What Is a Cost Management Plan? (With Elements and How-To)

Updated March 12, 2023

Funding is one of the most vital aspects of a project, and it can determine its level of success. Project managers employ various systems and budgeting strategies to manage their funds for the best results. Understanding a cost management plan can help you manage projects more effectively. In this article, we discuss what budget management plans are, explore common terms in a budget management plan, identify its essential elements, and explain how to create a plan.

What is a cost management plan?

A cost management plan or budget management plan outlines the resources and estimated costs for a project. It's a document showing details of a project's budget and how the project manager intends to manage costs to fit into it. Budget management plans are essential parts of project management, as they enable managers to use limited resources effectively. They usually reflect all costs associated with a project, including direct and indirect costs. Direct costs relate to the project itself, like building materials in a construction project, while indirect costs relate to expenses like legal fees.

Projects across various industries require budget management plans. They're particularly useful for large projects with many cost items. Drawing reliable budget management plans ensures the project managers act within their approved budget. It also informs the quality and extent of the project, helping manage clients' expectations. A budget management plan can help project managers identify and remove unnecessary spending. They also improve the effectiveness of project units or departments, as they act within the budget's limitations.

Related: Create an Effective Work Plan for a Successful Project (With Template)

Common terms in budget management plans

Here are a few terms you may encounter when learning about or making budget management plans:

  • Cost baseline: The cost baseline is a reasonable estimation of project expenses, considering its timeline, client's expectations, and required resources. Project managers use the cost baseline as a measure to determine the effectiveness of their budget management plan.

  • Earned value measurement: Earned value is the monetary value of work, usually expressed in time. It forms the basis for earned value management, a tool that measures project performance by the value of the work completed.

  • Three-point estimation: This is a project management technique that estimates the likely outcome by analyzing available data. This technique estimates the project's likely, worst-case, and best-case scenarios.

  • Bottom-up estimation: This project planning technique involves breaking down a project into the smallest tasks to determine its overall cost or timeline. This technique has great accuracy as it requires assessing the project's component tasks closely.

  • Analogous estimation: This is a project management technique that involves estimating the cost or timeline of a project by analyzing past similar projects. While using this technique, it's vital you get expert analysis of the projects to determine how well they apply to the current project.

  • Parametric estimation: This is a statistical approach to project planning that analyzes past project data and other variables to estimate a project's cost and duration. This technique is popular due to its high accuracy level.

  • Work breakdown structure: This refers to how you divide the projects into tasks and assigns them to various personnel. The work breakdown structure is usually a visual design and may include timelines and key performance indicators.

Related: Why Project Management is Important (and Tips for Success)

Elements of a budget management plan

Here are some of the most important elements to include in a budget management plan:

Measurement units

A measurement unit is a specific measure for defining quantity. Depending on the field, laws or conventions determine what measurement units are and how they operate. This is important to allow a consensus and ease knowledge sharing. A plan usually contains several measurement units relating to project specifications, cost, and materials. It's important to specify the project's measurement units, so that communication is clear and every team member can understand the plan.

Precision level

The precision level in a budget management plan details the margin of error you allow in your estimations. It can relate to the project's cost, timeline, and resource requirements. The precision level may refer to the number of decimal places in your results for calculations. More decimal points imply a higher level of precision. It's vital you specify your level of precision in your project, so all employees are working with the same instructions. This ensures consistency across all aspects of the project, reducing errors.

Reporting methods

Reporting methods are the specific formats you use to monitor progress and provide client feedback. It includes the reporting timelines, the report's thoroughness, and its structure and content. Determining the reporting methods makes it easier to collect data from other team members or employees. It also makes it easier for clients to monitor their projects when they know the time to expect the project and its structure. It's important to be prompt with your reports and deliver them to all relevant authorities.

Control threshold

The control threshold is the limit you set for permissible variations from the budget. It's how much the project's cost or timeline can vary from the budget management plan before it requires correction. A project's cost threshold varies according to its size, the client's instructions, and the number of available resources. For example, a small $20,000 project may use a control threshold of $500. Alternatively, a $500,000 project may have a $20,000 control threshold.

Criteria for performance measurement

These are the metric you can use to judge the project's progress. Establishing clear criteria for measuring performance ensures the process is standard throughout the project's duration. It also ensures that team members and other stakeholders understand their goals clearly. You can choose from various methods of measuring performance. For example, you may measure performance by completed percentages or estimated value measurement. It's permissible and helpful to use multiple measurement criteria, depending on what aspect of the project you're assessing.

Related: How to Define and Measure a Key Performance Indicator

How to make a budget management plan

Here are a few steps you can follow to create a budget management plan:

1. Highlight project tasks

The first step to determining the cost and duration of a project is to understand which steps and tasks are necessary. It's crucial that you understand what tasks make up the entire project so you can classify tasks based on their nature or timelines. You can then further divide them into sub-tasks. It's also important to assign these tasks to specific team members or departments. Team member may find it helpful to have specific direction about the key performance indicators and expectations for each task.

2. Identified required resources

After dividing the project into smaller tasks, you can better understand the resources it requires. It's important you identify these resources to create a realistic budget. Relevant resources include people, materials, equipment, funding, and expertise. In addition to identifying required resources, it's important you also determine how to acquire them. For example, ensure you plan supply lines, establish relationships with vendors, and find high-quality materials.

3. Estimate costs

Once you determine the resources the project requires, you can estimate its cost and duration. The accuracy of your estimated cost determines the effectiveness of your budget management plan. While estimating the project's cost, it's important you consider external factors like inflation, market movements, and changes in contract terms. It's vital you make provisions for unforeseen expenses to improve your chances of staying within your budget. To estimate the total cost, add up the expected cost of all the resources you require. Remember to include possible indirect costs like legal fees, insurance, and rent.

4. Create a budget

After determining the project's cost, you can create a budget. A budget harmonizes all the information you've gathered on the project's cost, duration, and extent of operations. You can divide the project into tasks and structure your budget. This makes it easier to allocate resources to each aspect of the project.

Related: 22 Essential Project Management Skills

5. Execute cost control

Cost control is the process of ensuring a project's expenses are within the limits of its budget. To perform cost control, you compare the project's cost baseline to its actual cost. If the difference exceeds the project's cost threshold, you can implement measures to reduce expenses or increase the project's budget. Cost control is vital, as it ensures you always act within the project's set budget.

6. Measure performance

After creating and implementing the budget management plan, it's crucial you monitor its performance. Try to use clear key performance indicators and other metrics for measuring project progress. It's also helpful to have a consistent format to seek feedback from team members and other employees. Making detailed reports helps you track all expenses and determine when the project exceeds the budget's limitations.

7. Review your plan

After collecting reports on your plan, you can assess its effectiveness and review it where necessary. Assess the plan's results against your initial goals for the project. If the plan has a problem in any aspect, you can try a different approach for better results. When reviewing your plans, it can be helpful to involve high-ranking team members or employees. Additionally, it's also helpful to inform the client of relevant changes.

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