Cost Control Techniques in Project Management

Cost overruns are one of the reasons many projects fail. I once managed a manufacturing project where we spent over $50,000 each month before we applied cost control strategies. After three months, we managed to get back on budget and saved $200,000. Project cost control is more than preventing spending for a project; it is a strategic decision that can make the project a success or be yet another cause of project failure. Techniques like this are what make the difference between a project manager and a project manager with a PMP certification, capabilities that are strengthened through PMP certification training.

In this guide, I will give you 15 cost control techniques that have been proven to work in project management. I have saved millions in projects from various industries like construction, IT, and manufacturing.

In project management, cost control is the action of tracking project spending and taking action to avoid spending beyond the budget. Think of it as a correction of financial management and guardrails that keep track of actual spending versus planned spending to avoid any minor expenditures from leading to greater financial disaster.

The timing and scope of activities help distinguish between the two terms. While cost control is concerned with the monitoring aspect during the execution phase, cost management concerns itself with the planning, estimating, budgeting, and control of activities throughout the project management plan life cycle.

1. Earned Value Management (EVM)

Based on my experience, EVM is overly complicated and lengthens the reporting cycle without providing meaningful information or analysis to decision-makers. However, EVM is the best approach when scope, schedule, and cost must be integrated. EVM is also the most widely used approach in project management. EVM attempts to answer the following: What did we plan to spend? What did we actually spend? What value did we deliver?

Key EVM metrics include:

• Cost Performance Index (CPI): EV/AC. A CPI greater than 1.0 indicates the project is under budget.
• Cost Variance (CV): EV-AC. If the result is positive, the project is under budget.
• Estimate at Completion (EAC): forecasts what the final project cost will be.

I use EVM on every project over $100,000. The data allows me to accurately predict what the final costs will be and make adjustments months before the project is completed.

2. Cost-Benefit Analysis

Cost-benefit analysis should be conducted before approving any expenditure. Cost-benefit analysis helps determine whether the investment is worthwhile by comparing expected benefits with costs. This analysis is particularly important to determine whether scope changes or alternatives should be evaluated.

To determine your benefit-cost ratio, you will need to divide your total benefits by total costs. If the result is greater than 1.0, benefits outweigh the costs.

3. Variance Analysis

This accounting method looks at budgeted costs versus actual costs calculated. I review this on a weekly basis. If a difference of greater than 10% is calculated, I begin root cause analysis.

Root cause analysis can be triggered by any of the following:

• Changes in the costs of materials
• Disruptions in productivity
• Project scope changes
• Changes in the rates of resources

The earlier the variances are detected, the more likely the corrective action can be affordable.

4. Activity-Based Costing (ABC)

An ABC system is one where costs are traced to specific activities (rather than products). This clarifies and improves visibility regarding cost drivers.

In one construction project, ABC prompted me to find that material handling was 15% of total costs. After we redesigned the logistics, we saved $80,000!

5. Target Costing

This accounting method is most effective when working with profit margins that are constrained by the market. From a desired profit margin, work backwards. Then, establish the maximum cost, which is also based on the expected selling price and the profit that is required.

This method is particularly powerful when in the product development stage, and there is a market price that limits what you can charge.

6. Zero-Based Budgeting

With a ZBB method, all costs must be justified afresh. Whereas, in the traditional method, budgets begin with the last period's number, ZBB begins with zero.

Although ZBB methods are time-intensive, they help in the elimination of unnecessary spending. In many cases, I have used it to challenge what you refer to as "necessary" costs and have derived savings of 20-30%.

7. Life Cycle Costing

Life Cycle Costing (LCC) measures the value of an item over its entire life span, from acquisition to disposal. Effective life cycle costing avoids the pitfalls of considering options with low initial acquisition costs but higher costs over the complete life cycle due to repeated maintenance needs and other ownership costs.

In selecting an equipment supplier, the less expensive company's maintenance costs were 40% higher. Life cycle costing analysis indicated the higher-quality supplier would save us $200,000 over a 5-year time period.

8. Budgetary Control Systems

Establish a budget control system whereby you monitor the budget systematically at pre-defined intervals. I suggest three bands – green (within 5%), yellow (5 to 10%), and red (exceeding 10%). Yellow should prompt an analysis, while red should trigger a containment action.

In addition to these systems, you need to establish regular budget monitoring, reporting, variance analysis, and a clear procedure to control changes to the budget.

9. Cost Accounting

Cost accounting measures the cost of every project component and captures it in real-time. Effective cost accounting correctly attributes costs to direct costs (labour, materials) and indirect costs (overhead, administrative) related to the project.

Though most software of this type does a good job of automating much of this work, you need to conduct data tests, especially to verify accuracy, as well as check that data categorization is consistent.

10. Value Engineering

Value engineering is the practice of analyzing characteristics of a project to provide the best outcome at the lowest cost. The focus is not "how can we do this cheaper?" but instead "how do we provide this function for the most advantageous cost-to-value ratio?"

For an office renovation project, I ran a value engineering workshop, and we found cost savings of $150,000 on the project by using alternative materials that met the same specifications at a lower cost.

11. Job Costing

With job costing, you track costs associated with each job individually. This is crucial for professional services, construction, and manufacturing, where you must analyze profitability of each project.

In order to achieve precision with job costing, you must be highly disciplined with time tracking and expense allocation.

12. Break-Even Analysis

Break-even analysis is concerned with identifying points at which project revenues are equal to total costs. Knowing where your project breaks even is important for understanding your exposure.

To calculate break-even, one must divide fixed costs by the contribution margin per unit.

13. Total Cost of Ownership (TCO)

TCO analysis involves looking at the purchase price of an asset along with all costs associated with operating, maintaining, and disposing of it.

In software projects, TCO covers all costs associated with licensing, implementation, training, maintenance, and migration. Knowing TCO enabled me to recommend a higher-cost solution which, over five years, costs 35 per cent less.

14. Cost Reduction Strategies

Strategic cost reduction involves identifying areas where you may be able to reduce costs with no impact to your scope.

Some examples include:

• Optimizing processes.
• Sharing resources across projects.
• Negotiating with vendors.
• Prioritizing scope.
• Eliminating waste.

15. Continuous Cost Monitoring

Use automated alerts and set up real-time cost tracking. I like to use dashboards that show me the actual costs, committed costs, and forecasts, and update daily.

The Techademy’s PMP certification course shows you how to create systems that work effectively. Don't let the cost of the project go unmanaged until the monthly reports come out; by that time, it's too late.

The first step in any project is this: the accurate preparation of a budget. Historical data, bottom-up estimating, and the professional perspective of an expert create a solid foundation so that a budget may be realistic, reinforcing the importance of budgeting in project management. Set aside contingency reserves, and ensure that the types of project risk related to the project are assessed.

Define and allocate responsibility for cost management. Someone should be responsible for tracking the budget and analyzing variances. For larger-scale projects, this role may be filled by a dedicated cost controller.

Engagement and cost performance should be monitored and reported to stakeholders. I submit cost reports weekly, and I document actual versus planned expenditures, variances, and forecasts. Stakeholder engagement and cost performance are positively correlated, and so transparency encourages trust and facilitates rapid decision-making.

Controlling and reporting on project costs should be integrated with Key Performance Indicators (KPI). There are interval metrics that are primarily focused on cost, and those should be included in the project management tracking. Integrating cost management metrics as part of KPI in project management should be included in the overall project status reporting and aligned with the schedule, quality, and risk frameworks.

The most elusive challenge of project management is beginning without an accurate initial estimate. A baseline budget cannot be created with costs that are unrealistic. Plan projects and allocate time with the aim of creating thorough, accurate estimates.

The adverse impacts that result from scope creep are insidious. Engaging in and enforcing the use of change controls that require the formal approval of budget impacts as a result of scope changes will assist in the management of scope creep.

Inadequate communication regarding costs is the basis for surprise. Establish a communication plan that defines the recipients of the cost report, the reporting frequency, and the report formats.

Insufficient resources impede cost tracking. Spreadsheets can capture small projects, yet they often fail with more complicated projects and resource assignment. Try using project management software for improved visibility.

Employing new cost control techniques will help you make the transition from project coordinator to strategic financial manager. Start to use these techniques on your next project. The practice of disciplined cost control will significantly enhance your project success rate.