Cost management — the process of planning, estimating, monitoring and controlling a budget — is an essential part of managing a project or business budget forecast and spend. 

Effective cost management ensures that costs do not exceed approved and allocated resources, while also maximizing value to the organization by supporting informed decision-making and meeting long-term goals. 

Cost Management Procedures 

As a type of business accounting, cost management has several widely recognized procedures. 

Cost Management Plan Setup 

The cost management plan can be either a strategic document, when planning to manage a corporate budget, or tactical when it is a part of a project plan. In either case, the cost management plan should include the names and roles of stakeholders in the process, the tools used to manage costs, as well as the data and key performance indicators used to track and measure the effectiveness of the process. Additionally, it is important to identify the types and frequency of reporting. 

Cost Estimation 

Once the cost management plan is defined, the next step is to establish a budget. From an operational (strategic) perspective, this means estimating recurring costs, with a focus on gaining efficiencies. Historical data is often used for this purpose. From a project perspective, a budget will contain unique and one-time costs that are spent during a specified start and end date. This often means that project budgets can be revised over time, which makes tracking all the more important. 

Resource Planning 

An essential part of cost estimation is resource planning. This step helps you identify the staff, data and technical resources that are required. In this exercise, resource planning determines the allocation of each resource, how much of a resource is needed, and for how long. Also included is the cost for each resource, which will serve to measure the impact on either a corporate budget or a project budget. Project managers typically leverage a work breakdown structure (WBS) to gather input from project stakeholders, ensuring that all resource requirements are included. 

Cost Control 

Cost control allows you and other stakeholders to understand how actual costs differ from estimated costs. Effective cost control requires monitoring costs in real-time and collecting accurate data. Costs must be tracked as they are incurred, not just after the fact, so that corrective actions can be taken quickly. Accounting software, as well as project management software, can help to automate this step, bringing visibility through dashboards and data visualization. Lastly, regular reporting keeps all stakeholders informed, enabling prompt decisions regarding corrective actions. 

Cost Management Standards 

To help organizations plan, monitor and control costs effectively, there are several cost management regulations and standards that can provide consistency and accountability. 

Cost Accounting Standards (CAS) 

Cost Accounting Standards (CAS) are a set of guidelines and rules designed to standardize the cost accounting procedures of companies that contract with the government. Defined and published by the Cost Accounting Standards Board (CASB), the CAS consists of 19 standards that define a variety of costs, including depreciation, deferred compensation, direct costs, indirect costs, and how to account for research and development. The procedures for applying these rules and regulations can be found in the Federal Acquisition Regulation Part 30. 

International Cost Management Standard (ICMS) 

The International Cost Management Standard (ICMS) is a globally recognized standard that is meant to clarify how organizations classify, define, measure, and present cost information, particularly in the construction industry. Developed by the ICMS coalition, the ICMSC consists of 49 international organizations that develop and implement these standards, bringing a global perspective. The structured logical format of the ICMS provides a framework for costs associated with construction, operation, maintenance, acquisition and end-of-life activities. 

Project Management Institute’s Cost Management Knowledge Area 

The Project Management Institute (PMI) details processes for planning, estimating, budgeting and controlling project costs, forming one of the most important areas of the Project Management Body of Knowledge (PMBOK). As a fundamental practice of project managers, effective cost management is vital for a project to deliver on time and on budget. This knowledge area also contains standards for measuring and reporting, so all stakeholders see the same information consistently. 

Cost Management Tools 

While several mainstream cost management tools can help organizations budget, track, approve and optimize expenses, there are key functions and abilities to look for when trialing tools: 

Budget planning and forecasting: A cost management tool will help you to develop, monitor and make any changes to budgets for projects, departments, or the entire organization. They will analyze existing data to project outcomes, helping you to plan for both short-term and long-term needs. Many tools can run scenarios to show how changes in people, revenue and costs can impact budgets and forecasts. 

Expense tracking and monitoring: Capture and record expenses as they occur and when they are incurred with mobile apps and cloud services. This creates a real-time data set that can be leveraged for various purposes. Many tools take this data and utilize it to enforce company spending rules, process receipts, and manage the approval workflow based on corporate spending rules. 

Cost allocation and accountability: Distribute costs in a transparent manner to departments and business units based on defined rules and real-time usage. This provides an accurate mapping of costs. Cost ownership can be assigned at the resource level so senior managers can have clear visibility into their spending. Many tools support showback and chargeback models, where costs are reported to departments and business units are charged individually for consumption. 

Compliance and governance: Mainstream cost management tools will allow you to create, distribute, and enforce policies and governance regulations across the organization. With role-based access, only those with permissions can view data. Tools should make auditing easier with audit trails and automatic reporting that can be triggered based on key factors. Lastly, many tools will monitor regulatory changes and map them to your organizational controls so changes can be made and distributed. 

Cost Management Templates 

Cost management templates provide structure to cost planning, controlling and reporting across the organization and in projects. 

Cost management plan template 

This template outlines how costs will be estimated, tracked and controlled in a project or in the business units within an organization. This template can contain the following sections: 

• Framework for determining costs
• Budget determination process
• Approval and spending authority levels
• Cost breakdown structure
• Change control process
• Reporting procedures 

Project cost control template 

This must-have template for any-sized project helps to monitor and control project expenses that compare budgeted expenses with actual costs, highlighting any discrepancies. Sections may include: 

• Project overview
• Budgeted costs
• Actual costs
• Cost breakdown by phase or time period
• Forecast to complete
• Responsible individuals 

Cost-benefit analysis template 

Cost-benefit analysis assists with decision-making when performing cost management. It helps you to evaluate both the financial and strategic feasibility of starting a project or making an important business decision. Consider the following aspects to include: 

• Project overview and objectives
• Cost breakdown
• Benefit categories (e.g., indirect, direct and strategic)
• Valuation of costs and benefits
• Calculation worksheets
• Key assumptions 

Leading Techniques for Managing Costs 

When performing cost management, consider the following best practices. 

Practice strategic cost management. 

Strategic cost management involves aligning your organization’s cost structure and resource allocation with long-term goals. While many organizations choose to reduce expenses for short-term gains, taking a long-term view can give your organization a competitive advantage. Begin by clearly understanding the long-term objectives from senior leadership, allowing you to prioritize investments that support these goals, and reducing or eliminating expenditures that don’t support those goals. Then, set clear measurable objectives, such as improving resource utilization, improving productivity, or reducing operating costs. Leverage key performance indicators (KPIs) to track progress, using these in reports to share with employees and senior leadership. 

Prepare detailed budgets and forecasts. 

The best way to manage costs is to meticulously plan and track expenses through detailed budgets and forecasts. Consider following these steps when preparing your budgets and forecasts: 

1. Gather all financial and operational data; real-time information is best if available.
2. Understand the drivers that influence cost, such as sales volume, operational costs, labor costs and capital expenditures.
3. Collect historical data, including past budgets, expenditures and revenues to spot trends. Make sure that all data is normalized.
4. Select a forecasting method, such as zero-based budgeting or incremental budgeting.
5. Incorporate risk. All detailed forecasts need to include scenarios that prepare for changing circumstances and their financial impact.
6. Collaborate across departments and involve stakeholders to validate all assumptions, data, drivers and risks. 

Develop a culture of cost awareness. 

When all employees recognize the cost associated with business operations, important initiatives, and the impact these costs have on the health of the organization, they become cost-conscious. 

Begin by fostering open communication and discussion about financial performance, costs and budgets across the organization. Consider hosting budget workshops, so all employees have the opportunity to see the budgeting steps and decisions that are made in the process. 

Senior leaders should set clear expectations about managing costs by demonstrating it themselves. Leadership should consider adding one or more goals to help demonstrate the business value of cost awareness, federating these goals to all employees. When goals are met, celebrate! Publicly recognize departments or individuals who contribute to cost savings. 

Learn more about cost management by exploring these related resources on KnowledgeLeader: 

• Estimate-at-Completion Policy
• Cost Estimation Audit Work Program
• The Art of Balancing Costs and Profits: A Guide to Cost Management