September 30, 2022
Explainer

How to create a cost management plan that helps you boost project ROI

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Project planning is an intricate and time-consuming task. Cost controls and avoiding project budget overruns are critical to project success. A project cost management plan helps you avoid these outcomes by outlining all your financial information in a single place.

So what is a cost management plan, and how do you create one? In this guide, you will learn what a cost management plan is, along with the following:

What is a cost management plan?

A cost management plan is a document that helps project managers control and estimate project costs while allocating resources efficiently. Project managers create this plan during cost planning exercises before a project kicks off.

Note that you can create a cost management plan for any project, from detailed IT implementation to workplace improvement. Good cost management plans give you quick insights into budgeted amounts versus actual spending, along with the flexibility to adjust spending limits on the fly.

Why is building a cost management plan important?

Building a cost management plan is important because they help you achieve the following objectives:

  • Calculate project costs accurately
  • Determine project delivery timelines
  • Monitor cost overruns and ensure project ROI remains intact
  • Anticipate future expenses and plan beforehand
  • Identify cost sinks in your project and smooth cash flow
  • Create a healthy financial culture in your company

Cost management plans are a part of a project's founding documents. Project managers must present and explain them in detail to executives to receive the green light on a project. Cost management plans are extremely important when kicking off complex projects.

For instance, if your company plans on building new features to an existing platform, you must buy tools, hire new talent, and calculate the return on investment the project offers. Cost management plans help you understand all the costs involved, giving you the data you need to capture financial performance.

Important cost management terms you must know

You must understand a few important terms before diving into your cost management plan:

  • Work structure: The work structure or project work structure refers to how you will execute tasks and activities. Will you follow a sprint work system or a Waterfall, for example? 
  • Baselines: Baselines are cost estimates. For example, how much do you think buying new computers for your team will cost? This number is your baseline.
  • Cost thresholds: Thresholds are spending limits that you place above baselines. For instance, you can allocate $10,000 to buy new computers for staff with a threshold of $11,000. You will manually review and approve any expenses above the threshold.
  • Earned value: This measures the value your project has delivered thus far. You can calculate this by multiplying the percentage of tasks completed according to the project schedule by the budget allocated up to that point. It is a part of an earned value management plan.
  • Three-point estimation: This is a method of estimating a baseline. You can average your best-case, worst-case, and best-guess/most likely numbers to calculate a baseline.
  • Parametric estimation: This is a method of calculating a baseline. You can calculate an estimate using historic costs and multiplying those numbers with a modifier. Here is a helpful primer on parametric estimation.
  • Bottom-up estimation: With this method, you calculate the costs of each sub-task in the project and aggregate them into a sum to give you overall costs.

What is included in a cost management plan?

Good cost management plans have the following elements within them:

  • Cost thresholds: These are your spending limits.
  • Cost baselines: These are your projected costs.
  • Project timelines: Timelines include milestones and delivery dates.
  • Measurement units: If you're in charge of an international project, define the units you will use to measure performance.
  • Performance measurement: You can use multiple methods, such as percentage of completion or earned value measurement, to calculate project progress. 
  • ROI calculation rules: Define how you will calculate the return on your investment in the project.
  • Reporting timelines: Define what reports you will produce and how often.
  • Cost monitoring workflows: Clarify which workflows you will use to monitor costs and keep them in check.

How to create a cost management plan

Creating a cost management plan is an essential financial planning and analysis (FP&A) task. Here is how you can create one that keeps your costs in check and measures progress towards your goals.

1. Resource allocation

In the first step, you will use your work breakdown structure (described in the previous section) to create a timeline and deliverables. You can then break each deliverable into smaller milestones with respective delivery dates.

After you determine your milestones, use your resource lists to allocate resources to project tasks and calculate the cost of each sub-task. You can figure out the most resource-intensive tasks in your project by the end of this step.

Make sure you follow vendor management best practices when allocating resources toward suppliers.

2. Budgeting 

Budgeting is perhaps the most time-consuming step in the cost management planning process. You can use several techniques to estimate costs. For instance, you can use historical trends to estimate the costs of hiring employees for your app expansion project.

Alternatively, you could use the three-point estimation technique to baseline costs. Whatever method you use, note that your budgets are never set in stone.

As projects evolve, you will understand your costs better, leading to more refined estimates. Always leave room in your budget for a buffer or a threshold to account for unexpected events.

Also, some estimation techniques will be less accurate than others. However, they're still useful. At the start of your project, you will lack information, making techniques that rely on estimation and projection the better choice. Deterministic estimation techniques will work better once you understand your plan and deliverables better.

3. Tracking performance 

Once you have calculated a reasonably accurate budget for your project, you must track business expenses. For instance, if you are hiring new resources for your project, define how you'll track recruiting costs. Will you use recruiter timesheets? Or will you record a lump-sum cost upfront?

More importantly, once your project kicks off, how will you track spending? You can use purchase receipts, timesheets, and several other cost records to control expenses. 

4. Reporting 

The quality of reports you rely on to track financial performance goes a long way towards helping you achieve your cost management goals. Choose visual reports that depict project performance. Compared to text-based reports, images offer instant clarity.

Define the reports you will send to executives and your team members. Each report will have different degrees of granularity, so pay attention to the information you'll include in all of them. Also, define when you'll send these reports and whether you'll have to change this frequency in the future.

5 best practices for creating an optimal cost management plan

Here are five best practices that will help you create a cost management plan that works.

Prioritize stakeholder communication

Stakeholders offer support and ease management buy-ins. You must communicate your project's progress and budget accurately to them. Make sure your reports have all the information a stakeholder needs. For instance, an executive will need a high-level overview of your actual spending versus projected, with any problem areas highlighted.

However, a controller tasked with auditing the project will need more cost-related details. Tailor your reports to your audience and offer them the degree of transparency they need.

You'll find that receiving management support and additional resources becomes very easy once you communicate smoothly with your stakeholders.

Breakdown each step clearly

Many project managers make the mistake of leaving too much information in their heads. Their project plans demand team members fill in the blanks. Needless to say, this situation leads to a ton of miscommunication and misalignment within teams.

This issue gets worse the larger the project team is. Always record all project step details minutely. You might believe the degree of information you're recording is overkill. However, you're best served offering more information than less.

When defining the scope of your project's steps, record which roles are essential to the process, the budget involved, how you'll process invoices, how you'll long expense reports, and the thresholds. Define approval or rejection workflows if you breach those thresholds and identify the roles involved. If timelines are relevant or tied to project deliverables, list those too.

Use sophisticated electronic tools to track expenditures

While tools such as spreadsheets are great to record data, they fail to address the needs of large projects. For instance, tracking actual costs versus estimates and cost variance is extremely challenging on a spreadsheet. Spreadsheets also introduce the possibility of manual errors creeping in, such as mistyped numbers or formulas.

Detecting such errors is impossible unless your outputs deviate significantly from expected values. A sophisticated business budgeting software can pull financial data from multiple sources, helping you centralize cost and expense tracking.

Use visual reporting formats

When sending reports, make sure you rely on high-quality visual dashboards that clearly indicate total cost deviations in project activities and other important data. Reporting is often the difference between approved and failed projects. 

Visual reports help you align your team toward your goals by displaying relevant data intuitively. They also help you communicate effectively with your stakeholders, helping you secure buy-in and monitor progress.

Decide your optimal work structure 

You can opt from one of many project work structures. Whether it's an agile method like the sprint philosophy or a traditional Waterfall method, choose one that works for you. Do not hesitate to borrow each method's best elements to create a structure that works for you.

Using the right tools will help you implement your ideal work structure. For instance, you can use Kanban-based boards to communicate tasks and deadlines to your team members within sprints. Automate task tracking as much as possible, and you'll quickly handle your costs. This happens because you'll have more time to devote to spend analysis and resource planning.

How Ramp helps you stick to your cost management plan

Cost management is a critical part of every project. In many cases, projects fail due to inadequate cost performance tracking. Ramp helps you automate and streamline expense tracking, giving you all the insights you need into your project's costs.

Centralized spend tracking

Ramp consolidates all of your spending on one easy-to-use platform. Whether card spending, AP, or reimbursements, you'll have a central dashboard that gives you all the information you need.

You can even centralize travel spending information in one place and integrate expense itineraries with your expense policies.

Create limits per spend category

Small expenses across several categories can throw your cost management plan out of sync. Ramp helps you define category spending control thresholds. You can even control spending per employee or team. 

Ramp's virtual cards and spend controls help you set and forget your cost baselines, ensuring you'll always finish within your thresholds.

Automate expense approval workflows

Expense approvals are one of the most time-consuming tasks project managers deal with. Ramp helps you digitize and automate your expense policies, making approvals a breeze. Spend more time monitoring your project's success, instead of analyzing expenses and searching for matching receipts.

You can even link these expense data to your favorite small business accounting software to simplify monthly closes.

Cost management is a time-consuming but important task in every project's lifecycle. Fail to control costs, and you'll likely miss your targets. Follow the step-by-step process listed in this guide to ensure you stay on top of your costs at all times.

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FAQs
What is a cost management plan?

A cost management plan is a document that helps project managers control and estimate project costs while allocating resources efficiently. Project managers create this plan during cost planning exercises before a project kicks off.

What is included in a cost management plan?

Good cost management plans include:

  • Cost thresholds 
  • Cost baselines 
  • Project timelines
  • Measurement units 
  • Performance measurement 
  • ROI calculation rules
  • Reporting timelines
  • Cost monitoring

What are the four main processes within cost management?

The four main cost management processes are:

  1. Resource allocation
  2. Budgeting
  3. Tracking performance
  4. Reporting

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