What is Cost Management

Cost management is equally important to all companies, regardless of size. Small companies generally have tighter monetary controls, mainly because of the risk with the failure of as little as one project, but with less sophisticated control techniques. Large companies may have the luxury to spread project losses over several projects whereas the small company may have few projects. Cost management is not only “monitoring” of costs and recording perhaps massive quantities of data, but also analyzing the data in order to take corrective action before it is too late. Cost management should be performed by all personnel who incur costs not merely the project office.

Cost management must include:-

Cost estimating. Cost accounting. Project cash flow. Company cash flow. Direct labour testing. Overhead rate costing. Others such as incentives, penalties and profit sharing.

The primary objective of cost management is economy and the efforts of management must be so directed to maximize profitability. The requirement of cost management should include:-

Thorough planning of the work to be performed to complete the project. Good estimating of time, labour, and costs. Clean communication of the scope of the required tasks. A discipline budget and authorization of expenditures. Timely accounting of physical progress and cost expenditures. Periodic reestimation of time and cost to complete remaining work. Frequent, periodic comparison of actual progress and expenditures to schedules and budgets, both at the time of comparison and at project completion.

The role of the project manager in cost management may be stated as:-

Setting up the cost control system in conjunction with needs and recommendations of the financial functions. Allocating responsibilities for administration and analysis of financial data. Ensuring costs are allocated properly. Ensuring costs are incurred in the genuine pursuit of project activities. Ensuring contractor’s payments are authorized. Checking other projects is not using your budget.

Cost management problems :-

Poor estimating techniques. Out of sequence staring and completion of activities and events. Inadequate work breakdown structure. Unforeseen technical problems. Material escalation factors that are unrealistic.