Predicting costs of a project in advance is a challenging task, but without accurate cost estimation, spending on a project can spiral out of control and it can seriously damage a business and its relationship with its clients. Preparing an accurate budget and cost sheet when taking on a project, especially in an Agile environment with multiple iterations, is considered a major concern. Here are some of the difficulties in preparing a project cost sheet and how businesses can recognize and address these issues.
A cost sheet should show the total costs for a project management tool based on the cost of components while also showing the cost of past comparable projects. They are essential for negotiating with clients and presenting final costs to internal and external stakeholders.
Historical vs. Estimated Cost Sheets
Preparing a cost sheet is difficult without a basis to start with. A historical cost sheet can be created at the completion of a project based on the past experience and totaling of all expended costs, but this is no use for getting an idea of costs ahead of time. Businesses that want to avoid going over budget prefer to have a clear idea of the project’s spending needs and expenses in advance or while the project is reaching key milestones.
For this reason, an estimated cost sheet is needed to guide the project’s financial impact as it progresses. An estimated cost sheet has many more unknowns.
If the project is similar to one that has been completed before, the historical costs can be used to create a new cost sheet to consult. Still, there are many factors that can make the costs differ from past projects, such as changes in material costs, different labor requirements, differences in workflow due to improved processes, or unique requirements for the new project.
Costs may include fixed costs, variable costs for the production of each new unit of a product, direct costs of materials and labor, and indirect costs such as operating expenses. Tracking indirect costs and calculating their impact on a project can be challenging and requires full knowledge of the business’s overall operating costs.
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Project Budget Issues
Budget issues can arise for various reasons. In an Agile project management tool environment, multiple iterations without advanced planning can add unpredictability to the cost structure and cause demand for resources to change unexpectedly. Major changes made in development may not be communicated to the financial oversight team, so they will be unable to get a clear idea of the corresponding changes in cost. With multiple teams involved, spending may come from other sources and be unaccounted for in an estimated cost sheet.
Whether working on a contract for a client based on an agreed-upon rate, or planning the cost sheet based on the predicted revenue of future sales to customers, these issues can impact the relationship between the company and its customers. Having to change the price of a product for sale or renegotiating a contract for more time or money can hurt a product development team’s reputation in the long-term and impact other projects. Budgets across the company may need to be adjusted and team members may be reassigned.
Improving Cost Sheets with Project Management Tools
Product teams rely heavily on digital project management tools, so they present one of the best ways to ensure that costs are managed. When new issues and tasks are added to the project, also include notes on estimated costs and share them with those responsible for maintaining the cost sheet. Track when money from reserves that have been set aside is being used. Some project management tools like LiquidPlanner provide insights into resource allocation so managers can review on a regular basis and see if unexpected costs are appearing.
Tracking issues within your project management tool along with their costs will make it much easier to modify an estimated cost sheet and provide useful information for future projects. Even in flexible environments like Agile that allow projects to develop and change over time, you can learn from these experiences. In these conditions, preparing for unexpected costs is more important than ever.