Think about it for a minute – what have you done in the last six months to improve your cost management? How many of your projects came in over budget? Let's look at some practical ways to actually improve your cost management.
Consider John, a savvy project manager, who was asked to manage a project aimed at replacing a dated network system. The project sponsor told him that he had $100,000 for the project.
As John started the project, he checked the historical records of similar projects as well as some other companies. His early estimate – an analogous estimate – was $125,000 with a range of accuracy between -25 percent to +50 percent. John shared the estimate with the sponsor and said that he would provide a more detailed estimate after completing a work breakdown structure (WBS) with the project team.
Later in the project, the team used the Work Breakdown Structure (WBS) to complete a bottom-up estimate, estimating each project activity and rolling the individual estimates up to higher levels and ultimately to a project total. John reported the revised estimate of $120,000 with a range of accuracy of -5 percent to +10 percent. The sponsor increased the budget to $110,000.
John worked with the sponsor and the team to find more ways to decrease the cost. What could be excluded? How could the team obtain discounts when purchasing the equipment, software, and wiring?
Cost management is rarely a straight line. We zigzag, don't we? We give and we take, and we attempt to find ways to deal with the budget constraints we face each day. Let's look at some ways to improve your cost management.
Improve Your Cost Management
- First, perform a Work Breakdown Structure (WBS) with your team. Your team can help you break the project into deliverables and ultimately into project activities or tasks. The detailed breakdown can greatly improve your team's ability to estimate cost.
- Ask for estimates from the people doing the work. Project managers should NOT estimate the work themselves. Rather, ask the subject matter experts, the ones who will do the work.
- Next, create a contingency reserves. Projects – like life – are filled with uncertainty. Uncertain events actually occur. Consequently, our cost increases. Wise project managers identify risks, estimate the cost for these risks, and create a contingency reserve.
- Create a management reserve. Furthermore, you may wish to set aside some money for the risks that no one knows about, sometimes referred to as unknown, unknown risks.
- Perform change control. Adding, changing, or eliminating project activities without adjusting the budget is a formula for disaster. It's like giving a teenager your credit card with no instructions. If you want to deliver your projects at or below budget, be sure to implement and use a change control process.
- Finally, compare your actual expenses against your planned expenses regularly. So, you have a budget. Great start! But you must monitor your expenses as compared to the budget baseline regularly. If expenses start to run higher than expected, work with your team to find ways to further exploit purchase discounts and find ways to reduce expenses.
Project Risk Coach Tips
Sign up for project risk management tips and receive the Project Management Plan Checklist. This will allow you to deliver projects with fewer problems and greater value.
"Intelligent leadership, creative communication and depth of technical skill all describe Harry Hall." –John Bartuska, Director of HR–ONUG Communications