Control project costs for greater profitability

Cost control plays a vital role in any financial strategy. How do you stay on budget when you're keeping track of your project finances? Just like developing a personal budget, several options are available to you: classify expenses, determine the most expensive items and find solutions to limit expenses in each area. After completing all these actions, you will be able to control the budget, to analyze your profitability and increase profits.

The basic principles of cost control are the same for all budgets, whether corporate or personal. In this article, Finance de Demain Consulting Explains the concept of cost control and how it fits into a larger cost management system.

What is cost control?

Cost control is a principle of identifying and reducing expenses aimed at increasing company profits. It can be carried out at the project level or at the entire company level.

In this case, we will focus on applying the cost control process within the framework of a project or group of projects.

As a project manager, cost control will serve you to monitor your resource management plan and react to budget overruns.

If you go over budget for your project, a reporting tool can also come in handy. Suppose the freelance designer you hired for a new project took much longer than expected to edit the images.

After identifying this additional cost, you may decide to hire an in-house designer for your next project to reduce costs and gain efficiency.

How can controlling costs make a difference?

Is your team failing to meet project scope or budget? This is where cost control becomes important. Even if you are on budget, controlling costs can help you reduce it further and increase revenue along the way.

This process provides insight into overall company spend: it highlights the most expensive areas and further identifies spend in each of these areas.

As a first step, cost control can be applied to the project with the objective of reducing costs at this scale and thus potentially increasing the profits of the company.

What are cost control techniques?

Initially, cost control may occur at higher levels of the business, but it often takes place at the project level. It is at this level that you can assess the actual costs per project and manage them effectively.

Here are the five steps to follow to better control the costs of a project:

1. Plan your budget

First, you need to plan your budget in order to get a detailed cost estimate and allocate resources efficiently. Developing a detailed project plan will reduce cost variances, which are the difference between your original budget and actual expenses.

Include in your budget plan:

• The number of team members needed for the project
• An estimate of the time needed to complete the project
• Materials needed for the project

When calculating the time and materials needed for the project, keep some slack in your budget. The unexpected is not uncommon and you may need to extend the project timeline or request additional resources.

2. Monitor all expenses

The second step in project cost control is to monitor the progress of project expenses. You will be able to take corrective action more easily if you notice cost variances in real time.

At the end of the project, it will be too late, the money will be spent. At this point, all you have to do is learn from it to prevent this situation from happening again in the future.

To effectively monitor your expenses during a project, set project milestones. At each milestone, you can analyze your expenses and ensure that the scope of the project is respected. And if you ever notice cost overruns at a given milestone, you can find a solution to reduce them later in the project.

3. Use change control systems

It is essential to set clear objectives during the planning phase of the project. To ensure you achieve these goals, a change control process may be necessary.

Change control is a set of steps governing all changes made by stakeholders during a project. It allows you to prevent the drift of objectives by preparing you for changes as soon as they appear, and thus adapting the project accordingly.

4. The stages of a control process

priming

The change control process begins when a stakeholder requests a change to the project. The request can vary: it can be the extension of deadlines or new project deliverables.

Evaluation

The project manager or department head scans the request for basic information, such as the resources needed, the impact of the request, and the recipients of the request. After the initial assessment, the change request moves to the analysis phase.

analysis

During the analysis phase, the relevant project manager approves or rejects the request. In some cases, a change control committee may be set up to control the approval of changes. The project manager approves or denies the request, and notifies the team.

Depending on the size of the project, the project manager may also log the change in a change log to ensure that all project stakeholders receive the information.

Implementation

Implementing a change can vary depending on the stage of the project, but generally involves updating the timeline and deliverables, as well as informing the project team.

You should assess the scope of the project and verify that changing the timeline will not have a major impact on the planned objectives.

Closing reception

After documenting, disseminating and implementing the request, you can move on to the closing phase. It is recommended that you have a formal closeout plan in place so that all team members can access and refer to this information in the future.

By effectively reviewing changes to your projects, cost control should come naturally.

Accurately forecasting the budget and success of a project involves maintaining conscientious management from start to finish. Unforeseen events along the way are inevitable, but the establishment of certain systems helps guard against these deviations.

4. Manage your time

Time management is an integral part of cost control: when the total duration of a project increases, the total cost of the project also increases. In order not to exceed the allocated budget, you must above all respect the project schedule.

Adopt time management strategies to increase productivity and help team members complete work on time within budget.

Here are some time management tips:

Timeboxing

Timeboxing is a goal-oriented time management strategy that involves completing tasks within a " block of time ».

For example, if you need to write a blog post, you can create a two-hour block to outline it. Then, after a break, you can go back to another block of three hours to make a first draft.

Time blocking

Time blocking is similar to timeboxing, but instead of setting a certain amount of time for each individual task, you'll block out specific periods of your calendar for related work.

The Pomodoro Method

Like timeboxing and time blocking, the Pomodoro technique helps you complete your tasks in a short amount of time and take breaks between work sessions.

For example, work for 25 minutes, then take a five-minute break four times. Then, after the fourth work session, take a longer break from 20 or 30 minutess.

swallow the toad

SAccording to a famous quote from Mark Twain: “If you have to swallow a toad, you better do it first thing in the morning.” The time management strategy “eat the frog” is inspired by these words and encourages you to take care of important or complex tasks first before working on less important or less urgent ones.

The Pareto principle

Still called the 80-20 rule This principle is based on a fundamental rule: we devote 20% of our time to accomplishing 80% of the work. Concretely, being able to process these 80% of tasks sufficiently quickly therefore leaves us more time during our working day to take care of the remaining 20% ​​which will take us 80% of the time.

Getting things done (GTD)

Invented by David Allen in the early 2000s, the method “ Getting Things Done » or “Getting things done” in French, recommends making a list of planned tasks in writing beforehand. Once free from these considerations, rather than relying on work management tools, you will be able to take action without having to figure out what to do.

It may seem counterintuitive to focus on productivity as part of cost control, but project performance is the cornerstone of cash flow.

If your team is not productive, you will not meet project deadlines, and failure to meet deadlines generates additional costs. Logically, if your project costs more, your company's cash flow decreases. 

5. Track Earned Value

Tracking your earned value can help you predict the financial outcome of a project. This cost control method requires knowledge of cost accounting. It can help you detect the onset of variable costs and therefore prevent variances in future projects.

Earned value is the amount of tasks actually completed within a project. To track earned value and see if you're on schedule, you need to multiply the percentage of tasks completed by the project budget.

Steps to Track Earned Value

To track earned value, follow these steps:

Step 1: determine the degree of completion of each task as a percentage.

Step 2: set the planned value (Planned Value or PV) or the budgeted cost of the planned work. This is the budget authorized to accomplish the planned work.

Step 3: determine the earned value (Earned Value or EV), or the budgeted cost of the work performed. This is the amount of work actually completed.

Step 4: establish the actual cost (Actual Cost or AC), which represents the actual cost of the work performed. These are expenses relating to work already carried out.

Step 5: calculate cost variances (Cost Variance or CV) by subtracting the earned value from the actual cost (CV = EV – AC).

Step 6: compile the results.

For the first three steps, you need to collect cost information for your project, while for the last three, you need to perform calculations and analysis. Cost variances represent the cost status of your project.

When you control costs, your CV is the metric that determines whether your project is on track with the budget. A Negative CV means the project is over budget.

Should you control costs or manage costs?

It is common to confuse cost control with cost management. These are two distinct terms that need to be defined and understood correctly. Cost control is a sub-process within the larger system of cost management.

While cost control is about identifying expenses and reducing them to increase profits, cost management is the overall process of estimating, budgeting, and controlling the costs of a project.

Your company probably has many employees involved in cost management. Depending on the size of your team, different people may work on resource planning and budgeting.

For effective cost control, teams need to monitor spending at different levels of the business to pay enough attention to each part of the business budget and analyze it thoroughly.

Use cost control to track and reduce your project expenses

Tracking cost data to reduce project spend is a tedious process, but cost management has a direct impact on profitability.

In order to effectively manage costs, create a customizable dashboard to have all the information at your fingertips. This automation will allow you to juggle between project management and cost control, all in one place.

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