4 Tools for Cost Control
From the The Money Files Blog
by Elizabeth Harrin
A blog that looks at all aspects of project and program finances from budgets, estimating and accounting to getting a pay rise and managing contracts.
Written by Elizabeth Harrin from RebelsGuideToPM.com.
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Date
In Project-Driven Creation, Jo Bos, Ernst Harting and Marlet Hesslelink talk about 4 instruments for cost control – and by ‘instruments’ they mean tools.
They describe 4 different tools that you can use as your project progresses.
- In the Initiation Phase, use cost estimates.
- In the Planning Phase (which they call Definition), use a budget.
- In the Execution phase, use cost monitoring.
- In the Closing phase, use financial evaluation.
Let me talk a little bit more about each of those tools and how you can best use them.
Cost Estimate
During the project’s very early days you won’t have a lot of detail. The first financial planning you do for the project is in the form of cost estimates. And there’s a ton of stuff on this blog about estimating. (Start here).
At this point all you are doing is working out whether the project is financially viable or not. You might still go ahead even if the finances don’t stack up. There’s often good reasons to do projects that are going to cost, rather than make money, such as compliance and regulatory obligations. But even if that is the case, your sponsor will still want to see an early view of how much the project is going to cost.
Cost estimates are how you do that.
Budget
When you’ve got approval to go ahead and you’re planning out the work, you take the cost estimates and turn them into a working budget. It’s more accurate than your early estimates but it’s still only a forecast.
You build your estimate from the work breakdown structure, details of how much tasks will cost and expert input from your team. Then build in a margin, just in case you’ve got it wrong.
Cost Monitoring
Now the project is fully underway and you’re working your way through the tasks in the Execution Phase.
This is where you use cost monitoring to check that your project spending is broadly in line with what you said it would be. Monitoring your costs regularly lets you see if there are any overspends or trends towards performance that you want to investigate further. The faster you spot it, the faster you can do something about it.
The authors write:
“This comparison is only useful if the monitoring includes evaluating whether the project activities are also on schedule.”
That’s really important, because you could burn through all your money and only be 20% through the tasks. Doing this in any formal way normally includes using Earned Value but for many projects that is overkill. Use your professional judgement to monitor your costs and if you aren’t comfortable tracking expenditure and tasks and taking a position on whether they are progressing as you expected, then talk to your finance team, your PMO or someone else who’s opinion you respect.
Financial Evaluation
Finally, you’ve reached project closure. Your cost control work doesn’t stop just yet: first you can complete your financial evaluation.
This lets you see if the project has hit the financial targets that were set, especially around benefits. So, did it achieve the increase in revenue or cost savings that were expected? This is an evaluation around the outcomes of the project.
Second, you want to measure the project management effectiveness of the project. Did you do the work in line with the budget? Or was your budget woefully wrong? How did you deal with any surprises or overruns and what caused them? And most importantly, what can you and the team learn from them so it doesn’t happen again?
Taken together, these 4 tools give you a good handle on cost control. Even if you didn’t do anything else on your project, these would let you manage the financials adequately.
Do you agree? Let me know what you think of the 4 instruments of cost control in the comments below!
Posted on: March 09, 2016 12:00 AM |
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Comments (11)
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Markus Kopko
AI Enabler for Project & Program Mgmt | Founder PMotion.ai / The PM
AI Coach| PMotion.ai
Hamburg, Hamburg, Germany
Hello thx for the blog, nice freshup and overview as starting point for getting in more detail (may be by the book ;) ).
btw: i like the new pic much more than the previous one, nice.
Thanks, Markus! I thought it was time to update my picture.
Hello Elizabeth,
Nice read, but I would like add more than just monitoring. Monitoring is a "passive" action. I would add budget controlling - trying to keep the cost under estimated budget.
 | tarmizee |
Hello Elizabeth, nice blog.
Good one Elizabeth. I was wondering what is 'new' (other than labels) in what the authors of the book suggest.
Nalaka Kanthiarachchi
Electrical Services Manager| American University of Sharjah
Sharjah, United Arab Emirates
Thank you Elizabeth for the useful tips & tools
Prabhaker, I think the 'new' part is the collaborative approach that focuses on the project manager acting as project leader, and the sponsor being a hands-on part of the team. It's all very team-driven with a dedicated kick off period for project initiation, involving being shut away in a room for a few days until it's all sorted out.
fosco frongia
Senior project manager| ENTE PATRIMONIALE CHIESA GESU' CRISTO SUG
Fino Mornasco, Como, Italy
Thanks Elizabeth,
basically I work as described in your article. In the budgeting phase I tend to apply Pareto rules focusing my attention in the most important element, which I analyze in a deeply manner; and maintain a more basic estimate for the elements without a strong economical impact.
Useful tips and nice info
Great piece, thanks Elizabeth
Walter Macias
Ingeniero Electrónico en Automatización y Control| Corporación Nacional de Electricidad CNEL EP
Guayaquil, Ecuador
Thank you Elizabeth, excellent article.
In the estimation phase it is important to take into account the gaps and define certain risks that may affect the cost of the project. In this way we can base ourselves on a budget that has enough contingencies to combat risks that may arise within the development.
Greetings from Quevedo-Ecuador
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