What is cost control?
Cost control is a practice within project management where expenses are identified and assessed in comparison to projected revenue to boost profitability.
In many cases of cost control, business expenses are cut or reduced in the budgeting stage of a project to align with anticipated outcomes. Risks are also reviewed, and additional planning is incorporated into the budget for potential setbacks or unanticipated expenses.
Project managers are typically those tasked with cost control and use project cost management software to monitor profitability and estimate the costs of different project elements.
Types of cost control
There are many different techniques for controlling a project’s costs, both ahead of work starting and during the project’s completion. Some of the most popular types of cost control are:
- Inventory management. Overstocking or understocking can lead to significant cashflow issues within a business. By effectively managing inventory, costs can be controlled to minimize stock obsolescence and carrying or storage costs.
- Process optimization. By removing inefficiencies in the workflow, project managers can reduce overall costs. This is often completed through automating repetitive tasks and improving processes within the team.
- Waste management. Minimizing waste saves money upfront and maximizes resources within the business. There may also be financial incentives that the business can benefit from by incorporating more sustainable practices in the company.
- Pricing adjustments. Having a good understanding of competitor pricing and the customer market gives businesses better opportunities to maximize revenue within their industry.
- Supplier management. Developing good relationships with vendors can lead to cost-effective solutions, along with collaborative work throughout the supply chain that reduces waste.
Basic elements of cost control
Before any new project begins, project managers must account for three key areas for better cost control. These are:
- Budgeting. All effective cost control strategies must begin with an outline of predicted expenses for a project. This should include the cost of materials, along with the cost of labor for completing the project.
- Cost analysis. Once a budget has been made, it must be continually reviewed. By listing the actual cost against the projection, a determination can be made on the cost variance to see whether the project is over or under budget. Return on investment (ROI) can then be calculated to gauge profitability.
- Expense tracking. Tracking outgoings for expenses is vital in managing costs for a project. By doing so in real time, project managers can reduce or cut expenses as needed before additional funds, unaccounted for in the original budget, are spent.
Benefits of cost control
Along with the financial savings that cost control can bring, there are several additional benefits to incorporating this practice into project management. These include:
- Improved profitability. Increasing profitability is the overall goal of cost control. By managing expenses and waste to minimize outgoings, businesses can improve the ROI of projects and see increased revenue at launch.
- Greater resource optimization. Another critical aspect of cost control is more effectively managing and using the resources available. This removes issues such as excess capacity or underutilization of materials or labor.
- More effective risk management. Financial risks are inevitable in every project, but cost control makes identifying and addressing these possible. Unforeseen problems can be costly, so preparing for these possibilities is beneficial.
- Opportunities for long-term growth. When resources and budgets are managed well, excess funds can be reinvested into the project or other areas of the business. This could include additional team training or recruiting, developing new projects, or moving into new markets.
Best practices for cost control
Planning and outlining goals ahead of budgeting are essential. Beyond this, there are several best practices that make cost control more successful, including:
- Monitoring key performance indicators (KPIs). With goals outlined ahead of time, progress should be reviewed throughout the project. These can then be measured against the milestone KPIs to determine whether or not costs and other elements of the project are still on track or if adjustments need to be made.
- Streamlining internal processes. Along with costs, processes should also be reviewed frequently. This can identify unnecessary tasks or steps that can be removed to save time and money. Understanding where team members or other resources aren’t being used effectively can also save on costs.
- Implementing automation where possible. Using technology in new areas of the project can free up time for team members to work on more important tasks. Automation can also provide real-time insight into the costs of the project, flagging any areas of possible overspending or estimated budgeting issues before they occur so that corrective action can be taken.
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