How to Cost Plan for a Project
A project cost plan is one of the most important elements of a project's plan. Not only does it outline the project's estimated costs, but it can help determine how those costs will be funded as well as show where the funds will be allocated and controlled for the various resources used throughout the project. Beyond any other component of a project plan, the cost plan helps ensure that the project does not go over budget.
A project cost plan should include three primary components: the cost estimate, the budget and cost controls. Before jumping into these components, however, you should also determine the measurements and levels of precision to be used in your project's cost plan.
The first component of a project cost plan is an estimate of the costs. This should be broken down for each resource used in the project. This varies widely from project to project. Technicians going to another city for a computer network migration will have different types of costs compared to a construction contractor framing a new house. Some of the resources to consider could include:
- Materials used in the project.
- Employee wages, including overtime if needed.
- Travel costs if required.
- Rental equipment if required.
- Licensing, insurance and permits if required.
The second component of the cost plan is the budget, which sums up all of the itemized costs. Of course, the more experienced you are in your field, the more precise your budget can be. As a rule of thumb, you should expect your project to go over budget somewhere.
For this reason, some project managers give themselves a buffer, including a "+/-" estimate for some areas in the budget. For example, if the cost of materials fluctuates from week to week, a "+/- 10 percent" buffer can help that portion of the project to stay on budget.
The third component of the cost plan is cost controls. Again, the specifics of this part of your plan will depend on the project. For a three-month project, a weekly review by management could help ensure costs stay within estimates. For a three-day project, a daily review of costs would be more appropriate.
In some cases, you may be able to get pricing guarantees from suppliers. If you are hiring outside contractors for a portion of the project, you may be able to pay them a flat fee rather than an hourly wage depending on your state's labor laws.
Units of measurement can be a vital part of a project's costs, particularly when the work is being done in a different country or in industries like construction. For these types of projects, it's important to specify the units of measurement in the cost estimates and to get all stakeholders in the project (particularly the client) to sign off before the estimate is finalized.
Similarly, the levels of precision being used should be specified in the cost plan. For example, if you are rounding up and down to the closest dollar in wage estimates, and workers are being paid $47.40 per hour, rounding down to $47 won't be an issue if they are only working a few hours. However, if you have 10 people working full time at that wage, this would put your project $160 over budget after the first week.
Precision and units of measurement can be even more crucial when material costs are being estimated. Suppose, for example, you have a small project requiring 200 pieces of material, like floor tiles. However, those pieces are sold by the case with 24 items in each case. To get a sufficient quantity, you would have to purchase nine cases for a total of 216 items. To be precise, your cost estimate should be in cases, not individual items.