4 Steps How to Manage Project Cost the Right Way

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Controlling costs surely is a very important process in project management and one of the first responses when asking people’s opinion about a project manager’s role.

Cost control certainly indeed is very important, but cost control is only a part of cost management – that should not be confused -,  and cost management will never succeed if other management areas are not taken equally care of.

In reality, cost management includes the following processes:

  1. Planning cost management,
  2. Estimating project cost,
  3. Determine project budget, and
  4. Controlling project cost.
Management Area Percentage
People’s response what a Project Manager is engaged with

What else a Project Manager has to take care about is shown in the image. The percentages are a result of a small assessment among a group of colleagues, website visitors and friends. It is difficult to classify whether cost management really is the most important part of project management. The number of different processes, which ultimately make up project management as a whole, is too great and the individual processes are too closely linked together to make such a classification.

For clarification, when I write, “The project manager does ABC,” does not mean that he does it all himself, but he is responsible for it.

A problem in the construction industry is that many companies are getting the project manager on board too late. From the point of view of a construction company awarded with a contract for a certain project, the planning phase across all areas, whether cost, schedule, quality or whatever area, is often too much neglected or done incomplete or wrong. Also read my blog article about common problems in construction projects.

Companies that quote for certain projects are very much focused on making an offer and securing a contract. Such offers are often based on

  • Mountains of assumptions,
  • Historical and/or unverified data from previous projects, and
  • Missing project detail knowledge.

In this way, an offer can never come about, which in relation to the cost estimate even comes close to the later actual costs.

Project Manager in Triangle
Project manager as a prisoner in a triangle

Project managers are almost always prisoners in a triangle of scope, time and cost. This symbolization makes it clear that all management areas are fundamentally related and cannot function individually. Neither side of the triangle can be changed without affecting the others. This symbolization, however, also illustrates the importance of treating all management areas equally important.

According to own observations and exchange of experiences among colleagues, the actual cause of cost overruns are often

  1. The scope of works is elaborated insufficiently, which may include quality and other requirements,
  2. The schedule is not created thorough enough and not according to best practices, and
  3. Resource estimates are skimmed over and are incorrect.

Please share your experience and leave a comment below.

1. Planning Project Cost Management

Many project managers create a schedule and look at it as their project management plan. Guys, that is insufficient. A project manager has to cover 10+ management areas, depending on the industry, and each area must be well planned and described in a document. This of course also applies to the area of cost management.

Planning cost management is therefore mainly concerned with

  • Setting the framework for each of the cost management processes so that performance of the processes will be efficient and coordinated, and
  • Describing the processes in the project cost management plan, which becomes a component of the overall project management plan.

These plans do not necessarily have to be prepared over and over again for each project from scratch and so I cannot accept a common project manager’s answer, that there would be more important things to do and that there is no time for that right now. There is no question that such a plan is reusable, but of course requires a revision during the early planning phase of each project. So, use your plan from your last project, or wasn’t there enough time? In that case check out this link, I share my templates with you for free!

2. Estimating Project Cost

Cost
No way to get cost right if ignoring the rest

Many construction companies are very much focused on pricing a particular project. Other processes such as:

  • Collecting and understanding stakeholder requirements,
  • Decomposing scope into manageable packages,
  • Estimating resources,
  • Estimating durations, and
  • Evaluating risks

Will either not be considered or will be addressed much later. But how can you get the cost right, if you miss out those important processes? If you get this wrong, there is little to control later. Maybe only frustration…

Something that you hear over and over again on construction projects are statements like “The crazy HSE officers are hindering us and cost us too much time and money with their overblown requirements.” Well, it could be that I have made similar remarks in the past – sorry guys -, but that was of course something completely different. 😉  The point is that these requirements usually arose long before the offer was submitted and the contractor should have known and taken into account.

Another mistake, which often leads to cost overrun, is that time components and resources are not sufficiently considered.

Often pricing is done according to the formula:

Finish concrete wall = x m3 reinforced concrete + y m2 plaster + y m2 wall paint.

This initially looks relatively logical even so I did not include formworks. However, it must be remembered that between concreting and plastering, as well as between plastering and painting up to 28 days have to pass to allow for curing. Curing by the way is an activity and requires resources. But if you price a bill of quantities (BoQ) you will usually not find this item. In other words, without decomposing the scope into manageable packages, estimating resources for each and every activity and task, and estimating their durations, there is great possibility of forgetting it.

I hope that sounds logic, right? I can tell you, the reality is often different.

Please share your point of view below.

3. Determine the Project Budget

The real situation in many construction companies is often that the company signed a contract, the project cost is estimated by someone and shall be X. The project manager is engaged after the contract being signed and thus commitments being made that can’t change easily anymore, and then he or she is challenged to commit himself or herself to something that is calculated as X-Y%, and that is considered being the budget.

Wait, before you comment below that it would be the responsibility of the project manager to prepare the budget, and I totally agree with you, the problem is as mentioned above, the project manager is very often only hired after a contract has been signed and X weeks time are lost already.

That means in summary his or her starting position is as follows:

  • Budget
    Budget Preparation

    X weeks time delay at the time of engagement,

  • Scope and requirements possibly not evaluated thoroughly,
  • Time and resources possibly estimated wrongly or incomplete,
  • A so-called budget is grabbed out of thin air and is a “done deal”.

What could be the likelihood that this project will finally become a success? I’m looking forward to your comments.

The more correct and far more promising way would be:

  • Estimate thoroughly the cost per each activity bottom-up,
  • Aggregate the activity costs to figure out the cost per work package and consequently for each deliverable,
  • Add the risk contingency.

4. Control Project Cost

As long as the above processes are not done correctly, there is not much left to do in cost control.

Otherwise controlling cost is about:

  • Ensuring that no money is expensed without the budget owner’s approval,
  • Preventing that expenditure exceed the individual budget per activity, work-package, and deliverable without authorization,
  • Monitoring cost and work performance and analyzing variances,
  • Managing overruns and ensure that overall project budget is maintained,
  • Influencing factors (such as scope changes etc.) that may result in a change to approved baselines,
  • Updating the budget to accommodate approved changes and keep budget changes within acceptable limits.

 

Please feel free to share your opinion with me. I would be very happy if you prove me wrong.

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