, consider using the project resource inventory you gather to estimate costs accurately.
Estimate Costs
Accurate estimation of a project’s cost compared to its actual cost is crucial for project success. Consider not only the project resources identified in the WBS but also factors such as direct costs, indirect costs, fixed costs, variable costs, sunk costs, and the time value of money. The following is the information you may need during the cost estimation step.
- The project resources identified in the previous steps
- The price of each project resource
- How long do you need that project resources
- Potential project risks
- Costs of similar projects
As a project manager, you can use numerous tools and techniques such as expert judgment, analogous estimate, parametric estimate, bottom-up estimate, three-point estimate, alternative analysis, reserve analysis, and project management information system to estimate the project’s costs. However, that depends on the information you have available. For example, if you have enough information about costs for similar projects you’ve completed in the past, you might use analogous estimation.
Pro tip💡 Project costs can be categorized and measured by using units such as labor costs, material costs, contractor costs, overhead costs, and travel and expenses.
However, you can use your cost estimation to make appropriate decisions regarding the project’s schedule and budget. You can also change your estimate as the project and its scope change, but some project managers create a new estimate for each phase in the project.
Cost Budgeting
In this step, you should calculate all the expenses of your project. Through that, you can accurately determine how much funding it needs. When creating a project budget, you may need the following information.
- Cost estimates
- The project scope
- The project timeline
- Organizational process assets (Includes the organization’s plans, policies, and procedures)
With this information, you can determine how much money you assign to each task and for how long. Then, establish a cost baseline because it will help you to measure the project’s performance. Read More: Cost baseline in project management.
To manage project costs more accurately, create a separate budget for each step that you can control and adjust depending on the project’s progress.
Perform Cost Control
Perform cost control entails comparing the differences between cost baseline and actual costs and making proper adjustments to keep the project within budget. Typically, cost control is performed repeatedly throughout the project to monitor and minimize spending or increase the budget as needed. However, you can use predetermined control thresholds to determine when needed to resolve any issues or problems.
Measure Performance
Create appropriate reports in consistent formats and at regular intervals throughout entire the project to monitor performance. Furthermore, reporting can help you identify variations in the planned budget versus the actual budget. On the other hand, it will help you determine whether you’re meeting project goals, objectives, and milestones. Moreover, you can use your reports for reference when planning future projects.
Conclusion
The cost management plan in project management is crucial to managing and controlling project costs, ensuring budget adherence, and risk mitigation. Units of measurement, level of accuracy, control thresholds, organizational procedure links, rules of performance measurement, and report formats are some elements of the cost management plan. When creating an effective cost management plan, the project manager should focus on these steps to ensure its success, including planning resources, estimating costs, cost budgeting, performing cost control, and measuring performance.
