Learn how to create a cost management plan for your construction project in six steps. A cost management plan can help you estimate, budget, track, and control the project costs.

Typically, new cost estimates are made after each design phase, which are used to revise the project's cost plan. However, this method often leads to a loss of insight into how the current cost has changed from the initial approved cost, potentially causing "scope creep" and deviating from the original cost plan. To address this issue, it's strongly advised to implement a strategy of progressive elaboration. This approach ensures a clear, accountable, and systematic process for constantly refining and detailing the initial cost plan as more detailed information and accurate estimates become available. This allows the project team to define the project's scope of work more effectively in line with evolving design development.

A cost baseline is a time-phased budget that is used as a reference point for measuring and monitoring the cost performance of a project. It includes the estimated costs for all the scope of project activities over a specific period of time, typically represented in the form of a cost curve or an S-curve. The cost baseline is usually established during the project planning phase and serves as a baseline against which actual costs are compared to determine variances and assess the project's cost performance. It helps project managers and stakeholders to track the project's financial health and make informed decisions to control costs and stay within budget.

How can you create a cost management plan?

A cost management plan is a document that outlines how the costs of a project will be estimated, budgeted, tracked, and controlled. It is an essential tool for ensuring that your project stays within the scope, schedule, and quality parameters while managing the risks and changes that may arise. In this article, you will learn how to create a cost management plan for your construction project in six steps.

1 Define the cost baseline

The cost baseline is the approved version of the project budget that serves as a reference point for measuring the project performance and progress. To define the cost baseline, you need to estimate the costs of all the project activities, resources, and deliverables, and then aggregate them into a total project cost. You should also include a contingency reserve to account for uncertainties and potential risks.

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Bassam Samman
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Typically, new cost estimates are made after each design phase, which are used to revise the project's cost plan. However, this method often leads to a loss of insight into how the current cost has changed from the initial approved cost, potentially causing "scope creep" and deviating from the original cost plan. To address this issue, it's strongly advised to implement a strategy of progressive elaboration. This approach ensures a clear, accountable, and systematic process for constantly refining and detailing the initial cost plan as more detailed information and accurate estimates become available. This allows the project team to define the project's scope of work more effectively in line with evolving design development.

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Muneeswari Velusamy PGPMEx, BE, PMP® RMP®

Strategy Planning | Portfolio Planning | Project Controls | PMO | Digital Transformation | Data Analysis | Business Intelligence | Risk Management | Mentoring, Coaching & Training
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A cost baseline is a time-phased budget that is used as a reference point for measuring and monitoring the cost performance of a project. It includes the estimated costs for all the scope of project activities over a specific period of time, typically represented in the form of a cost curve or an S-curve. The cost baseline is usually established during the project planning phase and serves as a baseline against which actual costs are compared to determine variances and assess the project's cost performance. It helps project managers and stakeholders to track the project's financial health and make informed decisions to control costs and stay within budget.

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Klaus Michel

Civil Engineer | Cost Estimator at Remote Cost Seg
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Creating a robust cost management plan is pivotal for project success. Defining the cost baseline, as the approved version of the project budget, establishes a crucial reference for tracking performance and progress. This involves meticulous estimation of costs across project activities, resources, and deliverables, culminating in a comprehensive project cost. Incorporating a contingency reserve is equally essential to address uncertainties and potential risks. A well-defined cost baseline ensures better control and adaptability throughout the project lifecycle.

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Donnie Montes Belleza

Industrial Engineer | Project Management | Project Planning | Finance | Engineering
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Based on my experience, this is the most challenging part of the planning process due to the significant uncertainty surrounding future expenditures and the limited time available for confirmation before project execution begins. Therefore, it is crucial to clearly define our initial assumptions and understand the potential risks we may face over time to establish a necessary contingency. The more extensive the project, the more careful we must be in defining the cost baseline based on a proper risk assessment.

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Uzair Shoro

Finance Manager | Supply Chain Finance | Project Management | FP&A | Commercial Finance | Data Analytics | Insurance | Business Partnering | Process Automation | BPR
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Always devise a budget. Identify the cost drivers, activities, and relevant costs at the very beginning. Ensure the cost estimates are realistic.

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2 Establish the cost control system

The cost control system is the set of processes and tools that you will use to monitor and compare the actual costs with the cost baseline, and to identify and correct any deviations or variances. The cost control system should include the following elements: the cost performance indicators, such as the cost variance (CV), the cost performance index (CPI), and the estimate at completion (EAC); the cost reporting format and frequency; the change management procedures; and the roles and responsibilities of the project team and stakeholders.

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Uzair Shoro

Finance Manager | Supply Chain Finance | Project Management | FP&A | Commercial Finance | Data Analytics | Insurance | Business Partnering | Process Automation | BPR
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The best tool to control cost is my having a proper variance reporting mechanism in place. Weekly/monthly variance reporting and review sessions would definitely contribute towards a better performance.

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3 Define the cost allocation method

The cost allocation method is the way that you will distribute the project costs among the different project components, such as phases, tasks, work packages, or deliverables. The cost allocation method should be consistent with the project scope and the work breakdown structure (WBS), and should reflect the logical and proportional relationship between the project costs and the project outputs. The cost allocation method can be based on various criteria, such as direct or indirect costs, fixed or variable costs, or resource consumption.

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Uzair Shoro

Finance Manager | Supply Chain Finance | Project Management | FP&A | Commercial Finance | Data Analytics | Insurance | Business Partnering | Process Automation | BPR
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The cost allocation can be done on many criteria such as: 1.Allocating cost based on activity levels - Sales/Production/Hours. 2. Allocating cost based on percentages of profit/loss coming from different profit centers. 3. Allocation based on the judgements/relevancy.

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4 Identify the cost drivers and assumptions

The cost drivers and assumptions are the factors that influence or determine the project costs, such as the project scope, schedule, quality, resources, risks, and changes. You should identify and document the cost drivers and assumptions that you used to estimate and budget the project costs, and explain how they affect the cost baseline and the cost control system. You should also review and update the cost drivers and assumptions regularly, as they may change over time due to internal or external factors.

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5 Review and validate the cost management plan

The cost management plan should be reviewed and validated by the project team and the key stakeholders, such as the project sponsor, the client, and the contractors. The review and validation process should ensure that the cost management plan is realistic, accurate, complete, and aligned with the project objectives and expectations. You should also solicit feedback and suggestions from the reviewers, and incorporate any necessary changes or improvements into the final version of the cost management plan.

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6 Communicate and update the cost management plan

The cost management plan should be communicated and updated throughout the project lifecycle, as the project costs may vary due to changes in the project scope, schedule, quality, resources, risks, or other factors. You should communicate the cost management plan to all the relevant project team members and stakeholders, and ensure that they understand and follow the cost management plan. You should also update the cost management plan whenever there are significant changes or deviations in the project costs, and document the reasons and impacts of the changes or deviations.

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7 Here’s what else to consider

This is a space to share examples, stories, or insights that don’t fit into any of the previous sections. What else would you like to add?

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Donnie Montes Belleza

Industrial Engineer | Project Management | Project Planning | Finance | Engineering
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We should be prepared to be both flexible and strict, as there will be changes over time (savings and overexpenses) that will affect the plan. It is essential to recall the history we saved during the development of the cost baseline and the risk assessment to update and avoid unnecessary impacts on the total cost forecast.

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How can you create a cost management plan?

1

2

3

4

5

6

7

1 Define the cost baseline

2 Establish the cost control system

3 Define the cost allocation method

4 Identify the cost drivers and assumptions

5 Review and validate the cost management plan

6 Communicate and update the cost management plan

7 Here’s what else to consider

Construction Management

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How can you create a cost management plan?

1

2

3

4

5

6

7

1 Define the cost baseline

2 Establish the cost control system

3 Define the cost allocation method

4 Identify the cost drivers and assumptions

5 Review and validate the cost management plan

6 Communicate and update the cost management plan

7 Here’s what else to consider

Construction Management

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Thanks for your feedback

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