Table of Contents Hide
- What Is Cost Control?
- Cost Control and Cost Management
- Cost Control Factors
- Why Is Cost Control Important?
- Cost Control Methods
- Cost Control Methods Examples
- Common Cost-Control Challenges
- Cost Control Software
- Cost Control FAQs
- What are cost control methods?
- What is the difference between cost control and cost management?
- What are the main objectives of cost control and cost reduction?
As the majority of industries continue to experience digital changes, the way firms approach cost control is changing dramatically.
Companies no longer place a premium on cost. The new cost control method is a hybrid technique that focuses on both cost management and growth.
While most firms fear going over budget, merely lowering expenditures is no longer sufficient. Instead, if organizations want to grow revenues, optimize budgets, and assure long-term financial sustainability, they must focus on context. Staying on track with adequate cost control methods and software is essential in project management, so let’s speak about cost control and its numerous facets.
What Is Cost Control?
The process of finding, eliminating, or lowering superfluous business expenses in order to maximize profits is known as cost control. It begins with budgeting and includes vendor selection and negotiation, taking process of early payment and volume discounts, utilizing spend management systems and enhancing production or construction efficiency and product quality.
Cost Control and Cost Management
Cost control manages the budget and actual variations by cost center, profit center, department, or project and takes corrective action to cut costs and expenses. One step in the cost management process is cost control.
Cost management is a comprehensive phrase that includes methods for projecting resources needed and performing cost estimation, budgeting, cash flow forecasting, funding the budget, controlling costs, and completing a post-project evaluation for future cost-saving potential. A company’s cost accounting function helps its cost management process.
Cost Control Factors
Several aspects are involved in project cost control monitoring, including:
#1. Labor cost
The cost of labor is the total compensation paid to employees working on a project, including employee perks and taxes. When budgeting a project, it is critical to consider the cost of labor because a project may entail multiple personnel working at the same time. For example, when creating a budget, make sure to include the total number of employees on the project as well as the length of time each employee can spend on the project to get an accurate estimate of the entire cost of the project.
#2. Materials cost
The cost of materials is the total cost of all supplies and equipment needed for a project. This includes materials ordered before the project begins, during the project’s completion, and after the project is completed.
#3. Real cost
The overall expenses incurred by a project from start to cost are referred to as the real cost. This comprises the cost of labor, materials, and any other project-related charges.
#4. Cost variation
Cost variation refers to any price differences between the project’s real cost and the budget you’ve set. For example, if you have a $1,000 budget for a project but the real cost is $1,500, the cost variance is $500 because that is the difference between the budget and the actual cost of the project.
#5. ROI (return on investment)
Return on investment (ROI) measures how profitable a project is in relation to the amount of money put into it. Having a high ROI suggests that the initiative brought in more money than it cost.
Why Is Cost Control Important?
Project schedules can be broken down into components and steps, and most managers assign the overall budget to each component based on its requirements. Making an attempt to control costs is beneficial:
- Monitor progress and KPIs (key performance indicators) and take corrective action when costs exceed acceptable levels.
- Maintain profit margins as projected.
- Establish clear expectations and avoid scope creep.
- Transparency must be achieved with management, stakeholders, and clients.
- Create helpful metrics for future project management.
A good budget in place has a direct impact on crucial decisions such as who to hire, what features to include, and how much time should be spent on each aspect of the task. A well-managed budget that adheres to an organization’s business principles effectively shows you where the project is headed and how it will be completed. In this situation, project performance is directly related to budgets.
Cost Control Methods
Here are five cost-control methods that can help a company maintain and track its overall costs:
#1. Proper financial planning
Budget management is one form of cost control that most firms utilize when starting a new project. Setting up an adequate time to create an appropriate budget for new projects is critical since budgeting helps anticipate costs, organize funds, and ensure cost variance is kept to a minimum. When budgeting, organizations examine all aspects of the project, such as how many personnel are required for the project, how long it may take to finish, and how much material is required.
It is critical to leave enough room in your budget for any unforeseen charges. For example, some projects may end up taking longer than intended or requiring more material than anticipated, which is why it’s critical to budget for unexpected changes.
#2. Using checkpoints, track all spending.
Monitoring all project expenses is a standard cost control strategy used by organizations to guarantee that the budget is followed accurately. Businesses frequently have checkpoints that are examined on a regular basis throughout a project to ensure that team members are staying within budget and to determine if any modifications need to be made, such as if team members request more time or material to complete the project. These milestones can be analyzed by professionals on a weekly to monthly basis.
Using these checkpoints, finance experts can examine the modifications that are required and adjust the budget accordingly. Using this cost-cutting strategy allows for alterations that have minor control over the budget.
#3. Using change control systems
Change control systems are cost-cutting methods that take into consideration any changes that may have a significant influence on the budget. These modifications can result from any complications that arise during the project or from major delays that cause the project to miss the deadline, resulting in an increase in the cost of labor and supplies. Change control systems monitor any changes made to the project to guarantee that professionals make budget modifications. They also document modifications and ensure that any changes are necessary for the project.
#4. Effective time management
Time management is a cost-cutting control that involves fulfilling project deadlines in order to keep project costs low. When a project is delayed, the cost of the entire project’s expenses rises since they continue to use resources and people to complete the project, lowering the project’s profitability.
#5. Keeping track of the earned value
Earned value is a prominent cost-cutting control among accountants. It entails multiplying the proportion of project work accomplished by the budget at the time of project completion. Earned value assists experts in predicting the financial outcome of a project based on the project’s completion time, total expense, and overall cost.
Cost Control Methods Examples
Cost control methods examples include the following:
- Contracts are being renegotiated with more advantageous conditions.
- Obtaining more competitive quotes from various providers
- Improving product quality to reduce waste and rework
- Lowering the amount of goods in inventory
- Employee expenses can be reduced through better spending management.
- Outsourcing of accounts payable
- Using automation tools to boost efficiency
- Taking advantage of early payment savings on bills payable
Common Cost-Control Challenges
Even experienced organizations make mistakes during cost-cutting initiatives. It’s also worth discussing some of the process’s hazards and challenges. They are as follows:
- Mistaking cost analysis for accounting: Accounting is primarily concerned with just calculating costs among other chores, whereas cost control delves deeply into a project and plans out the funding.
- Consistently assessing budget and predictions: Budgeting and cost control are frequently conducted by separate workers, resulting in inconsistent analyses that may jeopardize the trustworthiness of the results.
- Aligning data from many sources: Financial data from several subcontractors and content management systems can be aligned. It takes structure and talent to ensure that all of this data is useful.
- Aligning time and money: In the same spirit, there is a disparity between project schedulers who schedule workload based on activities and tasks and cost analysts who schedule workload based on transactions and fiscal periods. Making these two sources comparable is another cost-cutting hurdle.
- Allowing for project changes: As a project progresses, the scope, features, or goals may change. So, how can cost control, which is based on forecasting future spending, deal with this issue?
- Controlling the cost of cost control: Cost control can be time-consuming and error-prone, from data collection through analysis to implementing remedial actions. Another type of cost to consider is the outcome.
Regardless of the drawbacks, a well-planned cost-cutting system can position a company for success. The easiest strategy to cope with intricate or changing projects is to standardize the process while giving the organization flexibility.
Cost Control Software
As a management system for many corporate applications, cost control software is offered, which frequently includes dashboards for expenditure management and spend analysis.
#1. Accounting and ERP Software
Actual vs. budget comparisons for detailed financial statements by account are embedded into ERP and accounting systems, with drill-down to underlying data. These budget variance features are critical for cost control.
Manufacturing organizations can use feature-rich ERP systems to implement standard vs. actual costs. Labor hours, labor pricing, material purchase price, material usage, overhead spending and overhead usage fluctuations owing to changes in production volume or machine hours are all examples of standard costing variances.
#2. Budgeting and Financial Forecasting Software
Fully functional business forecasting and budgeting software may be available as an ERP software module or as a standalone software solution. A more accurate sales forecast and cost budget will be generated by advanced financial forecasting and budgeting software for cost control variance analysis.
#3. Modules for Smart Shop Floors
Cost control software offers specialized functionality within ERP systems for a smart shop floor application that uses IoT sensors, machine learning, and artificial intelligence software.
When manufacturing processes depart from standards, these systems send out real-time alert notifications, triggering exceptions. In general, the earlier the alarm is provided, the lower the manufacturer’s scrap and rework expenses.
#4. Accounts Payable Automation Software
Accounts payable automation software interfaces with ERP and accounting systems to streamline and minimize payables and global mass payments workloads by up to 80%, resulting in lower future labor costs for new hires.
AP automation software includes:
- Portal-based self-service supplier onboarding and tax reporting
- OCR-enabled electronic invoice capture or uploading
- Invoice matching with purchase orders and receipt reports
- Global regulatory adherence
- Screening for duplicate payments and fraud prevention
- Routing approvals automatically
- Global mass payments with a variety of payment methods and currencies
- Real-time notification of invoice payment status to vendors
- Payment reconciliation software
#5. Software for Expense Management and Tail Spend
Employee expenditure reporting and payment are made easier using expense management software. Travel management software, which may be included in expenditure management software, assists businesses in tracking and controlling travel-related spending. Tail spend software can be used to control track of employee-initiated regular spending on low-cost items outside of the procurement department.
#6. Cost Control Project Management Software
Project management software provides features such as project costing, project schedule estimation, resource estimation, resource costing and budgeting, Gannt charts, and variation analysis. The program should assist you in performing a post-project evaluation of actual expenditures, resulting in total cost vs. budget, as well as benchmarking with similar projects and competitors.
Earned value management, cost management processes, and project net income targets can all be included in project management software.
Thus, while cost control appears to ‘restrict’ itself to project execution control, its efficacy is determined by how efficiently cost management systems are integrated and linked. You may be ‘managing’ your project, but you are not conducting cost management if our workers work on each step of cost management independently, without alignment and sharing of information.
So, starting a project with cost management in mind will help you avoid certain potential pitfalls. Cost overruns are more likely if project expectations are not clearly established at the outset or are revised during the course of the project. If costs are not well examined prior to the project, they may be underestimated, giving erroneous signals of the project’s success.
A dollar earned in sales is a positive thing, but keep in mind that only a small fraction of it ends up in earnings. A cost-cutting dollar, on the other hand, travels directly to the bottom line. Understanding and managing costs is a good way to ensure long-term value creation.
Cost Control FAQs
What are cost control methods?
Target net income, variance analysis, and earned value management are some of the control methods used for spending and cost management. Control methods may also include the use of specialized cost management software for company and project management in order to improve cost planning and cost performance.
What is the difference between cost control and cost management?
Management of cost entails estimating a company’s or project’s financial operations, whereas cost control aims to influence that activity through modifications and estimation.
What are the main objectives of cost control and cost reduction?
Cost control focuses on lowering the total cost of production, whereas cost reduction focuses on lowering the cost per unit of a product. Cost control is a transitory process. In contrast to cost reduction, which is a continuous process. When the defined objective is met, the cost-control process will be completed.