Cost Control vs Cost Management: Understanding the Key Differences

Effective management of project and business costs is crucial for organizations to maximize value and profitability But there is often confusion between the related disciplines of cost control and cost management.

Though they have some overlap, cost control and cost management are distinct processes with different aims. Understanding the key distinctions enables smarter application of each.

Cost Management: Planning and Budgeting Costs

Cost management encompasses the steps of predicting analyzing and optimizing costs from project inception through completion. Key elements include

Resource Planning

Determining the labor, equipment, materials and other inputs required to complete project activities. This relies on breaking down the work into components via work breakdown structures

Cost Estimating

Developing cost predictions for the required resources using methods like analogous, parametric or detailed “bottom-up” estimates. Estimates become more refined as the project progresses.

Budgeting

Allocating the cost estimates over time based on the project schedule to produce periodic and cumulative cost budgets. This creates a time-phased cost baseline against which to track actual spending.

Financing

Securing and managing funding to pay for planned project costs through means like internal funds, loans, bonds, or investors.

The focus is proactively planning and optimizing costs before the money is actually spent. This provides the foundation for controlling costs during execution.

Cost Control: Monitoring and Containing Costs

Cost control picks up where management leaves off. It involves:

Measuring Performance

Monitoring actual project expenditures and progress against the cost baseline through consistent, timely performance reports.

Analyzing Variances

Identifying and explaining sources of variance when actual costs or schedules deviate from the baseline. Variances must be routinely tracked and comprehended.

Taking Corrective Action

Making adjustments to bring cost performance back in line with the baseline. This may involve changes to staff, schedules, scopes or resources.

Updating Cost Projections

Forecasting final expected total costs based on progress to date and impacts of changes. This projection informs future cost management decisions.

While management looks ahead to plan costs, control looks back to contain costs already being incurred. Tight control limits negative variance and overruns.

Aligning Cost Management and Control

Cost management and control work symbiotically:

• Effective management provides accurate budgets and plans for control to measure against.

• Tight control yields data to improve future management predictions and decisions.

Their chronological order is:

1. Management: Plan and estimate costs initially.

2. Control: Track actuals against estimates.

3. Management: Revise plans based on control data.

4. Repeat the cycle continually.

This enables incremental improvements to cost strategies over a project’s lifecycle.

Cost Management Allows Change Control

Cost control reactive responds to overruns, while management proactively targets savings.

For example, value engineering during planning can methodically eliminate unnecessary project scope to lower required resources and costs. This preemptively cuts spending rather than waiting to control overages later.

Careful upfront management also allows change control processes when new needs arise mid-project. Potential changes can be analyzed for cost impact before approval, containing cost creep.

Management Needs Long-Term Vision

Project control stays laser focused on containing near-term costs for fast results. This risks optimizing tactics at the expense of long-term strategy.

Cost management takes a wider view across the entire organization and project portfolio. It facilitates big picture decisions that maximize value and profitability over time, despite potential short-term cost increases.

This comprehensive outlook strengthens the business without sacrificing long-term goals to chase immediate savings.

Focus on Planning And Prevention

Cost overruns from poor planning can exceed overruns arising during execution. It seems counterintuitive, but the more rigor invested in upfront management, the less effort required for downstream control.

As management guru Peter Drucker famously stated:

“Cost control is not cost reduction. Cost control is the guidance of day-to-day business so that costs will be brought in line with actual achievements and expectations.”

Proper cost management allows desired business outcomes to be efficiently achieved, minimizing the need for drastic corrective control.

Seek Balance Between Control and Creativity

Cost control systems can stifle innovation if too rigid. Employees may fear punishment for reasonable cost variances.

Seek balance. Foster a culture where teams openly discuss cost data instead of hiding overruns. Case-by-case analysis of causes reduces overtime spent defending every minor deviation.

This protects cost goals without suffocating creative thinking and reasonable risk-taking. Finding this equilibrium takes practice but pays dividends.

Integrate Management and Control for Success

Cost control and management work best in concert, not isolation. When combined strategically they provide checks and balances that support overall business objectives.

The savvy organization implements both disciplines in proper proportion at each project stage to maximize value delivered for money spent.