Controlling project costs (and sticking to the
established budget) is perhaps the most complicated,
stressful, political, (and tedious) task a project manager must
perform.  Of course, it’s also an essential task – one that
must be handled with care and precision.  For the sake of the
project, and long term IT credibility, every cost and expenditure
must be properly estimated, accounted for, tracked and above all,
controlled.  Read on for more.

Within the project management context, cost control begins with estimating. As a practical matter, there are three
(3) primary uses for project
“cost
estimating”:

1. To identify and quantify potential (and probable) project “cost factors”
   (i.e. what will we have to spend money on?).
2. To estimate related cost values and create an appropriate,
   realistic budget (i.e. how and when funding will be spent).
3. To track estimated costs (as they become actual
   expenditures) and monitor any and all resulting variances.

Cost Control is Part of “Managed Change”

Since project cost estimates are just that – estimates, and it is
unlikely that related project budget, resulting from these estimates,
can be etched in stone. 
Projects have a pulse, and the circumstances
and conditions under which projects occur can, and do change, impacting
costs and expenses. To deal with this uncertainty, project managers
often apply a “contingency factor” when preparing a project budget. 
This contingency factor normally consists of a 5 – 10% boost of anticipated
project expenses in order to uncover inexperience, as well as the “unknown”
or the “unexpected”.   (Read More:
Easy Steps to Realistic Budgets)

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Contingency or “Not to” Contingency.  That is the question…..

Depending on the degree of internal experience with a given type
of project, contingency reserves may or may not be necessary. 
In addition, there is a philosophy that says that contingency reserves
are dangerous, leading to unwarranted project spending.

• Budget Contingency Pros:  The extra funds are in hand
  when needed, without seeking further approval. Considering that project
  circumstances can change so frequently, contingencies readily acknowledge
  this fact, facilitating project completion.
• Budget Contingency Cons: Contingency reserves make it easier
  to gloss over project costs, making budgets less precise.  Contingency
  reserves encourage cost overruns, by granting easy access to additional
  funding without a thorough consideration of available alternatives.

To-Do List: (4) Key Steps to “Trackable Costs”

The following listing lays out the four (4) primary steps for project
cost estimating and tracking:

Step #1 Make the continency decision.

Contingency budget decisions should be made at the start of the budget
estimating process. Will you need a contingency budget, and if so, in
what amount, and how will it be used?

Step #2  Identify the cost factors.

While cost factors will vary based on project characteristics and
business circumstances, in general, project costs can be viewed from
four basic perspectives – labor, capital investments, overhead (to maintain
the project environment) and project specific (costs to plan, manage
and execute the project):

Step #3  Establish cost factor values.

Project budgets quantify the expected costs associated with a project,
and these budgets must be based on a reasonable, realistic estimate
of likely project costs and expenses. The estimation of project costs
is part science, and part intuition, common sense and experience.  
(Also Read:  Project
Lessons Learned)

In fact, past projects can be the most valuable indicator of current
project expenses. As project costs are estimated, the following factors
should be considered:

• The specific cost factors involved depending on the needs of
  the project.
• The costs of similar projects in the past.
• The opinions and feedback of project participants.  When
  estimating costs, it is important to get a broad spectrum of information,
  experience and opinion.

Step #4  Track expenditures and variances.

Once the project budget is created and approved, and the project
is underway, costs and expenses must be tracked to ensure that budget
utilization is as planned and expected (are you spending what you expected
to spend based on how the project is proceeding?).

Variances Happen.  That’s not good
or bad in and of itself.  If variances exist (and they
will), you must determine whether the variance
is “positive” or “negative”, and what it all means.  Then
you can “react” and act accordingly.

A positive variance indicates that you are under budget, but appearances
to the contrary notwithstanding, this are not necessarily a good thing.
When project expenses are less than expected, this may be a sign that
the project is not proceeding according to plan, and may be behind schedule.
In addition, a positive variance may be a sign of ineffective estimating. 
On the other hand, this under budget condition may be the result of
legitimate changes, discounts, or cost saving measures.

A negative variance indicates that the project is over budget. 
Depending upon whether the negative variance is at a monthly or overall
project level, this variance may be the result of serious project problems,
such as excessive changes, schedule delays or ineffective budgeting. 
If the negative variance is on a monthly level, but the overall project
is on track, there may not be an immediate cause for concern.

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