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| ? What is the Difference Between Cost Controls and Cost Management |
Cost management and cost control are two terms that often get mixed up. If you think about the words, what sounds better? Would you rather be in control or managing your costs? It turns out that cost management and cost control really are two different things, and yet they are equally important to have in place! In this article, Elmer Sachteleben looks at the difference and how they relate.
Cost Management
Cost management is concerned with the process of planning and controlling the budget of a project or business. It includes activities such as planning, estimating, budgeting, financing, funding, managing, and controlling costs so that the project can be completed within the approved budget. Cost management covers the full life cycle of a project from the initial planning phase towards measuring the actual cost performance and project completion.
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Cost management is a continuous process that takes place during the project to determine and control the resources needed to perform activities or create assets:
Resource Planning
In the initial phase of a project, the required resources to complete the project activities need to be defined. Work Breakdown Structures (WBS) and historical information of comparable projects can be used to define which physical resources are needed. You can think of the required time, material, labor, equipment, etc. Once the resource types and quantities are known the associated costs can be determined.
Cost Estimating
Several Cost Estimating methods can be applied to predict how much it will cost to perform the project activities. The choice for the cost estimation techniques depends on the level of information available. Analogous estimating using the actual cost of previous, similar projects can serve as a basis for estimating the current project. Another option is to use parametric models in which the project characteristics are mathematically represented. Estimates can be refined when more information becomes available during the course of a project. Eventually, this results in a detailed unit cost estimate with a range of accuracy. Remaining uncertainties in estimates that will likely result in additional cost can be covered by reserving cost (e.g. using escalation and contingencies).
Cost Budgeting
The cost estimate together with a project schedule forms the input for cost budgeting. The budget gives an overview of the periodic and total costs of the project. The cost estimate defines the cost of each work package or activity, whereas the budget allocates the costs over the time period when the cost will be incurred. A cost baseline is an approved time-phased budget that is used as a starting point to measure actual performance progress.
Cost Control
Cost control is concerned with measuring variances from the cost baseline and taking effective corrective action to achieve minimum cost overruns. Procedures are applied to monitor expenditures and performance against the progress of a project. All changes to the cost baseline need to be recorded and the expected final total costs are continuously forecasted. When actual cost information becomes available, an important part of cost control is to explain what is causing the variance from the cost baseline. Based on this analysis, corrective action might be required to avoid cost overruns. Tight cost control gives a company considerable influence over its cash flows and reported profits.
As a cost controller, you have to actively expedite the scope of work and analyze its progress. Basically, you continuously have to be aware of these elements:
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The Author: Shohreh Ghorbani
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I am the founder of Project Control Academy, the leading provider of comprehensive online training in project controls. Thanks for visiting my LinkedIn profile. Let me give you a brief introduction about the Academy and how we can serve you. Project Control Academy was established with the vision of filling the education gap in project controls by providing premier training, resources, and expert guidance in project controls and leadership. Just like many Project Controls practitioners, I learned project controls by experience.
When I started my career in Project Controls, there was no formal education or even a comprehensive training program that could help me get started in project controls. I had great mentors who helped me tremendously in my project control journey. They inspired me to share my knowledge, serve and add value to people through my knowledge and experience. It was this conviction that inspired me to establish Project Controls Academy and help people soar to excellence in project controls.
I am pleased that Project Control Academy, a PMI Registered Educational Provider, is now helping tens of thousands of individuals and several international corporations build their technical Project Controls knowledge and shave off years of trial and error in learning the vital skills in controlling their projects. We are grateful for conducting numerous training programs that have given our clients the knowledge they need to execute their projects successfully. We have provided top quality training programs to Kentz International, SNC-Lavalin, Stantec, Waste Management, Incitec Pivot, TransAlta, and Telvent to name a few.
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