What does Cost mean in Project Management?

The monetary value or price of a project activity or component that includes the monetary worth of the resources required to perform and complete the activity or component, or to produce the component. A specific cost can be composed of a combination of cost components, including direct labor hours, other direct costs, indirect labor hours, other indirect costs, and purchased price. (However, in the earned value management methodology, in some instances, the term cost can represent only labor hours without conversion to monetary worth.) See also actual cost and estimate.

Table of contents

Meaning and definition of Cost

How to track Project Costs - a simple worked example

Here's an example of a simple project cost tracking table. It organises costs into categories and then records the planned cost, actual cost and variance. The table is updated daily / regularly during the project. You can adapt this table to suit your project and use it in a spreadsheet program like Microsoft Excel or Google Sheets.
Cost Category Planned Cost Actual Cost Variance
Personnel $50,000 $48,000 $2,000
Materials $30,000 $32,500 -$2,500
Equipment $20,000 $19,500 $500
Travel $10,000 $11,000 -$1,000
Subtotal $110,000 $111,000 -$1,000

Frequently Asked Questions (FAQs) on project cost management

What factors determine the cost of a project?

The cost of a project depends on factors such as resources required, labor hours, direct and indirect costs, and the price of purchased items.

How can I estimate the cost of a project?

To estimate the cost of a project, break it down into activities or components, and calculate the costs for each based on labor hours, material costs, equipment expenses, and other relevant factors.

Get a Activity Cost Estimate Template - This PMBOK template includes labor, physical and reserve costs

Get a Duration Estimates list - record the estimates of effort and duration for your project's activities.

Duration Estimation Worksheet - develop parametric, analogous and three-point estimates using this worksheet. Includes formulas for PERT Beta distribution and Triangular distribution.

Marketing Budget Template - this is a super easy template that prompts you to think about all the key costs you need to consider when creating a marketing budget

Project Budget Template FREE download - this is a simple Project Budgeting template in Excel and PDF.

What is the purpose of the Cost Management Plan?

The Project Management Body of Knowledge (PMBOK) Guide defines the Cost Management Plan as a component of the overall Project Management Plan. The primary purpose of the Cost Management Plan is to establish the policies, procedures, and guidelines for managing, monitoring, and controlling project costs throughout the project lifecycle. It provides a framework for all cost-related activities and decision-making processes in a project.

Cost Management Plan template

What is the difference between direct and indirect costs?

Direct costs are expenses directly tied to a specific project activity or component, such as wages for workers or material costs. Indirect costs are expenses not directly linked to a specific project activity, such as overhead, administration, or insurance.

How can I manage and control project costs effectively?

Effectively managing project costs involves creating a detailed budget, tracking expenses, comparing actual costs to estimates, and making necessary adjustments to stay within budget.

What is earned value management (EVM)?

Earned value management (EVM) is a project management methodology that measures project performance by comparing planned work, actual work, and the value of completed work to determine if a project is on schedule and within budget.

What is the difference between actual cost and estimated cost?

Actual cost is the total amount spent on a project activity or component, while the estimated cost is a prediction of how much money will be needed for that activity or component based on available information and assumptions.

What role does the Work Breakdown Structure play in tracking project costs?

The Work Breakdown Structure (WBS) plays a crucial role in tracking project costs by providing a detailed and organized breakdown of the project's scope into smaller, manageable components. This hierarchical structure helps in the following ways:

Cost estimation: By breaking down the project into smaller tasks or work packages, it becomes easier to estimate the costs associated with each component. This provides a more accurate overall project cost estimate and helps establish the project budget.

Cost allocation: The WBS facilitates allocating costs to specific tasks or work packages, ensuring that each component of the project has a designated budget. This promotes accountability among team members and helps control costs by making it easier to monitor and track expenditures at the task level.

Resource management: The WBS helps in identifying the resources required for each task or work package, such as labor, materials, and equipment. This allows project managers to optimize resource allocation and control costs by ensuring that resources are used efficiently and effectively.

Progress tracking and performance measurement: By monitoring the completion of tasks and work packages within the WBS, project managers can track the overall progress of the project and measure performance against the planned schedule and budget. This enables them to identify any deviations from the plan and take corrective action to control costs and maintain the project's timeline.

Cost control and variance analysis: Comparing actual costs against the planned costs at the work package level enables project managers to identify cost variances and determine the root causes of these discrepancies. This helps in taking corrective measures to address issues and prevent cost overruns.

Improved communication and reporting: The WBS provides a common framework for project team members to communicate and report on their progress and costs. This enhances transparency and collaboration, making it easier to identify potential issues early and keep costs under control.

In summary, the Work Breakdown Structure is a vital tool in tracking project costs by providing a structured framework for cost estimation, allocation, resource management, progress tracking, cost control, and reporting.

A few examples of Cost management systems

Cost management systems are tools or software applications that help organizations plan, monitor, and control project costs. These systems provide a centralized platform for managing budgets, tracking expenses, forecasting future costs, and analyzing cost performance. Some examples of cost management systems include:

Microsoft Project: A popular project management software that allows users to create project plans, allocate resources, and monitor progress. Microsoft Project also has built-in cost management features to help users estimate, track, and control project costs effectively.

Oracle Primavera P6: A powerful project management and cost control software used by organizations across various industries. Primavera P6 provides comprehensive cost management tools, including cost estimation, budgeting, resource allocation, and performance analysis.

Deltek Costpoint: A cost management and project accounting software designed for government contractors and other project-driven organizations. Costpoint offers robust financial management features, such as budgeting, cost tracking, and reporting, to help organizations manage project costs effectively.

Procore: A construction project management software that includes cost management features, such as budget tracking, change order management, and cost forecasting. Procore is designed specifically for the construction industry and helps users manage project costs, schedules, and resources efficiently.

Smartsheet: A work management and automation platform that offers cost management features through its project management tools. Smartsheet allows users to create budgets, track expenses, and forecast costs, making it suitable for organizations of various sizes and industries.

Wrike: A collaborative work management platform with built-in cost management capabilities. Wrike enables users to create project budgets, allocate resources, track expenses, and generate cost reports to help organizations stay on top of their project finances.

Monday.com: A work operating system that offers cost management features through its project management and workflow automation tools. Monday.com allows users to create budgets, track expenses, and monitor cost performance in real-time.

These are just a few examples of cost management systems available in the market. The choice of a cost management system depends on the specific needs of an organization, its industry, and the complexity of its projects. It is essential to evaluate each system's features and capabilities to select the best fit for your organization's cost management requirements.
See all project management words

Methodology specific dictionaries / glossaries