Project Cost Management (PCM) is a set of procedures and methods that an organization uses to measure the costs incurred by the company. Additionally, it helps regulate and measure the productivity output throughout the lifecycle of enterprise-level projects.
PCM is an essential function within the general project management vertical. It is also known to have a direct impact on a project’s perceived success and failure.
Project cost management entails several carefully planned steps. Travel and expenses (T&E) are one kind of cost involved in PCM. Project managers and cost accountants often overlook the importance of T&E management in the success of their projects.
In this article, we discuss some of the conventional project cost management techniques and the importance of T&E management in it.
List of the common project expenses
Broadly speaking, projects vary in scope, time duration, and budget. Projects also vary according to the industry they operate in.
Classification of common expenses and costs:
- Labor costs - These are the costs associated with allocating employees to a particular project. These include the labor costs which are accounted for as a per hour dollar cost. Accountants often also include the opportunity costs for employees who work on multiple projects to highlight the true cost.
- Material costs - These are the costs associated with the production of services, products, and other deliverables. These are accounted for as a per-unit dollar cost and are a direct cost to the project.
- Travel and expenses - These are variable expenses that include all the travel, meals, and other employee expenses claimed as reimbursements. These are considered indirect costs and accounted for as reimbursements.
What kind of companies need project cost management?
While almost all companies have some projects running at a given time, there are a few industries that need PCM more than anyone else. The best task management tools can help your project managers to be effective and productive. Also, having the right project management tool can save both cost and time. Here, we discuss the characteristics of an organization that may deem it necessary to manage project costs and expenses actively:
- Industry-specific factors - Some industries like manufacturing or chemical processing have a more defined production schedule. Though they employ robust project cost management, the variance is often low given the industry’s maturity.
- Project-basis- Sectors like information technology services, construction, and non-profits, operate more on a project basis. In such companies, the bottom-line of a company is mostly affected by the performance of individual projects.
- Multiple business units - Organizations with numerous business units often operate out of different geographies. Teams from distinct business units often collaborate on a single project, often remotely. This is supplemented with business travel as and when required.
- Project length - Depending on the project length, complexity, and scope of the entire project, cost management techniques can vary.
Importance of project cost management
The project cost management process is a highly strategic aspect of the entire project management function. Since the process covers the whole lifecycle of a project right from ideation through delivery, PCM becomes very important for the success of the project. Below are some of the reasons why PCM is important:
- Active monitoring of project cost vs. expected outcome allows project managers and cost accountants to gauge the health of their project budget.
- Project success and failure depend on the project budgets and the actual project cost.
- Project overrun can cut down margins and reduce the net profit margins. In such a case, effective and accurate cost management can work wonders to increase the bottom line of the company.
What are the steps involved in project cost management?
Traditionally, project cost management involves four steps that aim at planning and controlling the project expenses throughout the project lifecycle.
All projects upon approval, go through a resource planning phase. This phase is dedicated to mapping all the tasks and subtasks that are required to complete the project. The next steps include listing down all the resources needed to perform the tasks in the project. These resources can be material resources, human resources, project management software, or other resources which may be required.
Project managers create a schedule of all such tasks and associated expenses using a work breakdown structure. This schedule is used to create a total resource costs estimate for the entire project.
The resource planning step is followed up by cost estimating. Most businesses pull up multiple cost estimates during this step. This process is an iterative process where various methods can be used to estimate the cost. These methods can be based purely on a project manager’s experience or can use software-based determinative techniques like Monte-Carlo simulations.
This step majorly involves creating a budget based on the estimates generated in the cost estimating phase. The cost accountants and project managers come up with a consolidated project budget in this step.
Once a project initiates, the cost accountants are generally required to measure and report project cost performance. The project management plan often outlines cost control requirements. The cost accountant makes sure that (s)he reports cost variances for each part of the project.
Cost control is a periodic activity that requires active monitoring from various stakeholders like accountants, project managers, and project controllers.
Project expense management: The missing piece in project cost management
Project managers and cost accountants are generally able to track direct project costs. These costs, like material costs, labor costs, and others, can be easily tracked in the accounting software. For indirect costs like T&E, organizations often employ traditional or ERP based expense management solutions. This creates a situation wherein direct costs are tracked efficiently while T&E is still using an age-old solution.
Another aspect of this is that since employees report T&E after a particular period, it creates a dissonance between the direct and indirect costs.
For example, as a cost accountant, you can view the procurement costs for a particular week. Yet, you might not be able to get the total reimbursement amount for the same week. This is because your employees might not have submitted their expense reports.
How can an expense management software help in project cost management:
- With accurate T&E data captured by a receipt management software like Fyle, managers can enrich their periodic cost management performance reports. It will also ensure that KPI measurement is accurate.
- Most organizations have a pulse on their fixed costs and direct costs since there is enough historical data to project future costs. In the case of T&E, it is difficult to make forecasts. Most expense management software lack expense analytics on business expenses which makes projections very difficult.
- Most project cost control techniques limit themselves to applying control measures to traditional expenses which have been the norm. Expense policies allow organizations to introduce an additional level of control to their project costs. Violations are ignored in the absence of software capable of enforcing policies in real-time. It is primarily because T&E is challenging to manage and errors are consequently overlooked.
Why is project expense management important for the project manager?
The project manager, often the primary point of contact for all updates on an ongoing project, is one of the most critical stakeholders in the process. Cost accountants need to constantly monitor costs. They also need to also have a clear understanding of whether they are under-budget or over-budget at any given point of time during the project.
- Project expense management gives a real-time view of the T&E expenses even if the reports aren’t submitted. It ensures that a project manager can identify cost variances and course-correct them immediately without having to wait for updates from the cost accountant.
- To effectively control project costs, the project manager should be able to identify the various channels of project expenses. Labour and material costs can easily be determined using the payroll software and invoice management solution, respectively. Expense management software identifies the sources and categories of expenses instantly.
Why is project expense management important for the cost accountant?
The cost accountant is the person who takes care of the monitoring of cost performance. They are also responsible for updating all stakeholders on the consumption of the project budget. Though a cost accountant won’t be administering the expense management software by him(her)self, the insights can help their job tremendously.
- One of the primary challenges for the accountant is to reconcile costs and expenses recorded across various software solutions. An expense management software which integrates with your accounting software becomes a saviour in such cases.
- Expense analytics on historical data make sure that the cost estimation steps are facilitated by historical data on employee spend and consumption. Accurate cost estimation makes sure that your projections are close to the actual project costs.
In short, we believe that an expense management software like Fyle can reap benefits since T&E is the second most controllable expense in an organization. The benefits are many and will ensure that your employees, project managers, and accountants have visibility into project expenses. It will also ensure that projects are a success and don’t overshoot their budgets.
Interested to see how an expense management software can solve T&E challenges? Schedule a demo with us today!