What is Project Cost Management? Steps, Benefits, and Tips

Benefits of Project Cost Management

• Risk mitigation: Applying cost management empowers project teams to anticipate financial risks and implement strategies to manage them proactively, ensuring smoother project execution.
• Project and financial health monitoring: Accurate cost control, monitoring, and reporting (e.g., using metrics like CPI and SPI) help track financial performance, keep budgets under control, and enable better decision-making.
• Facilitates forecasting and planning: Tracking spending patterns and resource use provides insights that enhance financial planning and enable more accurate future cost predictions.
• Enables scope change management: Simplifies the assessment of cost implications for scope changes, ensuring project adjustments remain aligned with financial constraints.
• Ensures budget accuracy and prevents cost overruns: Cost management provides a framework to monitor expenditures, identify budget deviations early, and take corrective action to keep projects on financial track.
• Enhances decision-making: Comprehensive cost data enables well-informed decision-making throughout the project lifecycle.
• Supports continuous improvement: Cost management encourages learning from past projects by analyzing cost data and setting benchmarks. It facilitates the comparison of projects for continuous improvement and future planning.

The Project Cost Management Process: 4 Key Steps

Effective project cost management typically consists of 4 essential steps: resource planning, cost estimating, cost budgeting, and cost control.

Next, let’s dive into each step:

Step 1: Resource planning

The first step in project cost management is resource planning. Resource planning is the process of ascertaining future resource requirements for an organization or a scope of work. This involves evaluating and planning how to use the physical, human, financial, and informational resources required to complete work activities and their tasks.

Most activities involve using people to perform work. Some activities involve materials and consumables. Other tasks involve creating an asset using mainly information inputs (e.g., engineering or software design). Usually, people use tools such as equipment to help them. In some cases, automated tools may perform the work with little or no human effort.

Resource planning starts during the scope and execution plan development process. Here, various structures like the Work Breakdown Structure (WBS), Organizational Breakdown Structure (OBS), Resource Breakdown Structure (RBS), work packages, and execution strategy are developed.

• The WBS breaks down the project scope into manageable work packages.
• The OBS categorizes labor resources or responsibilities, facilitating resource planning since all resources fall under someone’s responsibility.
• The RBS classifies all resource types (e.g., labor, equipment, and materials) into a structured hierarchy for detailed tracking and assignment across the project.

Thus, these breakdown structures work together to define what work is required, who is responsible, and what resources are needed to perform it.

Resource estimating, often included in cost estimating, identifies the required quantities of resources for each activity, such as hours, tools, and materials. Schedule planning and development determine the sequence of work activities, followed by resource planning. Resource planning involves evaluating estimated resource quantities, assessing availability and limitations, and optimizing resource usage over time, all while considering project circumstances. This optimization occurs iteratively through the duration estimating and resource allocation steps within the schedule planning and development process.

Effective resource planning minimizes downtime, prevents resource conflicts, and keeps the project aligned with its execution strategy. This leads to greater efficiency, improved cost control, and more predictable outcomes.

Step 2: Estimating project costs

Cost estimating is the predictive process used to quantify, cost, and price the resources required by the scope of an investment option, activity, or project. It involves applying techniques that convert quantified technical and programmatic information about an asset or project into finance and resource information. Estimating outputs primarily serve as inputs for business planning, cost analysis, and decision-making. They also inform decision-making and project cost and schedule control processes

Project teams generally apply the cost estimating process during each phase of the asset or project life cycle while defining, modifying, and refining the scope. As the level of scope definition increases, the estimating methods used become more definitive and produce estimates with increasingly narrow probabilistic cost distributions.

Dedicated software systems like Cleopatra Enterprise and cost estimating and project cost databases like CESK support various types of estimates throughout the asset or project life cycle.

The estimation of activity time durations must be considered concurrently with costs, as changes in resource requirements identified during cost estimating may directly impact the schedule. Iterative approaches are used because outcomes of a cost estimate often lead to changes in scope or plans. In fact, we can view the estimating process as part of the scope definition process because iterative trading off between cost and scope intertwines the processes.

With Cleopatra’s cost estimating software, you can achieve:

• Creation of all kinds of cost estimates, from factor to detailed estimate.
• Successful tendering as it allows you to estimate costs, request bids, analyze those bids and to keep track of its costs.
• Connected cost estimating and cost control. Using the Cost Control Module, you can track project costs during the execution phase. Cleopatra Enterprise directly links your project controls document to your estimate, minimizing data handling, increasing efficiency, and reducing errors.
• Traditionally, management would ask to deliver an estimate based on the time remaining to the TA execution. However, more organizations now require estimators to follow a staged approach to estimating. It involves delivering three different types of estimates during the preparation phase.

Step 3: Cost budgeting

Within estimating, budgeting allocates the estimated cost of resources to cost accounts, which serve as benchmarks for measuring and assessing cost performance. This forms the baseline for project cost control, which enables teams to measure and evaluate project cost performance, identify variances early, and take corrective action to stay on track.

Cost accounts used from the chart of accounts must also support the cost accounting process. Budgets are often time-phased in accordance with the schedule or to address budget and cash flow constraints.

Step 4: Cost control

Cost control involves measuring variances from the cost baseline and implementing corrective actions to minimize costs. Procedures are applied to monitor expenditures and performance against the progress of a project.

Recording all changes to the cost baseline is crucial, along with continuously forecasting expected final costs. Furthermore, when actual cost information becomes available, an essential aspect of project cost control is explaining the cause of the variance from the cost baseline. Thus, this analysis informs necessary corrective actions to prevent cost overruns.

The figure below illustrates a process map for project performance measurement. Project teams should run this process in a continuous improvement cycle until project completion:

The process for performance assessment starts with planning and having the right tools in place. Dedicated cost control software tools can add value by defining cost control procedures, tracking and approving changes, and conducting analysis. Additionally, cost control software enhances and simplifies reporting, making it easier to inform all project stakeholders.

Cleopatra’s cost control software helps you achieve:

• Project cost control and always tracing back cost components to their original budget.
• Scope change management. Estimate costs and add them to your project controls document.
• Project completed? The feedback process will be in place. Send the actuals to your cost models to increase their accuracy and quality for future estimating. While most tools limit themselves to being cost estimating software or a cost control tool, Cleopatra Enterprise is both.

Bonus Step: Benchmarking for Continuous Improvement

While not always included in the cost management framework, it is wise to add project benchmarking as a step. By comparing actual costs against initial estimates, teams can drive continuous improvement.

Benchmarking plays a crucial role in closing the loop between project A and project B. It involves analyzing the knowledge gained from project A (referring to the running and executed projects) and applying the feedback to project B (the next project). This creates an improvement cycle aimed at increasing project performance.

Benchmarking is a widely adopted practice in technical industries to enhance project performance. Software systems like Cleopatra Project Benchmarking aid estimators and project controllers. They assist in addressing the complex question: How to use big data to execute projects within time and budget?

Project benchmarking aims to store data from executed and ongoing projects. It extracts valuable project metrics and benchmarks them with current estimates. Furthermore, performing statistical analysis on historical data provides valuable insights into the relationships between variables. These insights can then be used to establish a reliable cost knowledge base or to calibrate existing ones.

Project benchmarking includes not only comparing projects but also comparing revisions within a project.

What you can achieve with Cleopatra’s project benchmarking software:

• Collect historical project data that can provide valuable insights and project comparison to make critical business decisions.
• Benchmark your estimates against your previous projects and improve your cost estimate significantly.
• Extract metrics across projects to enhance future cost estimating accuracy.
• Develop meaningful and interactive reports.
• Export & Import data easily from Excel.

Common Challenges in Cost Management

Keeping project costs under control is rarely as straightforward as it sounds. Most teams come across these common cost management challenges:

• Inaccurate estimates: Poor forecasts due to a limited scope understanding or inexperience can easily lead to cost overruns and impact project profitability.
• Scope creep: Uncontrolled changes or project scope additions can complicate planning, resource allocation, and lead to unexpected budget increases.
• Poor expense and progress monitoring: The lack of real-time cost and progress monitoring can make issues go unnoticed until it’s too late to act.
• Resource constraints: Shortages of skilled workers, tools, or raw materials force substitutions or downtime that escalate costs.
• Outdated tools and processes: Scattered spreadsheets across emails or fragmented management systems block easy project visibility, slow collaboration, and increase the risk of errors.

Any of these issues impact project performance and can delay project delivery, lead to budget overruns, and shrink the ROI expected by stakeholders.

To overcome these challenges:

• Use an iterative approach to estimating and benchmarking to refine your cost estimates and continuously improve accuracy.
• Strengthen scope management by implementing formal change control processes to prevent uncontrolled changes.
• Use integrated cost management software to unify data, automate workflows, and increase visibility across all project phases.
• Proactively addressing these challenges will significantly improve the chances of successful project delivery.

Integration Between Cost and Other Domains

Project cost management doesn’t operate in isolation. It must work in tandem with schedule, risk, and scope management to provide real control and reliable project outcomes.

Cost and Schedule: Cost and schedule are interlinked as schedule delays can lead to additional labor, equipment, and overhead costs, while fast-tracking can raise expenses through overtime or premium rates. Integrated planning aligns timelines with budgets so that teams can make informed trade-offs and avoid overruns.

Cost and Risk: Identifying, assessing, and mitigating risks enables organizations to anticipate potential overruns and incorporate mitigation activities into the budget.

Cost and Scope: Scope changes directly impact project costs. Without a process that connects scope and cost controls, even minor changes can result in major budget issues.

All these areas are covered in a single platform in Cleopatra Enterprise. This integrated approach improves visibility, streamlines workflows, and supports more confident decision-making throughout the project lifecycle.

Comparison table: Cleopatra vs traditional tools

As you’ve seen, cost management is crucial for ensuring successful project delivery, but managing this entire process effectively can be challenging without the right tools.

Here’s how Cleopatra Enterprise compares to traditional spreadsheet-based tools.

Read our deeper dive on Cleopatra’s Cost Management Software to better understand how it compares to traditional tools and what features it offers to unlock project efficiency and control.

You prefer to see it in action? Request a demo today.