7 Strategies for Proactive Cost Management
Project Managers can proactively manage project costs by implementing these seven strategies.
1. Build a foundation for success in the cost estimate
The project cost estimate forms the basis for negotiating the contract price with the customer. The cost estimate needs to balance the expected competitive market price with the capabilities of the organization to execute the work for the estimated price. To achieve these dual goals, it is important to incorporate lessons learned and process improvements from prior project experience. This can be achieved by involving engineering, procurement, and construction representatives in the preparation and review of the cost estimate. These representatives will also be a source of innovative strategies, which will help align the estimate with market intelligence on competitive pricing.
2. Prepare a detailed project budget
The challenge for this step is to translate the cost estimate into a detailed project budget, without having to spend a lot of time restructuring the cost estimate. For example, costs estimates are frequently prepared based on a bill of materials or line items, that would need to be restructured or mapped into an activity-based detailed project budget.
One strategy is to prepare a detailed, activity-based, cost estimate that when finalized becomes the detailed project budget. Another strategy is using a resource loaded project schedule to prepare the cost estimate. This is achieved by assigning unit rates to the individual resources. For instance, hourly or daily rates for labor and equipment, unit prices for materials, and billing rates for subcontractors.
3. Create an earned value tracking tool
Earned value analysis provides an objective means to evaluate whether the project is on budget and on schedule. Earned value analysis compares the planned performance to the actual schedule and cost performance. The planned value (PV) is the authorized budget assigned to scheduled work. The earned value (EV) is a measure of work performed expressed in terms of the budget authorized for the work.
Cost variances (CV) are calculated by comparing the earned value (EV) to the actual cost (AC), or CV = EV-AC. Schedule variances (SV) are calculated by comparing the earned value (EV) to the planned value (PV), or SV = EV-PV.
4. Prepare a cost management plan
A cost management plan describes how expenditures are managed and tracked throughout the project. A potential pitfall for this step is to burden the project with an extremely detailed tracking system, which consumes significant labor resources. It preferable to strike a balance between the level of detail and ease of implementation while providing sufficient insight into actual costs on at least a weekly basis.
Review the cost management plan with the project team to raise awareness about how to use available tools for managing and tracking expenditures.
5. Track actual costs on a weekly basis
Weekly updates on actual costs will enable the project manager to spot issues when they arise and to develop timely corrective actions. To provide weekly updates, project cost information needs to be recorded at least weekly. This means that labor, equipment, material, and subcontractor costs need to be tracked and reported a least weekly.
Typically, projects will track accrued cost versus cash expenditures. For instance, labor costs will be accrued when weekly timesheets are processed versus when employee paychecks are issued.
6. Forecast estimates-at-completion (EAC) on a monthly basis
Forecasts enable project managers to assess whether the project will finish on budget based on project performance to date. One commonly used forecasting tool is the estimate at completion (EAC).
The basic approach to calculating EACs is by summing the actual costs (AC) with the estimate-to complete (ETC), or EAC = AC + ETC.
The ETC is prepared by the project manager with input from the project team, and is based on performance to date. It is recommended that the AC, ETC, and EAC be calculated at a task level to give an indication of which tasks are forecasted to be completed under budget and which tasks are forecasted to be completed over budget.
7. Proactively address potential cost overruns
The quicker a project manager is able to implement a corrective action, the faster the project can be put back on budget. Budget overruns oftentimes result when the project manager loses track of the actual costs for multiple weeks at a time. This delay could be due to problems in information collection or to the project manager being distracted due to project issues.
To avoid these delays, it is recommended that the project manager adopt a weekly habit of reviewing actual costs and make timely decisions about addressing issues. In addition, transparency and proactive communication with stakeholders will lead to quicker resolution of issues, including identifying potential candidates for change requests.
Project Managers who follow these 7 strategies for managing project costs will minimize budget overruns.