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September 27, 2023

Cost management – what it is and why it matters

Gantt Project Management WBS & Backlog Structuring
Jerzy Żurawiecki Content Specialist @BigPicture

If you don’t manage project costs, spending can get out of control fast. But by implementing cost management processes, you can avoid unpleasant surprises on your way to project completion (and improve your bottom line).

What is cost management?

Cost management is the process of planning, estimating, budgeting, and controlling project costs, you use it early in the life cycle. Stakeholders need to approve costs at the planning stage.

Your actual costs might change once the project is underway. But it’s still a good idea to set up a baseline for the budget.

Why is cost management important?

As one of the project constraints, cost sets the financial limitations of your project. Cost impacts your project’s scope, deliverables, and timeline. Having a budget means working within its limits in terms of both time and scope. That means project cost partly determines how much you can achieve.

Knowing how much money to allocate to the project enables the manager to make informed spending decisions. Avoiding cost overruns is much easier when you have control processes in place.

But project managers have more to worry about than overruns. Poor resource planning frequently leads to project failure. Ineffective (or non-existent) cost management processes can contribute to a similar result. But solid ones can prevent that from happening.

Tracking how funds are spent provides transparency and helps the manager keep the project under control. There’s a difference between saying, “We’ve spent this amount” vs. “We’ve spent this amount on X, Y, and Z.” 

Project sponsors value transparency, because they want to know what happens to their money.

Effective cost management in one project also contributes to positive results in other projects. Some managers estimate spending by using historical data. If they gather reliable data from previous initiatives, they’re more likely to estimate costs correctly for upcoming ones.

Challenges of Cost Management

No one budgets with perfect accuracy. Even if project scope remains constant, costs might change due to market conditions, inflation, supplier demands, etc.

And getting estimates wrong often means teams won’t have enough money to deliver the scope. That’s a fast track to project failure.

To make things more difficult, projects often go through changes. Whether it’s time, scope, or team member availability, changing one piece of the puzzle impacts the rest. So even if the estimate was correct initially, it may not hold true several months into the project.

Then, there’s communication. Cross-team initiatives require precise and fast information exchange, including cost information updates. When project team members aren’t updated about budget changes, they might continue working on things that are no longer in scope.
Cost management infographic

Project cost management processes

Cost management consists of four processes:

  • Resource planning
  • Cost estimation
  • Budgeting
  • Cost control

These processes apply throughout the project life cycle. But you’ll want to execute them in the order you see above, because each process impacts the others — just like phases in a Waterfall project.

Let’s take a closer look at the processes, shall we?

Resource planning

The first process has little to do with cost. The idea behind resource planning is to gather all the resources required to deliver your project. That includes people, materials, equipment, and software, to name a few.

At this stage, managers should already have a Work Breakdown Structure (WBS). The next step is to expand the WBS with information like:

  • Who’s going to perform the tasks?
  • What skills does the project require?
  • How long will the work take?
  • Do you need other resources?
  • If so, what are they?

Once each task contains that information, the manager has a complete inventory of resources.

You can use a few tricks when planning resources. One is using historical data. Previous projects might not align perfectly to your upcoming initiative, but they can serve as a reference point.

Also, make sure to consult team members. Their experience will help you establish the timeline and account for contingencies that only a practitioner could foresee.

Your resource planning results help you with the next step.

Cost estimation

Once you have all your metaphorical ducks in a row, you’re ready to estimate how much your project will cost. That’s what the cost estimation is about. In other words, it’s a process of approximating the cost of all the project resources.

For cost estimation, you’ll need:

  • Your list of resources
  • The price of each resource
  • The duration of each resource
  • External factors that might affect cost
  • Your list of potential risks 
  • Historical cost data from previous projects

Combining these elements should give you a rough project cost estimate. It likely won’t be 100% accurate, though. That’s important for all project participants (especially stakeholders) to keep in mind.

You have several cost estimation techniques to choose from.

  • Analogous estimating: Data from previous, similar projects. The closer your old and new projects match in terms of requirements, scope, and timeline, the more accurate your estimate will be.
  • Parametric modeling: A technique using algorithms, formulas, variables, and statistics to estimate the project cost. (Math enthusiasts will love this one!)
  • Bottom-up estimating: Start estimating from the lowest detail level and work your way up.

Cost budgeting

Armed with your estimate, you can move on to the next stage — budgeting. Your budget breaks down all the project costs. Budgeting also involves deciding how much, where, and when to allocate a given amount.

There are all kinds of costs to consider and allocate, including:

  • Labor
  • Material
  • Operating costs
  • Tools

Budgeting establishes your cost baseline. Knowing what the business can (and wants) to spend gives you more precise control. And the last cost management process is all about control.

Cost control

The other processes happen at the planning stage, but cost control occurs throughout the project’s duration.

This is how you verify whether actual spending matches the budget at each project stage: track spending — preferably using a project management tool — to see spending alongside other project data.

But control isn’t only about monitoring and comparing numbers, especially when things go wrong. If your project is heading towards an overrun, the project manager should react to stop the bleeding.

And even if the spending is on track, stakeholders will want to know about it. Frequent reporting of expenses reassures everyone that things are progressing according to plan. And when spending is over budget, there’s even more reason to inform the stakeholders. They need to understand the reasons behind any project changes, costs, and timelines.

Manage your project costs with BigPicture

The days of tracking costs with pen and paper are over. Now, organizations manage spending with software.

Jira users who want to see the project-level costs across the board will need additional software. Why not use a tool that will do more than that?

Appfire’s BigPicture enables you to manage every aspect of your project, program, or portfolio. Whether it’s planning, tracking, managing, or reporting, our PPM powerhouse will make it easier.

For example, you can use our Gantt module to break down the project scope with a WBS. You have many fields to track, including estimated and actual cost. And you can aggregate cost data across the entire project.

An example of BigPicture's Gantt module with estimated and actual cost fields.

The two-way integration with Jira means data will flow between tools seamlessly, and it will help you maintain data accuracy.

BigPicture will even serve as a reminder of your project’s budget.

BigPicture's home module showing the budget for each project.

Want to manage your projects (including their cost) better? Add BigPicture to your Jira instance. Start your free trial to see how a PPM tool can help control cost in your organization.