What Is Cost Management?

cost management

Cost management is the process of planning and controlling the spending budget of a business.

It is a sort of management accounting that permits a company to predict impending expenses to reduce the prospect of going over budget.

Many companies employ cost management plans for specific jobs, and also for the overall business model. When applying it to a job, anticipated expenses are calculated whilst the project is still in the planning period and therefore are accepted beforehand.

Throughout the project, all costs are recorded and monitored to ensure they remain in line with the cost management plan

After the project is completed, the predicted costs and actual costs can be compared and examined, helping future cost management predictions and budgets.

Several business intelligence programs offer cost management applications to help businesses monitor prices and increase endurance.

This kind of management covers the complete life cycle of a project from the initial planning phase towards quantifying the true cost performance and project completion.

This article will explain the various steps or procedures in cost management

cost management

Step One: Planning the resources

In the initial phase of a project, all the necessary resources must be defined. Work Breakdown Structures and historical info of comparable projects may be employed to specify which physical resources are required.

You may think of the necessary time, substance, man power, equipment, etc. After the source types and amounts are known the associated costs can be estimated.

Step Two: Estimating Cost

Several cost estimating approaches can be implemented to predict how far it’ll cost to execute the project.

The option for the estimation method is dependent on the level of information out there. Analogous estimating utilizing the true cost of previous, comparable projects can serve as a basis for estimating the present one.

Another option is to utilize parametric models where the job attributes are mathematically represented. Estimates could be refined when more info becomes available over the course of the project.

Finally this leads to a detailed assessment of the unit cost with high precision. Remaining uncertainties in estimates which will likely lead to additional cost could be dealt with by booking cost.

Step Three: Budgeting

The cost estimate is based on the project schedule along with the input for budgeting. The spending budget gives a summary of the periodic and total expenses of the project.

The cost management estimates specify the cost of every work package or action, whereas the spending budget allocates the expenses over the time period when the cost will be incurred.

A cost baseline is a licensed time phased budget that’s utilized as a starting point to measure real performance advancement.

Step Four: Controlling cost

Cost control is concerned with measuring variances from the price baseline and taking effective corrective actions to achieve minimum expenses.

Procedures are employed to monitor performance and expenses against the progress of a job. All changes to the cost baseline need to be recorded and the expected final total costs are continuously forecast.

When actual cost info becomes available a valuable part of price control is to describe what’s causing the variance from the price baseline.

Based on this analysis, corrective actions could be asked to prevent price overruns.

Cost Management Plan Components:

The cost administration plan guide these four processes. Created throughout the project planning phase, the cost management plan is a document that defines the way you handle, control, and convey a project’s costs to be able to finish the job on budget.

Among other stuff, a cost management plan describes the person or group accountable for cost management, details how you are going to evaluate a project’s cost performance, and sets guidelines for how to convey cost performance to project shareholders.

Additionally, it determines the methodologies by which you may control project price variations. While you may customize a price management plan to suit your organization’s needs, they typically follow a standard format.

Sections frequently include the price variance plan, the price management approach, info on cost estimation, the cost baseline, price control, and reporting processes, the change control process, the project spending budget, and approvals. 

You might also need to include the spending authority levels for key project personnel, specifying which roles can approve costs up to particular thresholds.

Cost management as a career:

Professional cost managers, sometimes referred to as quantity surveyors, work on large projects.

But project managers also need a comprehension of process management strategies and techniques to perform their responsibilities.

importance of cost management

Process management requires creative problem solving skills and a comprehensive comprehension of the factors that influence project costs.

As such, price managers are in high demand and have chances to advance to lead project managers.

One popular cost management profession will be cost accounting, which will be determining the expenses focused on developing a product or offering a service. 

Cost accountants deal with spending budget preparation and sustainability analysis, and their main responsibilities include collecting and communication cost related data to help management decision making and create monetary transparency.