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How do I Develop a Cost Management Plan?

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  • Written By: Osmand Vitez
  • Edited By: C. Wilborn
  • Last Modified Date: 03 November 2016
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A cost management plan lists the details of expected expenditures for a project. Companies may prepare these plans for other areas in their company as well, depending on its purpose. To develop a cost management plan, the company's management team will identify activities that produce costs, list the materials needed for the project, develop a timeline for the project, and state the metrics used to measure costs and any resulting variances. Other items may be on the plan, depending on the size and scope of the project.

Identifying cost activities is necessary to ensure the company details all areas it expects to incur expenditures. On production-style projects, these costs typically include the materials and labor necessary to produce the good. Service-based projects will have a different focus, however; the company must identify areas like customer service, delivery, ancillary services, or other indirect areas that will add costs to the project.

Listing materials is necessary for a cost management plan as most companies will prepare budgets with this information. Many cost-based projects are taken on at specific times during the year. Companies will have a budget limit for these projects and typically accept one or several that meet the cost restraints listed on the cost management plan. The company may also adjust the plan in order to complete more projects within the stated budget.

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Companies will also need to detail how they will track costs associated with their plan. This may include tracking the cost of materials and labor used on the project by stating actual costs. Incidental items may require different measurement techniques. For example, if a company expects to use workers from a separate department on the new project, it may use a percentage to calculate the corresponding cost. The cost management plan may state 25 percent of labor from the IT department will go against the new project.

Other items to include on the cost management plan include a timeline and variance analysis for the plan. The timeline helps avoid cost overruns and ensure that projects remain profitable; in some industries, such as construction, timelines are necessary in order to get paid. This process helps offset the early costs incurred in the project management plan.

Variance measurements are also necessary to determine why a cost management plan may have a cost overrun. Companies can then compare the plan against actual expenditures and determine the reason for any differences between the two.

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