One of the key parts of managing any project successfully is cost planning. According to given money resources, project managers need to know when and where money will be spent during the project. Effective cost planning helps managers keep things under control, including people, machines, materials, etc. 

Typically, all labor and non-labor items that need money have been included in a special plan called a resource-optimized schedule. A resource-optimized schedule specifies when each resource will be in use and the associated costs. Additionally, resource-optimized schedules enable project managers to view the total planned costs over selected intervals, allowing them to make informed decisions based on both cost and time.

There are 2 main types of cost-planning:

• Fixed costs: It happens only once time in a project like proper machine setup or purchasing certain tools
• Variable costs: It happens many times during the project, such as paying for different materials or making parts repeatedly

By proper cost planning in the project, managers can keep it under budget and avoid financial surprises. 

What is cost planning in project management?

Cost management is simple paperwork that helps you monitor and plan the money resources. Effective cost planning helps leaders to guess how much things will cost, spend money where it is needed and keep everything under control. 

This planning keeps all direct and indirect costs in one place. Direct costs like paying workers and purchasing project materials and indirect costs like renting tools, insurance, and upkeep. The project owner checks these costs to ensure that they do not break the budget in the future. 

The importance of cost planning in project management

Have you ever thought about what happens if money spending exceeds as compared to cost planning? It becomes the reason for many complications such as wasting money, upsetting clients, and many more! Here is an example:

Let’s suppose you have a project of making an app for a client. At mid-way through ‌project completion, they saw the costs were going too high. They had 2 options: keep going and exceed the cost planning or change the plan. 

They looked into areas where funds were being spent too quickly. They simplified their work, concentrated on key components, and discussed prices with assistants once more. As a result of their honesty and diligence, they were able to complete the project on schedule and satisfy the client.

This demonstrates how effective financial management can save a project.

What are the essentials of a cost management plan?

In order to control project costs effectively, a project manager should have all the information they require to prepare a clear plan.

A cost plan may consist of various components, including:

• Units of measure: These vary geographically. In the US, use inches; in Germany, use meters
• Accuracy: Determine how many decimal points to use and how much you can alter dates or numbers
• Limits for control: Establish a point to take action if costs or time get too far out of line. For instance, in case you lose $5,000, correct the issue
• Methods for checking progress: Select how work is going to be gauged, such as percent complete or earned value
• Style of report: Determine how and when to report on the project

How do cost planning in project management?

Any cost management plan should have the below mentioned 4 elements.

1. Resource planning

The first element in project management costs is resource planning. This means the leader who manages costs looks at the project details to figure out what essentials are required to finish the project. 

Resources can be included in anything that helps to get the work done. This may include tools, money, time, machines, and team members. To make a good resource plan, make conversation with team leaders and other important people. They suggest better things because they directly work on the project. 

For this purpose, you need to follow the below-mentioned steps:

• Clear project goals
• A detailed list of tasks that explains how big the project is
• A rough plan for managing resources
• A statement that explains the project

This helps make sure you have everything ready to complete the project on time and within budget.

2. Cost Estimating

Once you have a list of everything that you will require for your project, the next thing to do is determine how much they will cost. To achieve this effectively, it is wise to gather as much pricing information as possible.

For physical products such as tools and equipment, request actual price quotes from sellers. Inventory tracking software can assist you in obtaining current prices and supplier information promptly.

For the labor charges, obtain several quotations from various contractors. This will make you aware of how much the work will probably cost. Keep in mind that prices may fluctuate with time, so include some additional money just in case prices escalate.

In addition to adding extra for every item, add 5–10% to account for expenses that are unforeseen. If you are a new member of the team, look for previous budget reports. Such reports indicate the proximity of previous cost estimates to ‌actual expenses and can assist you in determining how much additional money to add.

You will need the following to estimate costs:

• A project timetable or chart indicating the sequence of tasks
• A list of what the project needs to deliver
• Clear aims to gauge success

This straightforward method will assist you in making more accurate cost estimates for your project.

3. Cost budgeting

Now you roughly know what your project needs and what resources are required. The next step is to start to make your cost budget. It is the clear plan that highlights how much total money you will spend, and when you will spend it. 

How you spend your money with time depends upon the project duration or how big the project is. For example, if you handle projects for many years, then it is good to spend a little part of the budget in the first year, like only 30%. This protects you from future money crises. 

At this point, you remember two important points:

• All steps in your project budget document
• A list of people who handle the project

Cost control

How often you perform cost control will depend on your specific project. In some instances, you may be doing ongoing cost control, other times you may be doing it every month or every 3 months or more. Share the updates with your team through reports to ensure that everyone is updated.

Keep in mind that if the project scope changes in size or workload, then so will the budget. Be aware of the changes in the project that haven’t changed in scope and if the spending is going over budget then ‌inform your team as well as main stakeholders immediately. From there, you can share information and correct the issue going forward.

You will need tools or applications that can aid you with project management and reporting.

Final words

To complete the project successfully it is essential for managers to have skills such as realistic project schedules, manage budgets effectively, and control costs throughout the project lifecycle. If you want to polish your project management and cost planning skills then enroll at Oxford Training Centre. We offer a comprehensive Project Scheduling and Cost Planning Course for Project Managers. After completing the course you will be able to efficiently use ‌project management software and techniques to handle project changes and risks efficiently.