The 4 phases of project cost management

Published on 19/04/2024

The 4 phases of project cost management

Published on 19/04/2024
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The 4 phases of project cost management

Project cost management is a crucial task within a company. Proper budget organization and expense control largely delineate the success of our project.

Managing project costs is not an easy task. Discussing costs means discussing the DNA of any company, what allows it to operate and people to continue working. Talking about costs is talking about investment, and therefore, about profits or losses. In short, managing the budget allocated to a project is not just any task. It is, after all, one of the most important, which is why the approach must be different from the usual.

So, how can we do it? No one wants to make a mistake. Every company will want to profit from any operation. For this, the best thing is to go through the 4 phases of project cost management. If we complete all these steps correctly, our project will have many more chances of being fruitful.

Project cost management phases:

1. Cost estimation: 

In this initial phase, our aim is to acquire a realistic projection of what our project will entail. This requires conducting an economic analysis to determine the project’s potential profitability. To estimate costs, we first identify the necessary tasks and develop a project schedule. Human resources often represent the highest cost, hence the planning phase is essential for estimating the project’s overall costs. Additionally, we must assess other potential costs associated with the project such as the acquisition of tools, materials, etc. After this assessment, we can determine how much we need to invest, guided by the results of our economic analysis and the statistics we review, including the project’s scope, confidence, and associated risk.

2. Budget formulation

In this second phase, we must draw conclusions. What does our economic analysis indicate? And the statistics? Based on the project costs determined in the first phase, we need to draft our budget considering the profit margin we aim to achieve. It is essential to bear in mind that there may be variations from the initial forecasts during the project development.

Naturally, the Project Manager will oversee the project to ensure that time and resources invested align with the initial planning. However, when formulating the budget, all variables must be considered to secure the desired margin. This is crucial because, in the end, there will be only two figures that really matter: the amount we have invested and the amount we have earned.

3. Project cost control

Good project cost management involves ensuring, throughout the project’s development, that there are no deviations. The Project Manager must invest time in task management and team management of the project. They should periodically control:

  • The progress and status of the tasks.
  • The time spent on each task and compare it with the initial schedule.

To maintain comprehensive control of the project, the Project Manager must have a project management tool that allows for real-time monitoring of the hours spent. The project management software in use should provide automatic calculations of human resource costs. If necessary, updates to the project schedule, workload rebalancing, and modification of task priorities may be required.

4. Calculating profitability

It’s time to assess how well our project has performed. We must conduct an evaluation to determine the cost application and whether we achieved the expected results. Accurate data extraction and analysis are necessary. Questions like “How many hours have we totally invested?”, “How many hours have we billed, and what profit margin have we achieved?” are critical. This analysis, based on profitability factors, will help us ascertain the project’s success, identify our successes and any mistakes made. Of course, other factors, such as quality and the end customer’s satisfaction, should also be considered.

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