David Appel on Achieving Optimal Project Cost Management

Published 31. 7. 2024

There is no easy route to project success, but one thing is clear—project cost management is an essential task.


 

About author:
David Appel is the global head of the SaaS vertical for the largest technology company on the London Stock Exchange, Sage. Over time as a Sales and GTM leader, his organizations have earned the business of >2,000 SaaS and software companies, growing at 40%+/Year. He previously ran direct sales at Bill.com, led NetSuite’s software vertical, and was part of IBM’s corporate development team.

 

Without effective financial planning, costs can easily spiral out of control and negatively affect team morale, stakeholder engagement, and overall project quality.

As a project manager, it’s up to you to stop this from happening. You must keep a tight rein on your project budgets and always balance the books with your business priorities in mind.

On this page, I’ll explain how you can do this in 7 simple steps and provide some tips from my own experience.

 

Table of contents:
What is project cost management?
Elements of project cost management
7 Strategies to achieve optimal project cost management
Key takeaways

 

What is project cost management?

A good project manager should know where every penny of their project budget is going, how much is left in the bank, and their spending priorities. You need to have a vision of all these factors to avoid nasty surprises like cost overruns or failed audits.

Here's a breakdown of typical project costs you need to watch and keep records of:

  • Project budget: This is your initial financial roadmap. It shows you what you plan to spend to reach your project goals.
  • Actual cost: What you really end up spending. Monitoring these helps in comparing planned versus actual spend.
  • Direct costs: These are the costs you can point directly to your project, including labor costs, materials, and equipment.
  • Indirect costs: The sneaky costs that aren't just for one project, like the electricity to keep the lights on or administrative expenses.
  • Variable costs: Expenses that can go up or down depending on how much work you're doing, such as overtime pay for your team members.

 

Elements of project cost management

Project cost management is your guide to not letting project costs spiral out of control.

So, what’s covered under the umbrella of the project cost management process? Let me list key elements that will help you nail project budgeting and avoid common pitfalls.

 

Resource identification and costing

Let’s imagine you're starting a project and need to figure out what stuff (resources) you need and how much they'll cost.

First up, you list everything from people to pencils—they're all resources. Then, you dive into how much each item on your list will set you back (costing). For instance, your team's time has a price tag based on salaries, and those office supplies aren't free!

This is where inventory and order management software becomes your best friend. It keeps track of what you have, what you need to order, and how much it all costs. All of this ensures you don't overspend or run out of something important at the last minute.

Sure, you could do everything manually on spreadsheets. But it's time-consuming and lacks features like real-time tracking or automated notifications.

 

inventory automation
Source: Sage.com

 

Contingency planning and risk mitigation

Let's talk about planning for the "just in case" scenarios. Contingency planning and risk mitigation are all about having a Plan B (and C, D, E…) for when things don't go as expected.

The reason is that it's better to take precautions than find out the hard way from an expensive mistake.

Key risk factors you should monitor include:

  • Unexpected price fluctuations in materials.
  • Delays that can lead to increased labor costs.
  • Scope changes require additional resources.
  • Unavailability of key team members impacting project timelines.

You need to identify these risks early, so you can proactively avoid budget overruns or delays to your key deliverables.

 

Monitoring and stakeholder communication

For several reasons, keeping an eye on your project's costs and chatting with your stakeholders is smart management. Why? Because you want to catch budget issues before they turn into budget disasters.

Plus, stakeholders like knowing what's happening with their money. The Project Management Institute categorizes these as ‘high-power skills,’ of which several may come in handy:

  • Leadership and influence: Steering your team to stick to the budget and inspiring a procedure-driven workspace culture.
  • Strategic thinking: Planning for the project's financial health and anticipating challenges.
  • Decision-making: Being capable of making tough calls on spending/resource allocation.
  • Technical expertise: Knowing your project inside out so you can recognize things that don’t look right and make informed budget decisions.

 

Image Sourced from PMI
Source: PMI

 

Post-project cost accounting

Once the dust settles and your project is done, it's time for post-project cost accounting. This is when you look back at all the money stuff—what you planned to spend, what you spent, and why there might have been differences.

This is a crucial step because it helps you learn from your mistakes and helps you not to repeat them. When it comes to future planning for your next project, you’ll be able to manage your money even better.

 

7 Strategies to achieve optimal project cost management

If you’re trying to optimize your project costs, read further. My effective strategies will help you manage your budget and avoid overspending. Or, if going over budget is inevitable, you can at least do some damage control and be honest with project stakeholders.

 

Develop accurate budgets based on realistic estimations

Creating a solid budget is a foundational part of every project, but the steps are quite extensive.

Steps to get started:

  1. Comprehensively list all potential costs: Start with direct costs such as materials needed, software licenses, and labor costs, including salaries and contractor fees.
  2. Estimate the cost of materials: Consider current market prices, potential bulk discounts, and any seasonal variations in cost.
  3. Calculate labor costs: Determine the number of hours each team member will work on the project and their hourly rates and include overtime if applicable.
  4. Account for equipment and technology costs: Whether it’s leasing construction equipment or purchasing new software, include these expenses.
  5. Consider location-related expenses: If your project involves physical space, factor in rent, utilities, and maintenance.
  6. Don’t forget indirect costs: Administrative expenses, insurance, legal fees, and other overhead costs also need inclusion.
  7. Include a contingency fund: Set aside a portion of your budget (usually 10-20%) for unexpected expenses.
  8. Review and refine your budget: Use historical data from past projects to guarantee your estimations are as accurate as possible. On top of this, it’s vital to discuss your budget with multiple team members so they can review the proposal and use their expertise to refine it.

 

Regularly monitor project costs to ensure budget alignment

Monitoring your project spending closely is critical to make sure it aligns with your budget. To avoid anything slipping past, you should set up a system that alerts you when you're about to hit your budget limit. Or once you’ve reached a near-enough threshold.

Audits also play a significant role here. Conducted by either external accountants or an internal audit team, they provide a thorough review of your finances. Keeping every receipt and a detailed log of your expenses makes these audits smooth sailing and keeps everyone honest about where the money's going.

 

Brainstorming Office

 

Closely follow the scope to prevent unexpected costs

Scope creep is an all-too-common issue that can eat into your project budget. It happens when new tasks or features keep piling up without proper budget checks. Imagine stakeholders wanting more bells and whistles or changing their minds mid-journey.

Justifying any changes to the scope and securing stakeholder agreements in advance is crucial. You've got to be upfront about what changes mean for the budget and timeline. Getting everyone on board early with solid reasons for any changes will help you avoid last-minute panic.

 

Evaluate and manage vendor costs and contracts

Dealing with vendors is a huge part of keeping your project on budget and on time.

I’ve put together some tips to make sure you’re not just throwing money at suppliers:

  • Identify potential vendor costs: These can include the cost of materials, shipping fees, minimum order quantities, and any rush order premiums.
  • Negotiate favorable terms: Work to get the best prices, payment terms, and delivery schedules.
  • Incorporate protective clauses in contracts: Make sure contracts include terms for late delivery penalties, quality standards, and return policies.
  • Keep digital copies of all contracts: Use a secure repository to store contracts for easy access and reference. Make sure team members have relevant permissions to access the documents they need.
  • Reuse and adapt contract templates: Start with lawyer-reviewed templates and customize them for each vendor, ensuring all essential protections are in place.

 

Apply cost control measures throughout the project lifecycle

Putting the brakes on unnecessary spending will help you save money at every stage. This task is made much easier when you use specialized software for spend management. These platforms take a top-down view of your company’s spending. And help you track budgets for individual departments or projects.

Just make sure that you pair great tools like this with effective communication and collaboration. This will help your teams or team members understand spending limits, their logic, and how they can work with them.

 

pc data

 

Communicate project cost status transparently and clearly

When you're chatting with your team, it's all about being open and encouraging smart spending habits. But when you're updating stakeholders, you need to blend transparency with confidence. Show them where every cent is going, but also reassure them that you're handling things like a pro.

 

Integrate automated systems with project management

Bringing automation into project management is a boon to productivity because you can focus on things that matter (like communicating with your staff) rather than getting bogged down in the tedious stuff.

These systems can track how much time everyone's spending on tasks, manage those endless to-do lists, and keep a watchful eye on your budget—all without you lifting a finger.

Think of project management software that comes loaded with features to automate updates, generate reports, and even give you a heads-up when things are looking tight on the budget.

 

Mastering Project Cost Management Is About Smart Planning

Let's circle back to the essentials: understanding the full spectrum of your project costs—direct, indirect, and those variable ones that sneak up on you—is your starting line.

From here, monitoring project spending and scope is how you stay on track. This process is much easier when you use automated systems and spend management software.

Do this right, and it’ll leave you time to focus on the final golden element—effective communication, which is crucial to building a proactive team culture and strong rapport with shareholders.