Cost Management
What is cost management?
Cost management is the process of planning and controlling the budget of a business. Having a good cost management system in place makes it easier for an organization to estimate and allocate its budget.
Cost management is a form of management accounting that helps a business reduce the chance of going over budget with more accurate forecasts of impending expenditures. Many businesses use cost management tactics for specific projects and for the overall business.
When applied to a project, expected costs are calculated while the project is being planned and are approved beforehand. All project expenses are recorded and monitored to ensure they align to the cost management plan. After the project is finished, the actual total costs are compared to the predicted costs. This analysis enhances future cost management predictions and cost budgeting.
While cost management is a general term relating to project cost management in any industry, it also often refers to estimating and managing cloud services costs to reduce cloud waste.
4 steps of cost management
Cost management is an integral part of project planning and management. Cost management strategies are developed alongside the project plan.
The following are the four main steps to cost management.
1. Setup
The setup phase determines what's included in the cost management plan. It identifies who the stakeholders in the plan are, the tools used to manage costs and the data structure needed to track costs.
2. Resource planning
This planning phase identifies the resources needed to complete a project. These could be physical materials, information assets, staff and cloud computing resources. Resource planning determines resource allocation, including how much of a resource is needed, for how long and how it will be allocated.
3. Budgeting and cost estimation
In this stage, project teams develop a project budget. Budgeted cost estimates get more specific as the project scope is refined. A picture of the full project costs emerges as resources are allocated.
Project managers compare the current project to earlier ones to gain insight. They can use top-down and bottom-up estimation methods. In the top-down approach, upper management in an organization determines the project duration, the tasks and project activities involved and the estimated costs for each of them. In a bottom-up approach, each team estimates the duration and allocated budget of their individual tasks. Management uses that information to determine the project's duration and estimated budget.
4. Cost control
This phase involves monitoring and controlling costs as the project progresses, using data from different project teams. Managers track how costs differ from the estimated budget and take action to accommodate cost overruns, reduce deviations from the budget and cap the budget when necessary.
Effective cost management processes require accurate cost reporting. This involves access to real-time cost data and insight using data visualization. Variances from budgeted costs must be measured, and corrective measures taken.
Benefits of cost management
The benefits of cost management include the following:
Reduces overspending. Cost controls help project managers keep their budget on track and not let costs get out of control.
Encourages planning. Cost management helps identify what is and isn't working. It provides insight into resources and processes that helps managers make faster and better decisions about the current project and future ones.
Facilitates financial health. Continuous monitoring, cost control and cost reporting contribute to a company's long-term financial health. These efforts provide the data necessary for good decision-making. Implementing a cost management structure for projects helps a business keep its overall budget under control.
Mitigates risk. Cost management typically involves setting a risk allowance for unforeseen costs, a useful step to prevent overspending.
Supports standards. Consistent cost control, analysis and reporting help organizations adopt standards for assessing future cost data and productivity levels.
Improves visibility. Many cost management tools for cloud services give real-time visibility into cost management metrics, like savings. They also provide a list of the users' assets, and some use machine learning to provide suggestions on areas where users can change behaviors to save money.