Monitoring Costs

While it is important for you to monitor the schedule of the project and maintain focus on the outcome, it is equally vital that you keep track of the costs your project is incurring. Failure to do so can result in a project that, while seemingly successful is, in fact, uneconomic.

Managing project accounts

Effective cost monitoring throughout the lifecycle of a project is important for a number of reasons: it enables you to give the sponsor a true picture of progress whenever you are asked for it; it reduces risk by ensuring decisions to modify or cancel the project are taken early; it identifies areas of inefficiency; and it provides valuable information for planning future projects. Keeping track of your costs is also important because it could highlight theft or fraud. Like any other pot of money, project budgets occasionally attract criminal attention. If you are the person responsible for controlling expenditure, you may be liable unless you can demonstrate that you have used suitable procedures for monitoring costs.

Adjusting to change

The property department in a law firm won a contract to review 6,000 files for a local government agency. They priced the job at $900k, based on two hours per file after a start-up period. This proved accurate—experienced team members took just under two hours per file. However, the volume of work and tight schedule meant that morale dipped and staff turnover increased. The constant need to induct new staff pushed the average time per file for the first thousand files up to 2 hours 15 minutes. This would have caused the contract to overshoot by 12.5 percent, costing the firm $112.5k in lost revenue. The head of the department negotiated replacements from other departments to spread the workload and offered incentives to raise morale. Thanks to the early intervention, productivity returned to less than two hours per file, and the project hit its projected profit margin.

Keeping track of costs

If you are managing a small project, you may not have a budget for out-of-pocket expenses—paid to external organizations for materials or services—but you would be advised to keep track of the invisible cost of the work undertaken by your internal team. Particularly in a multiproject environment, timesheets provide a mechanism for charging expenses back to the right client or cost center.

Out-of-pocket expenses generally attract heavy scrutiny. Nevertheless this budget can come under pressure either because of inaccurate estimates at the definition stage, additional features added to the scope without parallel increases in the budget, or poor risk management. If you are responsible for the budget, ensure that you are clear on the reasons for any unforeseen expenditure before authorizing payment. Check the impact on other aspects of the budget: are you using money for desirable but nonessential features, leaving later essential features underfunded?

Monitor invisible costs

Dealing with cost overruns

Not every cost overrun is serious—sometimes expenses run ahead of plan simply because work is progressing more quickly than anticipated. On other occasions, you may have underestimated the cost of a “one-time” item of expenditure, but feel this is likely to be offset by an overestimate elsewhere. The point at which even a minor overspend should be taken seriously is when it is early warning that you have underestimated a whole class of activity upon which the project depends. Tell the sponsor as soon as you perceive that unforeseen expenses may require an increase in the overall project budget. If the budget is fixed (critical), identify any nonessential features you can remove from the scope to bring expenses back in line.