Part 4: Cost Management


Contents of Topic:

Often a Project Manager is evaluated on his or her ability to complete a project within budget. If you have effectively managed the project resources and project schedule, this should not be a problem. It is, however, a task that requires the project manager’s careful attention. You can only manage effectively a limited number of cost items, so focus on the critical ones (see the 80-20 Rule in the sidebar).

  • Costs
  • Estimated, actual, variability

  • Contingencies
  • Weather, suppliers, design allowance

  • Profit
  • Cost, contingencies, remainder

    Each project task will have a cost, whether it is the cost of the labor hours of a computer programmer or the purchase price of a cubic yard of concrete. In preparing the project budget, each of these costs is estimated and then totaled. Some of these estimates will be more accurate than others. A company knows what it will charge each of its projects for different classifications of labor. Commodities like concrete are priced in a very competitive market so prices are fairly predictable. Other estimates are less accurate. For instance, the cost of a conveyor system with higher performance specifications that normal can be estimated to be more expensive, but it is hard to determine whether it will be 10% more or 15% more. For an expensive item, that can be a significant amount.

    When the estimated cost of an item is uncertain, the project budget often includes a design allowance. This is money that is set aside in the budget “just in case” the actual cost of the item is wildly different than the estimate.

    Unusual weather or problems with suppliers are always a possibility on large projects. Companies usually include a contingency amount in the project budget to cover these kinds of things.

    So a project budget is composed of the estimated cost, plus the contingency and design allowance, plus any profit. The project manager’s job is to keep the actual cost at or below the estimated cost, to use as little of the design allowance and contingency as possible, and to maximize the profit the company earns on the project.

    To maximize your chances of meeting your project budget, meet your project schedule. The most common cause of blown budgets is blown schedules. Meeting the project schedule won’t guarantee you will meet the project budget, but it significantly increases your chances. And above all, manage the project scope. Don’t allow the project scope to “creep” upward without getting budget and/or schedule adjustments to match.

    Successful project management is an art and a science that takes practice. The ideas presented above can give you a basic understanding of project management, but consider it only a beginning. If your job or career path includes project management, and you want to improve your skills, talk to successful project managers, read, and practice. Project management can be a very rewarding career.