Categories: cost management
This question: What is project cost control? comes up quite a lot. I’m not sure exactly why, but I think it’s to do with project managers wanting to make sure they are putting adequate measures in place to monitor and control spending. After all, it’s not our money. We are responsible for making sure it gets spent in a way that supports the project’s objectives and is fiscally responsible. It can feel like a lot to ask.
In my experience, it is actually easier managing huge sums of money than it is managing smaller amounts. On a teeny budget, every dollar counts. The larger the budget, the easier it is to manage because you have latitude to make decisions within your control and tolerance limits, such as approving an extra $50 for something or dealing with an invoice that’s 10% more than you expected. Having financial responsibility is a good way to help manage roadblocks and get things done on a project.
OK, so what do we mean by cost control? Generally, we’re talking about processes to do with:
- Budget planning
- Estimating costs
- Financing and funding i.e. finding the money from somewhere, applying for grants, securing financial support etc
- Managing costs i.e. the day to day operational effort of raising purchase orders for the correct amounts, receiving and matching invoices, tracking line items of project spend and ensuring that what you are spending isn’t more than what you thought you would.
All of these help to ensure the project can be completed within the approved budget.
One of the biggest areas of focus for cost control is budget tracking.
What do you track in a budget?
Let’s say you’ve started the work. What is it that you should be tracking through the project?
You can track:
- Forecast expenditure: What you are predicting to spend for the rest of the project
- Actual expenditure: What you are actually spending.
Actual expenditure itself is a bit of a vague term because it’s often used to encompass three other terms:
- Committed spend: money you have definitely committed to spend. For example, you’ve raised a purchase order or placed a firm order for services or goods.
- Accruals: where the work has been completed (or partially completed) but you haven’t paid for it yet, or you haven’t paid all of it yet.
- Actuals: this is what we typically think of as ‘actual expenditure’. It’s money out the door, leaving the bank account, to settle an invoice or otherwise pay for something. The money has been physically spent.
Tracking budget KPIs
Another part of cost control is making sure that any financial reporting for the project is complete. Cost is normally a big factor in deciding whether the project is on track for success or not – I’ve certainly found execs to be very interested in the cost performance of projects, especially the larger budgets. They want to know the money is being spent in the way they expect and that we’ve got enough of it to get to the end.
Cost is typically a key performance indicator, but you might find it worthwhile to track other budget related KPIs. In a programme, you might track return on investment for projects that have completed, for example.
Who does project cost control?
The project manager is often fully responsible for project budget management, but you could also have a Finance person attached to the project (I had this once – he was great). Depending on the size of the project, and the size of the budget, you may be able to have someone on the project’s senior team leading on cost tracking.
Your corporate Finance team will also be involved, even if much of the day to day handling of invoices etc comes to you. They may rely on you to approve invoices (because you are best placed to confirm the work is complete) but they’ll be processing the payments in operational systems and checking they have been correctly posted to the right cost centre for accounting purposes.
Another part of cost control happens when the project is formally reviewed. The review happens anyway, and cost is part of the discussion, and part of the decision about whether the project is still viable.
One of the factors to take into consideration is sunk costs – costs that can’t be recovered because they have already been spent or committed including costs that would be incurred if you cancelled a contract or similar.
However, execs sometimes look at sunk costs and think they must continue the project because they’ve already spent money on it, even if all other signs point to the project being stopped. The viability check needs to take that into account: but why throw good money after bad? If you can’t salvage the project, don’t spend more on it just to get it to ‘done’. That would continue to be a waste of resources.
The project manager’s role is to input to these kinds of discussions with full facts and an approach that draws on commercial acumen, so the team ends up making the right decision for the future of the project.
Planning for risk
Finally, cost control also involves planning for financial risk – in fact, planning for any type of risk.
Dealing with risk costs money, because you’d want some kind of budget to pay for risk management actions such as mitigating the potential problem. Risk and issues can mean paying out for things you didn’t expect to have to fund.
The more risk budget planning you can do, the better prepared you will be, and the less likely it is that your overall budget will suffer. You’ll have more time and money to deal with the problems because you planned for them.
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