Cost management steps: Plan, estimate, budget, control

When it comes to project management, there are few things more important than keeping costs under control. Especially when a project is complicated, expenses can send your costs skyrocketing more quickly than you expect. Project managers need to plan their cost management approach to keep their budgets on track.

In this article, we'll go over the four functions of cost management and explain exactly how to use them to improve your project's bottom line.

What is cost management?

Cost management is the process of estimating, budgeting, and controlling project costs to keep spending within an approved budget. It begins during the planning phase and continues throughout the project life cycle. Managers continuously review, monitor, and adjust expenditures to prevent overspending.

Why is cost management important?

Effective cost management prevents budget overruns that can strain client relationships and cause financial losses. When teams track and control project spending, they deliver work on time and within budget.

Key benefits of cost management include:

• Financial control: Keep projects profitable by identifying cost issues early.

• Better decision-making: Use real-time data to allocate resources wisely.

• Stronger client relationships: Build trust through transparency and reliable delivery.

• Reduced risk: Anticipate and address budget variances before they escalate.

Consider this example: A software development team realized their project was exceeding budget midway through. By implementing cost management strategies, they identified overspending areas, prioritized essential features, and renegotiated with subcontractors. The result? They brought the project back on budget and strengthened their client relationship.

How to create a cost management plan

Cost management is a continuous, fluid process. However, there are four main elements or functions that can be found in any cost management plan:

1. Resource planning

2. Cost estimating

3. Cost budgeting

4. Cost control

Because new expenses can appear and project scope can be adjusted, cost managers need to be prepared to perform all four functions at any time throughout the project life cycle. Your workflow will vary according to the project's needs.

Here, we'll break down each of the four elements in greater detail and explain what the cost manager is required to do at each stage.

Resource planning

The very first step in any cost management process is resource planning. This is when the cost manager reviews the project's scope and specs to determine the resources required.

A resource is anything that helps you complete a project, including tools, money, time, equipment, and even team members. To create the most accurate resource plan possible, consult directly with team leads and stakeholders to determine the resources they will need during the project.

For this step, you'll need:

• Clearly defined project objectives

• A high-level project roadmap or a work breakdown structure (WBS), depending on the complexity of the project

• A tentative resource management plan

• A project scope statement

Cost estimating

Once you have a list of necessary resources, estimate the cost to procure them. Gather as much pricing information as possible to make informed estimates.

Follow these best practices for accurate cost estimates:

• Get real price quotes: For tools, supplies, and equipment, request quotes from sellers. Inventory management software can streamline this with real-time pricing data.

• Collect multiple labor quotes: Get several quotes from contractors to understand realistic costs for the work you need.

• Build in price buffers: Account for price increases between estimation and purchase.

• Add a contingency of 5–10%: This covers unexpected expenses that inevitably arise.

• Review historical data: Check past projects' cost variances to benchmark how much margin to build in.

In the estimation stage, you'll need:

• Project schedule or a PERT chart, depending on the complexity of the project

• A list of your project deliverables

• Clearly defined success metrics

Cost budgeting

Now that you have general estimates for your project needs and resource requirements, you can begin to work on your project budget. Your project budget is a detailed plan of how much you plan to spend during the project, for what, and by when.

Depending on the complexity of your project, the "when" may significantly influence your cost management strategy. For multi-year projects, you may want to specify cost allocations so that no more than 30% of your budget should be spent in the first year. This can prevent cost overruns later.

In this stage, you'll need:

• A project budget document

• A project stakeholder analysis

Cost control

The bulk of the cost management process is cost control, recording and accounting costs as the project progresses, making adjustments, and alerting stakeholders to problems. The goal of project controls is to compare actual costs with budgets and keep the project as close to plan as possible.

Key cost control practices include:

• Set a review cadence: Review costs in real time, monthly, or quarterly, depending on project needs.

• Share updates regularly: Use project status reports to keep the team aligned.

• Watch for scope creep: Any scope changes should follow a change control process because they affect the budget.

• Communicate deviations early: Alert stakeholders quickly if costs stray from the budget so you can create an action plan.

In this stage, you'll need:

• Project management tool

• Universal reporting tool

Post-project cost accounting

Once the project is over, it's time to calculate cost variance and evaluate how far your project deviated from your original budget and estimates. What were the project's total costs? How did your actual costs compare to your estimated costs?

A successful project ends close to (but under) the forecasted project budget. If you spent too much money, you either underestimated your project budget or had too many unforeseen expenses. If this happens, hold a project post-mortem meeting to evaluate why that happened and prevent it from happening in the future.

On the flip side, spending too little of your budget is also not ideal. Log this information as historical data and use it for continuous improvement in future projects, so you can increase your accuracy during the cost estimation phase.

How to calculate project costs

To keep your project profitable and within budget, you need to understand how to calculate project costs. The right method depends on your project's complexity, task predictability, client expectations, and required flexibility.

Hourly

Calculating project costs on an hourly basis involves paying for work measured in hours. This method works well for projects where the scope is flexible or uncertain because it allows adaptability as the project progresses.

For example, if a software development team works 100 hours a month at $100 per hour, the project cost for that month is $10,000. This method accommodates scope changes effectively.

Flat rate

A flat rate approach involves agreeing on a total project cost upfront. This method is ideal for projects with well-defined scope and deliverables, giving both parties a clear understanding of the total cost.

For example, an agency and client might agree on a fixed price of $20,000 for an entire marketing campaign. The client knows exactly what the project will cost, regardless of time and resources used.

Cost plus

The cost-plus method charges actual project costs plus a markup or additional fee. This approach works well for long-term projects where costs can't be accurately estimated at the start.

For example, a construction contractor charges for actual materials and labor ($50,000) plus a 20% markup, for a total of $60,000. Both parties aim for optimal cost performance.

Value-based pricing

Value-based pricing focuses on the benefit the client receives rather than the project cost itself. This method suits projects where the outcome has high perceived value.

For example, a consulting firm helps a client increase annual revenue by $1 million. The consultant might charge 10% of the revenue increase ($100,000), ensuring pricing reflects value delivered.

Effective project cost management methods

One of the most persistent challenges teams across industries face is controlling and preventing budget overruns. These overruns not only strain financial resources but can also compromise project quality, delay timelines, and even lead to project failure.

Effective cost management is the key to tackling this challenge because it ensures projects are delivered within their allocated budgets while maintaining high standards of quality and efficiency. To further optimize costs, teams can leverage automation, management software, and dashboards that provide real-time cost analysis.

Top-down estimating

Top-down estimating is a method in which the overall project cost is estimated first, and then individual costs are derived from this total. This approach is beneficial in the early stages of project planning, when detailed information is not yet available.

For example, in a new software development project, the project manager might estimate the total project cost at $200,000 based on previous similar projects. This total is then broken down into segments such as design, coding, testing, and deployment, each of which is allocated a portion of the budget.

Bottom-up estimating

Bottom-up estimating is the reverse of the top-down approach. It involves estimating individual tasks or components first, then adding them to get the total project cost. This method is more accurate, especially for projects with a well-defined scope.

Consider a construction project where each part, foundation laying, framing, plumbing, and electrical work, is estimated individually. After estimating all components, the costs are summed to determine the overall project budget.

Earned value management

Earned value management (EVM) is a sophisticated approach that combines measurements of project performance across scope, schedule, and cost. EVM provides a comprehensive view of the project's progress and its alignment with the original plan.

For instance, in a large infrastructure project, EVM would be used to track the following:

• Budgeted cost of work scheduled (BCWS)

• Actual cost of work performed (ACWP)

• Budgeted cost of work performed (BCWP)

By comparing these figures, project managers can gauge cost performance and take corrective action if necessary.

Three-point estimating

Three-point estimating determines a more realistic estimate by considering three scenarios:

1. Most optimistic (best-case)

2. Most pessimistic (worst-case)

3. Most likely

This method provides a range of possible outcomes, which can improve a project's predictability and cost performance.

For example, a project manager might estimate that the design phase could take 30 days (optimistic), 45 days (most likely), or 60 days (pessimistic). Using these three points, they calculate a weighted average to set realistic timelines and budgets.

Common challenges in project cost management

Even experienced project managers face obstacles when managing costs. Understanding these challenges helps you anticipate problems before they derail your budget.

• Inaccurate cost estimates: Rushing the estimation process or lacking historical data can lead to underestimating resource, labor, and material costs. Improve accuracy by gathering multiple quotes and reviewing past project data.

• Scope creep: Small requirement changes add up quickly without corresponding budget adjustments. Document all change requests and require stakeholder approval before implementation.

• Lack of real-time visibility: Without current cost data, problems surface too late. Use project management software with real-time dashboards and automated spending alerts.

• Poor communication between teams: Fragmented information across field teams, finance, and project managers results in unreliable cost data. Establish clear communication channels and regular check-ins.

• Difficulty integrating schedule and cost data: Schedulers work in work breakdown structures, while cost analysts use cost codes and fiscal periods. Bridge this gap with standardized processes and integrated tools.

Improve your project performance with cost management

Cost management involves many moving parts. But as long as your team has visibility into project costs, you can prevent cost overruns and ensure your project finishes under budget every time.

To keep track of all of your project's information, use a work management platform like Asana. From project costing and kickoff to post-mortem, Asana helps you stay in sync with your project team members and stakeholders throughout the project. Get started today to see how Asana can help your team manage costs more effectively.

Frequently asked questions about cost management