The way you categorize project expenses can substantially define the quality of your investment decisions. This list will help you learn more about the 6 main types of project costs.
Excellent financial performance is a major goal of every profit-oriented project. The superb quality of services and products, brand recognition and employee dedication are merely a few of the ingredients in the recipe for success. Another essential and underlying one is compliance with the budget, which is possible to guarantee only with the help of proper expense control activities.
Cost tracking is an integral part of expense control and project cost management as a whole. Thus, you cannot track costs without paying attention to budgeting and other relevant cost management practices and expect to receive excellent results.
To secure the financial health of the project, you must develop an integrated approach to cost control and, in this article, we have described how you can do so in 7 steps.
Why Is Cost Tracking So Vital?
Budget overruns pose a massive threat to the project’s well-being and longevity. Causes of overruns are many, but, in one way or another, they all can be reduced to just one factor – LACK OF CONTROL.
If you want to avoid this problem, cost tracking is exactly what you need. The very verb “track” means to closely monitor, acknowledge and register all occurrences, changes and trends in the course of an event under consideration. In other words, when tracking project costs, you keep a detailed record of every expense item. If you do it correctly and combine cost tracking with adequate budgeting and project management activities, this practice will vest you with a tremendous sense of control over the situation as nothing else can.
How to Set Up a Cost Tracking Procedure?
When arranging the cost tracking procedure, be sure to do the following:
1. Develop accurate cost estimates and a realistic project budget
Before starting to track costs, you need to know how much funds are at your disposal and identify the amount of money required to perform each project activity. Without this knowledge, you have no basis for cost control and no clear objective to work with.
Therefore, make sure to forecast and calculate costs by using one or a few of available cost estimation techniques and don’t forget to create a project budget – a detailed outline of all expenses (and revenues) you reasonably expect to have throughout the project’s life cycle.
Budgeted estimates will serve as a reference point in the cost tracking process. The more accurate and credible your estimates and budget are, the lower the risk of cost overruns you bear because, being aware of the financial limitations of your project, you become more effective in the control and prevention of spending excesses.
2. Discuss project cost and performance expectations with your team members
The cost of a project activity largely depends on how it is performed. If workers are paid hourly, the faster they complete tasks, the lower the total project cost will be. However, when you do things in a hurry and, as a result, make many errors, you end up being counterproductive and investing more time and money in cleaning up the mess.
The major takeaway from the above examples is that in case your team doesn’t understand what you expect of them in terms of performance and if your employees and contractors have no clue about quality and efficiency requirements, the risk for cost overrun increases.
For this reason, it is critical to discuss individual and general productivity expectations with your team throughout the course of project realization and clearly explain how staff performance is linked to the project’s financial results. In this way, you will have a higher chance of improving adherence to budgeted estimates, which will help control project expenses better.
3. Allocate cost control roles
In order to guarantee that any task is done well, you need to allocate enough time and resources for its completion. Hence, it is highly advisable to assign all budget monitoring and cost tracking activities to a competent professional.
It’s not essential whether the expense control role is performed full-time or part-time. What’s important is to secure regular attention to the ongoing project spending, which is somewhat simpler to do when you have a specialist or a team of specialists entirely devoted to this issue and able to manage it with sufficient care.
By allocating cost control roles to competent staff members, you maximize the accountability for expense monitoring in your project. In this way, you can foster better budget adherence and cost tracking, as well as a timelier detection of cost overrun risks.
4. Establish a system to collect and share information
As hierarchical representations of numerous interdependent subcomponents, systems help organize various tasks, activities and processes and bring more clarity in their supervision. Hence, you may largely benefit from implementing a system or, more precisely, a Project Management Information System (PMIS) for cost monitoring.
PMISs are commonly used by managers across industries for data storage and distribution. They comprise various digital or manual tools and techniques meant to collect project-related information and share it with relevant stakeholders in a well-arranged, standardized way.
PMISs may fulfill multiple functions, including project planning, budget development and scheduling. And of course, they can be utilized for cost control and analysis.
To develop your own PMIS for project cost monitoring, consider these 3 core things:
- What you want to track (i.e., types of costs and project activities),
- How you want to track it (i.e., techniques and regularity),
- How you want to communicate the tracking results (i.e., means, formats and patterns).
Overall, your primary goals here are to identify relevant measurement parameters, select methods for cost tracking and develop reporting routines. If you succeed in doing so, you won’t miss a single piece of crucial information regarding project expenditures and will increase the efficacy of the management process.
5. Use spreadsheets
When speaking of cost tracking methods, the most common and traditional one is a spreadsheet, which can be as detailed or simple as you wish it to be.
Basically, to make a cost tracking a spreadsheet, you just need to create an Excel file and list there all the relevant expense items and categories, depending on your project plan and work breakdown. Then, you will have to set up Excel formulas for calculating monthly / quarterly / yearly cost balances and accurately submit data regarding each of the mentioned expense items to the document regularly.
In a more advanced version of the spreadsheet, every expense category can be correlated with a specific spending limit. This additional feature allows tracking costs in relation to the developed project budget.
6. Implement cost and time tracking apps
For quite many people, keeping meticulous records manually is a psychologically draining and discouraging activity. Luckily, there’s no need to exhaust yourself with expense record keeping anymore because, today, a countless number of digital tools that can make this work effortless is available in the market.
Some of the existing apps for budget management and expense control, for instance, Expensify and Smart Receipts, allow for automatic cost tracking with the receipt capture and credit card synchronization features.
Other pieces of software require some degree of manual data submission. However, they can significantly facilitate data reporting and help you compare project costs against budgeted estimates and income in a visually appealing and clear format.
Besides cost tracking, such tools often include a plethora of other features meant to streamline various accounting and budgeting operations. Thus, they will eventually save you a ton of time and nerves. If you’re interested in purchasing one of these apps, check Quickbooks and Zoho Expense – two of the best digital instruments for project cost (and income) management.
To track labor costs, you may also utilize a time tracking app, such as actiTIME. In this case, your team members will simply need to register how much time they spend on each project assignment in a timesheet or a chart in the app of your choice. Afterward, you will be able to overview how much every individual task and the project as a whole will have cost you based on employees’ hourly rates and the time they used to do the work.
An extra advantage of time trackers is that they aid in evaluating performance efficiency and foster more educated decisions on the improvement of team productivity. In other words, they provide information needed to boost cost efficiency and, thus, can be regarded as valuable assistants in project cost management.
It’s an amazing product and, despite the fact that there is no cost associated with the free edition, it is extremely well-polished and a good deal better than other apps which have license fees. At this point, actiTIME more than meets the needs of my company. Thanks for developing such a wonderful app and keeping it free!
7. Compare actual costs with budgeted estimates
To ensure compliance with the budget, you must continually compare the actual expenses incurred by your team with the predicted ones throughout the project’s life cycle. This type of cost analysis has 3 principal aims:
- Adjustment of spending practices in a way that prevents cost overruns and maximizes revenues;
- Evaluation of the quality of your approach to cost management as a whole, as well as cost estimation and budgeting, in particular;
- Final assessment of project outcomes.
Overall, the comparison of actual expenses with budget estimates while the project is still in the phase of realization will let you stay in the know of whether everything is going according to the plan or if something is missing the mark. Knowing this, you will be able to make timely corrections if necessary.
At the same time, by contrasting actual and predicted costs when closing the project, you will also deepen your understanding of key achievements and errors in the project management process. Later on, you’ll have an opportunity to drive your future business endeavors to even greater success with this type of evidence.
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