If you want to understand cost control, it is necessary to understand why it is used: monitoring expenses and identifying risks in order to increase profits. Do not be confused with cost management, cost control has its own way of operations and objectives that can save businesses money and give profit.
What Is Cost Control?
A simple term for cost control, is the process of estimating costs in order to plan and adjust a budget. To make accurate cost estimates, all of your business expenses need to be monitored, and control spending to accommodate for any changes.
Managing to predict risks is another key factor in cost control. If you accurately analyze risks before they happen, you can modify a project’s budget before any change occurs. This decreases the likelihood of exceeding the budget. Construction projects are facing difficulties that make them go over budget, but using proper cost control prevents this from happening and provides useful information to make future predictions.
During the development of a project, cost control begins with monitoring and tracking changes to expenses. When having these changes they are called variations, and they can be either “favorable” or “unfavorable.” These variations can be used to make more accurate predictions in the future .
What Is Expense Control?
Expense control is the process of developing direct changes to spending. These changes are informed by cost control data. While cost control is focusing on both the big picture and the smaller details, expense control is making immediate and dircet changes to spending habits so the project keeps on the right way.
When trracking and controlling expenses, they must be identified and sorted into one of two categories: direct expenses and indirect expenses.
Direct Expenses
Direct expenses go directly on a project’s tangible needs. Most common examples of direct expense are materials, labor and equipment. All of these expenses will be specific to the project and “create” something tangible.
Indirect Expenses
Indirect expenses are costs that are constantly operating in the background of a project. Some common examples of indirect expenses are employee salaries, employee benefits, personnel expenses, office/facility rental and car rental. Keeping under control the indirect expenses can be the difference for a project between success and failure.
Tips for Better Cost Control
For sure most of the projects have risks and experience changes. But this doesn’t mean that a project will go over budget. Following these good practices for cost control will set your process up for success:
- Definition of Important KPIs
For each task or process, project management should decide on key performance indicators. These indicators are predetermined metrics were a team established before the beginning of the project, and are referred to throughout the project to check progress. - Anticipate Inflation
The cost of goods and services fluctuate depending on market. This can result in increased or decreased expenses. Any price changes necessitate adjustments to budgets and spending. For cost control this means that you must take these changes into account when preparing for risks and variances. - Develop Contingency Plans
Even if a project is well planned, there is still a chance that some things will go the wrong way. You need to anticipate these financial risks by creating strategies for adapting to them without incurring unfavorable variances. These contingencies are something like back-up plans for your project. While being prepared for the unexpected, you are prepared for the worst-case scenario. - Real Time Track Expenses
A critical aspect for cost control is to track and document expenses of a project. This is the best and only way to find variances and correct them as the projects is developed. When tracking expenses in real-time, you can find variances and develop the appropriate changes. Following this method, even unfavorable variances can inform about how costs are controlled for the remainder of the project. - Collect Data on a Regular Basis
Consistency is a critical factor for cost control. When a project appears to be running smoothly the collectinon of data seems like a low priority. But if this allowed to happen, the data becomes skewed and less useful as the project is going forward. Keep in mind that cost control is about spotting favorable variancesand also unfavorable ones. - Document any Variations
Is there a small variation? This should be documented too. Variations seem insignificant at the time, but odds are they will come in handy later on. When hourly employees will need a few hours of overtime to complete a task, this will become an unexpected indirect expense. Small size variations like these can seem like flukes, but they can be used to make more better and accurate budgets in the future. - Communicate with your Team
Cost control is a team game and not a one-man show. if you want to create smarter budgets, you must deliver variations and their causes to your entire team. This will keep everyone on the same side and aware of setbacks and successes. If you make the mistake of thinking data isn’t relevant to team members then problems may come to you. Cost control is a collection of data, but if no one is using it the data becomes useless.
Things to Avoid When Controlling Costs and Expenses
Cost control is a complex process, but there are many ways to make it a bit less tricky. There are three common cost control mistakes even top project managers do not avoid. Luckily, they are avoidable when you know what to look out for:
Neglecting to Consider Indirect Expenses
Indirect expenses are overlooked often. They can lurk in the background of any project, but the costs add up. Additionally, if you don’t consistently track indirect expenses, costs like an increase in rent, personell expenses and other forms of inflation will not be noticed. In a perfect project, indirect expenses should be static, but not accounting for their constant changes can easily send your project over budget.
Undervaluing Contractor and Supplier Relationships
A good relationship with contractors or suppliers can make controlling direct expenses much easer and simpler. When you have a strong relationship with your suppliers, they may be more likely to inform you of price increases or decreases ahead of time. Keeping these relationships in a healthy level can make it easier to renegotiate contracts.
Favorable variances may mean you can buy more supplies or contract more help. Unfavorable variances may mean you need to cut back. Either way, a good relationship makes the process painless.
Not Using Automated Tools
The secret for having effective cost control is to stay on top of expenses, risks and other factors that affect the budget of your project. In order to do so, you must use tools to manage data, track expenses and resources, create reports and make adjustments to budget in real-time.
When executing these tasks is a non stop process and the data may have already changed and you can’t document every variation. Instead, using automated solutions that allow you to see all the information you need at once it gives you the ability to make the necessary adjustments and reports and get more accurate decisions.
How Rabio helps With Cost Control
Rabio is an opensource tool that can be part of your project management solution that allows to get accurate views to every aspect of your project. Cost control process requires current data and easy and fast reporting in order to get the most accurate estimates that will help your decisions.
Create and control your budget with Rabio
Rabio is open-source business budgeting software that was designed to manage and control budgets, their costs, and produce reports based on a flexible cost breakdown structure. It is budgeting software and it is distributed for free.
You can easily use it for your personal needs or your business. Using Rabio ‘s managers system you can design and control your budget and compare it with costs at any time using the easy reporting internal system.
Furthermore, you can alter your budget or create forecast and projection managers and compare new data with the original budget.
Rabio is using Cost Breakdown Structure
Take control of budget and costs using Rabio with the flexible Cost Breakdown Structure (CBS) of cost centers, cost categories, and the addition of tags.
The CBS is required for project business to appropriately manage the financial aspect of any project. It is the planning structure financial controllers use to create budgets and calculate various financial metrics such as: estimate at completion, cost to complete, variances and earned value.
Rabio is open-source
You can download Rabio open-source version here
