Helpful Insights to Control the Cost of Your Project

FinanceManagementCompanies/Organisations

Managing a project is not everybody’s cup of tea. There are many aspects of the projects which we need to plan and manage perfectly to achieve the desired success, whether it is the scope, schedule, cost or quality. It is also seen that many times, the project runs into trouble only because the Project Manager fails to monitor and control the project cost.

So it is important to manage the project cost throughout the project with proper planning and controlling the project budget. To manage the project cost effectively, there are certain activities which we need to perform initially.

  • Planning the Cost: A proper plan should be in place to manage and control the project task throughout the project life cycle. Planning should be done by considering various available artifacts such as Scope baseline, Schedule baseline, work breakdown structure and other information.
  • Estimation of Cost: Estimate the project cost by using some well-established techniques to predict the approximate cost required for each of the project activities till the completion of the project.
  • Budget Determination: Sum up the estimated costs of all the activities to determine the final budget, that has to be taken as cost baseline to look upon throughout the project cycle.
  • Control Cost: Finally, monitor and control the project cost, measure the variances against the cost baseline, and take corrective actions to maintain the costs under the thresholds. Any changes to the cost baseline should be analyzed and recorded properly; also continuously forecast the expected total cost till the completion of the project.

Not performing these activities cautiously may badly impact on your project; chances are there that you may go over budget by the end of the project, and the expected revenue may end up in a negative figure.

It can certainly hamper your reputation as a project manager as well as questionable to your credibility. Let’s discuss a common scenario to understand the importance of cost management.

Case Studies

Suppose you buy a land in a posh area of the city and wanted to build a house there. As you are busy in your day to day works, and also do not have required skills to build a house, so you hire a construction company to build your house.

Let’s figure out the things you need to perform in this process.

Informal Meeting

  • You called the representative of the construction company to discuss and shape out the plan. In this informal meeting, you told him your rough requirements and asked him to come up with a proper plan in the next meeting.

Formal Meeting and Requirements Gathering

  • You set the scope, provides all your requirements like the no of bedrooms, bathrooms, balconies, the styles and designs you want in your house
  • In the next formal meeting the contractor comes with the plan, they show you the possible layout designs of your house and roughly estimated budget plan

Budget Finalization

  • After the series of discussions and negotiations, you and the contractors agreed on the overall budget to complete the construction work of your dream house
  • And you have handed over the initial payments to the contractor to start the construction work, and with an agreement to pay the rest of the amount phase wise as the works progress

Kick Starting of the Work

Finally, the constructions works starts from here. As you have given the contracts to construct your house to the construction company, it is not your job to look for the resources and materials; you just need to pay the money time to time. And off-course, it is your job to supervise the quality of works and progress of the work as the time passes.

Problematic Times

All goes well till the 85% of the house was built. And then the problem arises, further building of the house and hitting the approved budget. The contractor requires more money to finishing the remaining 15% of works. But you have already given him the whole agreed budget and currently, nothing is left with you to funding further.

Isn’t it a big issue? Who is responsible for this? Why did this happened in the first place? There are many such questions which must be coming to your mind now. Let’s find out the reason behind this situation.

Failure Analysis

Though the construction company carefully planned it before by considering the scope and budget in the beginning, but they failed to control the cost. Thus, the required cost shoots up the agreed cost baseline.

Controlling the project cost is an important part of project management. There are few tools and techniques which must be adhered to perfectly monitor and control the cost.

Tools and Techniques to Control the Cost

Measure the Variances: While monitoring the project cost, it is important to evaluate and calculate the current variances from the cost baseline.

Schedule Variances can be measured by calculating the difference between earned value and the planned value. This is a useful metric to find out whether the project is falling behind or ahead of its baseline. It becomes zero when the project completes because all of the planned value has been earned at that time.

Equation of Schedule Variance (SV) = Earned Value (EV) – Planned Value (PV)

Cost variances can be measured by calculating the earned value and the actual cost to determine whether the budget is a deficit or in surplus at any given point of time. In case, of a negative outcome of this calculation indicates that the project is suffering badly in terms of cost and recovery from that stage is too difficult for the project manager.

Equation of Schedule Variance (SV) = Earned Value (EV) – Actual Cost (AC)

So, it is important to carefully handle the cost of the project by planning, estimating, setting up the budget and, finally monitoring and controlling the cost. And while monitoring the project cost, keep measuring the variances, evaluates the impact of the changes using various tools and techniques to correctly forecast the cost to completion. And sincerely convey the impacts of the changes to the clients and the stakeholders.

raja
Published on 21-Jan-2020 16:42:19
Advertisements