How to Manage Variances and Project Costs Research Paper

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Introduction

During the implementation of a project, processes for project control along with record keeping come to be vital components to managers and other participants in the entire project process. Imperatively, these components provide the twofold objective of recording the financial transactions that take place in addition to handing managers a sign of the progress and the issues linked with the project. Notably, the issues of project cost control are fittingly encapsulated in a long-standing delineation of a project as any group of ambiguously associated activities that are 90 percent, over budgeted and late (Walker, 2015). The supposition is that the similar cost control approaches will not work efficaciously for all projects. Cost control does not just encompass monitoring costs and recording data but also takes into account the analysis of such data so as to undertake remedial action prior to being too late. The purpose of this paper is to provide a comprehensive delineation of the cost control processes or procedures to be carried out for the project environment. It will encompass the operating cycle, budgets, the earned value measurement system, and the approach to a prospective cost overrun predicament.

Operating Cycle in Cost Control

The operating cycle is basically the amount of cash flow that is necessitated by a project to sustain and grow it. In other words, it is the cash flow that is required to move the project process. In particular, when a project has a short operating cycle, then the projects necessitates less cash in maintaining the operations of the project in order to retail at minimal margins. On the other hand, when there is a long operating cycle, in the end the project will cost more even at reasonable and adequate levels. As a manager in the project process, the main objective is to maintain the operating cycle as short as possible in order to minimalize the costs necessitate in conducting the project process. Notably, it is the process that dispenses the cash of the project, convert the cash into a product, and render it out to the end consumer so as to generate back the project cash. According to Kerzner (2013), failure of a cost control system to fittingly and precisely delineate the true status of a project does not basically give the implication that the cost control system is to blame or incorrect. The illustration below delineates the phases of a management cost and control system.

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Imperatively, any system of cost control is only as good as the initial plan against which measurement of performance will be undertaken. As a result, the designing of a system of planning must take into consideration the cost control system. As a result, the operating cycle is commonly referred to as cost and control (Kerzner, 2013).

Budgeting

Cost control takes into account practicing the identification and reduction of business costs to increase profit, and this process usually begins with the budgeting procedure. This comprises of making comparison of actual outcomes to the budget expectations, and in the event that the actual costs incurred are greater than the planned costs, then it becomes necessary to take action. Budgeting encompasses the appreciation of what costs will be sustained, when and why, and evidently trails on from the estimating activities and the award of the project (Burtonshaw-Gunn, 2009). A budget ascertains the planned spending for a project, program or portfolio. It is utilized as a reference point against which the actual spending and projected eventual cost of the work can be reported. Basically, initial cost approximations can be comparative or parametric. These are distinguished as the viability and desirability of the initiative are examined and a better understanding of scope, schedule and resources is established. Once sanction is given, these distinguished estimates create the baseline cost. By apportioning costs to the activities in a schedule, a profile of spending is formed (Association for Project Management, 2017).

Costs have four conceivable aspects including direct, indirect, fixed, or variable. To begin with, direct costs are exclusive to the project and consist of resources that are directly involved in managing the work. Secondly, indirect costs encompass overheads and other costs that may be shared across numerous activities or dissimilar departments. Third, fixed costs continue to the same irrespective of how much output is attained. For instance, the procurement of an item of plant. Lastly, variable costs, for instance, salaries, change reliant on how much resource is utilized. Most of all, the costs may be organized into a cost work breakdown structure in which dissimilar levels apportion costs into progressively more detailed classifications. The work breakdown structure is the foundation for any budget. This takes into account all of the work that is essential in the creation of the product of the project.….....

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