Cost control is an essential part of any financial strategy. When monitoring your company’s finances, how can you stay within budget?
Just like personal budgeting, you can do a variety of things, like categorize spending, determine areas where your team spends the most money, and find ways to limit spending in each area. Successfully doing all these things is what controls the budget and increases profits.
The basic principles of cost control are similar for corporate and personal budgets. In this article, we’ll explain what cost control is and how cost control fits into the cost management system.
Cost control involves identifying and reducing expenses to increase company profits. Cost control can occur at the project level or company wide. Here, we'll focus on how you can apply the cost control process to a project or group of projects.
As a project manager, you’ll use cost control to monitor your resource management plan and take action when you notice overspending.
A reporting tool can also be helpful to identify when you exceed your project budget. Say the freelance designer you brought on to a new project took much longer than expected to edit images. Once you identify this cost, you may decide to hire an in-house designer on your next project to reduce costs and drive efficiency.
Does your team have a hard time staying within scope or budget? This is where cost control comes into play. Even if your team does stay within budget, cost control can help you reduce your budget further, which will lead to an increase in income.
It provides insight into the company’s overall spending by showing what areas cost the most within the business and what expenses occur within those areas. Cost control may first occur at the project level to reduce individual project costs in hopes that the company can increase overall profits.
Understanding the key factors that influence project costs is essential for effective cost control. By implementing a robust cost management system and deploying cost control methods, project expenses can be optimized and workflows can be streamlined.
Let's take a closer look at some of the most critical cost factors:
Labor costs are a significant expense in most projects. This includes salaries, benefits, and other associated costs of the workforce involved in the project. Controlling labor costs involves ensuring that the right number of people with the appropriate skills are assigned to the project and that their time is used efficiently.
Material costs can also be a major factor in project expenses. This includes raw materials, components, and any other physical items needed for the project. Effective cost control requires careful planning and monitoring of material purchases and usage to minimize waste and overspending.
Implementing a procurement management system and negotiating with suppliers can lead to significant cost savings.
Actual cost refers to the real amount spent on a project, as opposed to the estimated or budgeted cost. Tracking actual costs in real-time is key for identifying variances from the project budget and making necessary adjustments to keep the project on track financially.
Using cost accounting metrics and a cost control system can help monitor actual costs and prevent cost overruns.
Cost variance is the difference between the actual cost and the budgeted cost for a project or task. Analyzing cost variances helps project managers identify areas where costs are higher or lower than expected, so they can investigate the reasons and take corrective actions.
Regularly reviewing cost performance indicators and comparing them to the baseline can help keep the project within budget.
ROI is a measure of the profitability of a project or investment. It compares the amount of money gained or lost relative to the amount initially invested. In cost control, considering ROI can help prioritize spending and ensure that the project delivers a positive financial outcome.
Effective cost control measures and initiatives can improve the project's bottom line and overall financial performance.
Cost control may initially happen at higher levels within the company, but it often moves forward at the project level. The project level is where you can assess actual costs per project and manage those costs effectively.
To become better at controlling costs within your company, try these five steps:
The first step is to plan your budget so you can get granular with your cost estimations and effectively allocate resources. Making a detailed project plan will result in lower cost variances—or fewer differences between your initial budget and actual spending.
As you plan your budget, include:
When calculating the time and materials needed for the project, try to give your budget some room to expand if needed. There’s always a chance that unexpected project risks will occur and you’ll need to extend your project timeline or request additional resources.
The next step to project cost control is to monitor project expenditures as they occur. It’s easier to take corrective action if you notice cost variances in real time. If you don’t notice you’ve gone over budget until the project is complete, then you’ve already spent the money. At that point, all you can do is use the information as a lesson for future projects.
A good way to monitor your expenses during a project is to set project milestones. At each milestone, you can assess your spending and ensure the project is staying within scope. Then, if you notice cost overruns at any given milestone, you can determine how to reduce costs moving forward.
It's important to set clear project objectives during the project planning stage, but to ensure you hit those objectives, you may need a change control process.
Change control is a set of steps that manage any changes that come through from stakeholders while a project is in progress. This helps prevent scope creep because you can be prepared for changes as they occur and adjust the project accordingly.
Steps for setting up a change control system include:
When you properly control changes to your projects, you have a better chance of controlling costs as well. Accurately forecasting a project’s budget and success requires careful management from start to finish. There will always be inevitable hiccups along the way, but having systems in place to prepare for these deviations can be crucial.
Time management is an important cost control method because when the total time of a project increases, the total cost of the project also increases. Staying within your estimated project schedule is one of the best ways to stay within your project budget.
Implement time management strategies to increase productivity and help team members finish their work on time and on budget.
Some time-management tips include:
It may seem counterintuitive to focus your attention on productivity when thinking about cost control, but project performance is at the root of cash flow. If your team isn’t productive, your project won’t meet its deadlines. If your project doesn’t meet its deadlines, it costs more money. If your project costs more money, your company has less cash flow.
Keeping track of your earned value can help you predict the financial outcome of a project. This cost control method takes some cost accounting knowledge, but it can help you understand when variable costs will arise and ultimately prevent variances from occurring in future projects.
Earned value is the amount of work that’s actually been completed on a project. To track earned value and see whether you’re on pace, you’ll need to multiply the percentage of work completed by the project budget. You can use the following steps to track earned value:
The first three steps require gathering cost information from your project, while the last three steps require calculations and analysis. Cost variance represents the cost status of your project.
When controlling costs, your CV is the measurement that will notify you if your project is performing at a rate that meets its budget. A negative CV indicates the project is over budget.
There are various cost control methods and techniques used to estimate, monitor, and manage project expenses. Here are some of the most common cost control methods:
This method involves estimating costs based on historical data from similar projects. It uses factors like the size, complexity, and duration of the project to calculate the expected costs. Factor estimation is a quick way to get a rough idea of project costs, but it may not be as accurate as other methods.
Using cost estimation templates and tools can help streamline the factor estimation process.
Parametric estimation uses statistical modeling to estimate costs based on key project parameters. This method involves identifying the main cost drivers and creating a mathematical model that relates them to total costs. While more complex than factor estimation, parametric estimation can be more accurate, especially for larger projects.
Incorporating parametric estimation into the cost control process can help improve forecasting accuracy.
Quantitative factors are measurable aspects of a project that can impact fixed costs, such as the number of team members, the volume of materials needed, or the duration of specific tasks. Analyzing these quantitative factors can help in estimating and controlling costs more precisely.
Using cost control software and accounting systems can automate the tracking and analysis of quantitative factors, leading to more effective cost control.
This approach estimates costs by breaking down the project into individual tasks and the resources needed for each task. It involves estimating the quantity of each resource (e.g., labor hours, materials, production costs) and multiplying by the unit cost of that resource.
Resource-based estimation can be very accurate but requires detailed project planning. Integrating resource-based estimation into the project management life cycle can help optimize resource allocation and control costs.
The unit rate method calculates production costs based on the cost per unit of work, such as the cost per hour of labor or the cost per unit of material. This method is straightforward and can be useful for projects with repetitive tasks or well-defined unit costs.
Incorporating unit-rate cost control strategies can help monitor and control variable costs associated with production and other business expenses.
Real-world examples of effective cost control demonstrate how companies can successfully manage expenses and maintain profitability in their projects. By studying these cases, we can learn valuable lessons and best practices that can be applied across various industries and project types.
A large construction company was faced with the challenge of completing a multimillion-dollar building project within a tight budget. To ensure they were managing costs effectively, the team:
The results were impressive:
A mid-sized software development company was struggling with frequent cost overruns on their projects. To address this, they:
The impact was significant:
These cost control examples illustrate that managing costs requires detailed planning, regular monitoring, clear communication, and a willingness to adapt as needed. By embedding these practices into their project management processes, companies can improve their financial performance and deliver more value to their clients.
Improving cost control in your business requires a multi-faceted approach that involves planning, monitoring, communication, and continuous improvement. Here are some steps you can take to enhance cost control in your organization:
Remember, effective cost control is not a one-time event but an ongoing process. It requires consistent attention, discipline, and a willingness to adapt as circumstances change. By embedding cost control into your organizational culture and processes, you can improve project profitability, competitiveness, and overall financial performance.
People often confuse cost control with cost management, but these are distinct terms that should be properly defined and understood. Cost control is a smaller process within the larger cost management system.
While cost control involves identifying expenses and reducing those expenses to increase profits, cost management is the overall process of estimating, budgeting, and controlling project costs.
There are likely many people involved in your company’s cost management operation. Depending on how big your team is, you may have different people working on resource planning and budgeting.
To properly control costs, teams must monitor spending at various levels within the company. This allows each part of the company's budget to receive thorough attention and analysis.
Monitoring cost data to reduce project expenses is a tedious process, but cost management is crucial for profitability.
The best way to manage costs is to view all the information you need in a customizable dashboard. That way, you can use automation to juggle project management and cost control—all in one place.
What is the difference between cost control and cost reduction?
Cost control involves managing expenses to keep a project within budget, while cost reduction focuses on actively cutting costs. Cost control is about spending wisely, whereas cost reduction is about spending less overall.
How does cost control relate to project quality?
Effective cost control contributes to better project quality by ensuring sufficient resources are available for critical quality-related activities. However, cutting costs in ways that directly undermine quality should be avoided.
What role does communication play in cost control?
Clear and regular communication is vital for effective cost control. Project managers must communicate budget information and cost performance to team members, stakeholders, and clients. Team members need to communicate potential cost issues or changes that could impact the project.
Can you have too much cost control?
Excessive or rigid cost control can be counterproductive, leading to shortsighted decisions that undermine project quality, delay necessary work, or demotivate the team. Effective cost control strikes a balance between being rigorous enough to keep the project financially on track and flexible enough to adapt to changing circumstances.