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- How To Develop a Cost Management Plan
By Indeed Editorial Team
Updated February 22, 2022 | Published June 8, 2021
Updated February 22, 2022
Published June 8, 2021
The Indeed Editorial Team comprises a diverse and talented team of writers, researchers and subject matter experts equipped with Indeed's data and insights to deliver useful tips to help guide your career journey.
When planning a project, you often need to create a data-driven strategy for managing costs. A cost management plan can help you establish a budget, determine how to use your resources and monitor funds. In this article, we describe the components of an effective cost management plan and we explain how to develop your own cost management plan to help keep your projects on budget.
What is a cost management plan?
A cost management plan is an outline of a project's estimated costs and required resources and how to use and control them. This document is an important part of the project planning process and helps keep project costs within budget. Project managers can use it to monitor expenses throughout a project and make adjustments as needed. Projects in any industry, from manufacturing and information technology to retail, can benefit from having cost management plans.
Related: The Complete Guide to Project Cost Management
Elements of a cost management plan
For a cost management plan to be effective, it should include the following sections and elements:
Units of measurement
Units of measurement are the standards you use to measure budget and variations in project scope. Decide what units you want to use to measure project aspects such as monetary amounts, dimensions and quantities. Establishing units of measurement is particularly important if you are working with multiple calculations or currencies. This reference point can make communication easier and prevent confusion.
Related: Project Management: What Is Scope?
Performance measurement
Create rules for measuring performance so that you can monitor project progress accurately. An example of performance measurement is percent completion. You can use one or more methods of measurement to determine how close you are to meeting project objectives or completing certain tasks.
Control thresholds
Set control thresholds, which are limits for how much project costs can vary before you need to correct them. These figures depend on the project size and budget and help prevent it from exceeding budgets and deadlines. For example, if a project's budget is $50,000, you might set your control threshold at $1,000. When an aspect of the project gets off track by $1,000, you need to take action.
Levels of precision
Determine how precise you need to be when measuring amounts or making calculations. For example, you might state in your project plan that measurements can vary by up to 2 centimeters or that calculations must include three decimal points. Setting consistent levels of precision and ensuring all team members understand them helps you maintain an accurate cost estimation.
Levels of accuracy
Levels of accuracy are similar to levels of precision but involve percentages and the degree to which they can vary before you take action. If you set your level of accuracy at 8%, for example, costs can fluctuate up to 8% above your planned budget before you respond. Levels of accuracy help you control costs while allowing for inevitable variations.
Reporting formats
Determine how and when you plan to report project progress so that you can identify potential variations. You want to use a consistent format for every report, so team members know what they are looking for. Identify which details you want to include in each report, and set deadlines or milestones for creating them.
Related: 6 Types of Performance Reports for Projects
Cost management terms
Cost management plans include many figures and calculations that have established names. Understand the terminology before creating your plan, so you can measure the correct items and produce an accurate report. Common cost management plan terms include:
Cost baseline: The cost baseline is an estimate of project costs based on the project's set timeline. You can use this baseline to assess project performance.
Earned value measurement: This technique involves measuring project progress based on the amount of work that has been completed.
Three-point estimation: This technique uses a formula to create minimum and maximum estimates of a project's costs, length and amount of work so that you can calculate the ideal estimate value.
Bottom-up estimation: With bottom-up estimation, you estimate the costs of the smallest details and add them together to estimate the total project cost.
Analogous estimation: Calculate this estimate by comparing the costs of all past projects to your current one.
Parametric estimation: This estimate involves calculating the unit cost of each task, adding them together and comparing them to your budget.
Work breakdown structure: This visual layout of a project shows the tasks you expect all team members to perform.
Related: 50 Project Management Terms To Know
How to develop a cost management plan
At the beginning of a project, follow these steps to create a cost management plan that can help you control expenses and stay on budget:
1. Plan resources
Before starting a project, determine the resources it requires, which might include certain people, skills, materials, tools, equipment and funds. You can use a work breakdown structure to illustrate the project and assign individuals and resources to each task. This outline also lets you visualize the costs associated with each stage of the project. You can use the resource inventory you gather to accurately estimate costs.
2. Estimate costs
An accurate estimation of a project's cost compared to its actual cost is key to success. Consider not only the resources you identified in the work breakdown structure but also factors such as fixed costs, variable costs, overhead, inflation and the time value of money. Information you might need in your cost estimation includes:
The resources you identified in the previous step
Each resource's price
How long you need each resource
Potential risks
Costs of similar projects
You can use a variety of techniques to estimate the project's costs, depending on the information you have available. If you have lots of data about costs from similar projects you have completed in the past, you might use analogous estimation. If you don't, you might consider a bottom-up approach. Use your cost estimation to make decisions about the project's budget and schedule. You can also change your estimate as the project and its scope change. Some project managers create a new estimate for each stage of the project.
3. Create a budget
Calculate all the expenses of your project so that you can accurately determine how much funding it needs. To create a budget, you need:
Cost estimates
Project schedule
Project scope
Organizational process assets, which are the company's plans, policies and procedures
Determine how much money you need to assign to each task and for how long. Then, establish a cost baseline you can use to measure the project's performance.
To manage costs more accurately, create a separate budget for each phase that you can control and adjust depending on the project's progress. You can meet your budgeting goals easier if you are doing it by milestone or stage rather than trying to match the budget for the entire project.
4. Perform cost control
Cost control involves comparing the differences between your cost baseline and actual costs and making adjustments to keep the project within budget. Perform cost control repeatedly throughout the project to monitor and reduce spending or increase budget as needed. Use your predetermined control thresholds to determine when you need to take action.
5. Measure performance
Create reports in consistent formats and regular intervals throughout the project to monitor performance. Reporting helps you identify variations in the planned versus actual budget. It also helps you determine whether you are meeting your goals and milestones. You can look back at your reports for reference when planning future projects.