What is a Cost Management Plan?
A cost management plan is a document that helps you map and control a budget. It enables project managers to estimate their costs, allocate resources to the right areas, and control overall spending.
Cost management plans keep all project costs in one place, including direct and indirect costs. A project manager will track these costs to ensure there are no budget overruns.
A cost management plan example could be the budget for a home improvement project. Direct costs would include hired labor and building materials. Indirect costs would include equipment rental fees, insurance, and general maintenance.
What is included in a cost management plan?
For effective cost management in project management, a project manager needs to ensure they have all the required information to create a detailed plan.
A cost management plan can include many different elements, such as:
- Measurement units: These will differ depending on the region. If you are in the US, you’ll use inches; if you are in Germany, you’ll use meters.
- Precision levels: This is where you determine the number of decimal places in your calculations. You can also define the amount of flexibility in your deadlines and figures.
- Control thresholds: Set a threshold for taking action if you are behind on schedule. If you hit the -$5,000 mark, for example, this can be the point where you correct course to get back on track.
- Performance measurement rules: Consider the techniques for measuring your performance. Will you use earned value management or the percentage of completion method?
- Reporting formats: Determine how you will report your project progress and how often.
Why is a cost management plan important?
A cost management plan is important because it creates a detailed outline of your project budget. It helps project managers to stay organized and on track to hit their project deliverables.
If you don’t estimate costs accurately, allocate sufficient resources where they are needed, and regularly monitor spending, you run the risk of budget overrun. This can lead to project failure. Therefore, cost planning in project management is an essential exercise in ensuring project success.
A project cost management plan can also be highly beneficial for cutting unnecessary costs. One of the biggest challenges project managers face is an overstretched budget with no clear indication of excess spending. According to Harvard Business Review, “to cut costs effectively, companies must connect costs to their strategy.” A cost management plan will help project managers to assess cost priorities and save money.
How to make a cost management plan
To make a project cost management plan, you need to follow four simple steps:
- Break work into tasks: Build a work breakdown structure with folders and subfolders, which you can break down further into tasks and subtasks. A useful tool such as Wrike Resource will help you pick the right person for each task.
- Estimate your costs: Create a cost estimation forecast for your project. Include your direct and indirect costs, cut unnecessary spending, and budget for unforeseen events. Ensure you use flexible software as your forecast is subject to change.
- Create your budget: Once your cost estimation is complete, you can go into more detail with your actual budget. Use milestones in Gantt charts to separate your budget into stages for easier cost management.
- Monitor performance: A cost control plan is vital in tracking performance. Match team progress to your expenses to date and ensure you are on schedule.
Find out how Wrike’s project management software can help you improve your cost and budget management skills.