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Cost management

With an ever-changing global economy, it’s more important than ever for organisations to look at ways to reduce operating costs, allocate budgets effectively and have sound cost management to survive and grow the business.

What is meant by cost management?

Cost management is the control of actual or forecasted expenditure of an organisation. It involves controlling costs which will help you to estimate and allocate your budget effectively. It’s about increasing an organisation’s productivity, enhancing profitability and ultimately plays an essential role in planning, controlling, and making business decisions. Cost management forms part of procurements objectives, budgeting, project management and contract management and is vital for any organisation.

 

Why is cost management important?

With an ever-changing global economy, it’s more important than ever for organisations to look at ways to reduce operating costs, allocate budgets effectively and have sound cost management to survive and grow the business. Cost management should not be limited to periods of crisis but should be firmly embedded within your procurement function.

Cost management helps you to prioritise financial goals and anticipate expenses. Not only is it a major part of project planning, but it ensures you have more cash available for other initiatives and gives you a competitive advantage.

 

What is the cost management process?

Cost management starts at the planning phase and continues throughout the process. Take a look below at the four key areas of cost management.

Plan

The first stage in the process is to plan your resources. A resource is typically anything that will help you reach the end goal of your projects, such as equipment, time, and staff resources. You’ll need clear objectives and a project plan to help you understand what resources are needed. You could also collect information about past projects or similar ones to understand the time and effort involved too.

Estimate

Estimate how much it will cost you to procure the resources needed. Gather as much pricing information you can and get real price quotes to inform your estimates. Just remember that pricing information and quotes can change as time goes on.

Budget

Your budget should be detailed and sets out how much you plan to spend for what and by when.

Control

Cost control is the important part of the process. You’ll need to record and account for all costs throughout the project and make any adjustments if you need to and compare actual costs with your budgets and estimates. You’ll need to review the costs regularly and share updates with all stakeholders too.

 

Tips for effective cost management

Cost management is integral to procurement. Here are some tips for ensuring your cost management process effective.

  • Cost management involves a degree of flexibility and transparency. The whole organisation needs to align on costs, and you’ll need to be agile when controlling your costs.
  • Benchmark yourself against competitors, see what they’re doing well.
  • Use digital solutions to help you automate tasks. This helps to eliminate errors and improves efficiency as you’ll be automating routine admin tasks, allowing you to focus on other areas.
  • Identify any expenditures that could make you exceed budget and learn from them.
  • Have a clean sheet approach to budgeting. Usually, budgeting uses the previous year's cost as a baseline. Estimate the budget bottom up based on business activity.

Financial management

Explore how procurement can apply financial analysis and the techniques used to minimise costs and reduce risks. Explore Financial Management in Procurement

Financial management key themes

Activity Based Costing Whole life costing Total cost of ownership Spend analysis
Value analysis CIPS Contract Management Cycle CIPS Procurement Cycle

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Access the latest research, whitepapers and tools across a range of key procurement and supply topics.

Financial management in procurement

This CIPS guide explores the importance of financial management in procurement and supply management (P&SM). It will outline the principles of financial management and give you tips on how to implement performance monitoring.

Whole life costing

This guide presents the principles and practice of whole life costing (WLC), and how you can use this method to assess your options, particularly when approaching a high-value or high-risk procurement.

Total cost of ownership

This knowledge paper offers you insights into total cost of ownership (TCO), consideration of the price of the whole transaction through to disposal of the asset, not just the cost price paid. The paper also encourages awareness of impacts of choice such as sustainable impacts.

Spend analysis

This document will explore the basics of spend analysis and how the process can help you to improve visibility of spend, identify possible savings, and better align procurement spend with your organisation’s wider strategy.

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