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The ultimate guide to project cost management

In this article we’ll show you how to develop an accurate project plan, practice effective project cost management, and ensure you remain profitable.

Introduction

Web agency Juicyorange used to consistently under-quote clients who wanted to work with a particularly finicky piece of web technology. “We would say, ‘Yeah, we know how to do that. It’s got an API and we’re good at that stuff. We can get it done,’” says founder Mark Robohm. “And then we absolutely hemorrhaged time with it. It took two or three of those jobs in review to see how bad it was. We would never do another fixed bid project with that software again.” They’re not alone—research shows that more than half of software development projects go over budget. And software is just the tip of the iceberg. No matter what industry you’re coming from, project cost management can be a huge challenge. 

Why do projects end up costing more than you bargained for, in spite of the most diligent planning and budgeting? You can blame the planning fallacy—a belief we can complete tasks in less time, or for less money, than is realistic. 

This happens because when we envision setting out to complete a project, we don’t imagine the setbacks that we’ll face along the way. It’s easy to imagine the path to project completion as a smooth, straight line—but more often than not, there will be bumps in the road. And not just bumps, but boulders, overgrown patches, and flooded sections. All of these setbacks increase a project’s time and expense.

Doghouse Diaries

So how do you develop a more accurate picture of your project path, practice effective project cost management, and ensure you remain profitable? It all comes down to making more realistic estimates, keeping a close eye on your project burn, and ensuring your clients and stakeholders understand the value of your work.

1. Use time tracking to make more accurate project cost estimates

To overcome the planning fallacy, you need data about how much projects cost in reality—not just in your imagination. And while you can’t see the future, you can do the next best thing: Learn from the past. 

You can use time tracking to log your hours and gradually build an archive of past projects. This is the approach companies like The Charles use. “We can look at previous projects and say, ‘Okay, well how does this stack up against this similar type of project? Oh, wait, we're way over. Why? Well, oh, because we mis-sold or misrepresented what we thought this was going to be,’” says CEO Aaron Edwards. They’re able to make more accurate project cost estimates—leading to better overall project budget management—because they have a log of past work to check their numbers against.

2. Monitor your project costs on an ongoing basis

Whether you bill hourly or on a flat rate basis, it’s important to understand how much of your project budget you’ve used up and how much you have left. Logging your time can help with tracking your project budget. 

“It’s important for the team to understand where they are on projects,” says Alexander Adamick, Founder of Adamick Architecture. “So we establish a budget on every single project. We go through, and we look at the profitability of everybody’s projects and understand where time is the expense.” To help with project cost management, they have a weekly check-in to see how everyone’s projects are going. If they see a project veering off budget, they take the opportunity to course-correct.

Harvest helps monitor project costs.

3. Establish boundaries about the kinds of projects you’ll take on

Another important component of project cost management is knowing when to say no. Certain types of projects may simply not be profitable for your business, or you may need to reconsider how you price them to make them profitable (for instance, opting for an hourly rate rather than a fixed bid). 

By monitoring and tracking your work, you can better understand what kinds of projects bring in money. For instance, maybe smaller projects simply aren’t profitable for your team, so you introduce a minimum spend. Alternatively, you make it a practice to add a cost buffer to your less profitable projects and, if you stay under budget, refund clients the difference.

4. Prevent your invoices from getting questioned

If a client pushes back on an invoice, it can result in frustrating back-and-forth, lost trust, and plain old financial losses. Putting a detailed cost breakdown on your invoices can make it clear exactly what your customers are paying for. 

Think about your invoices like receipts from a store. If they don’t show your clients exactly what they bought and how much it cost, they’re going to have questions. They might feel anxious that they were overcharged. But if you have line items for each task along with the name of the person who completed it, it all becomes much more obvious and transparent—putting your clients at ease. If you use a time tracking tool like Harvest, you can generate detailed invoices that show your clients exactly how much time was spent on each task.

5. Show your value

If you’re doing a client a favor or offering them a significant discount, they probably won’t notice—unless you draw their attention to it. “The reality is servicing a client takes a lot of time and it isn’t necessarily noticed by the client unless they see it,” says Mark Robohm, Founder of Juicyorange. “A lot of times we’ll send clients an actual invoice accounting for our time and then put a significant discount so they can see how we work, ‘Ok, we spent 25 hours on you this month, but we’re only charging you five. We do not bill like lawyers, we’ve got your back.’” 

Making your value visible in your invoicing allows you to set expectations with your client around what your work is worth, while maintaining good relationships.

6. Make conscious trade-offs

There’s a flip side to effective project cost management. Sometimes you will need to lose out on some money in order to maintain good relationships with your customers or stay competitive. And that’s okay—but it is important that you understand what these trade-offs are and why you’re doing them. 

For instance, you may decide to not bill clients for time spent in meetings. This will cost you a little, but the benefits you gain in terms of making clients feel they’re getting good value may well be worth it. It’s a give and take. After all, In the long run, it’s better to have a good reputation than try to squeeze every last penny out of every project. Just be thoughtful about where you decide to take calculated losses in the context of your overall business health. 

Achieving project profitability

Project cost management comes down to managing expectations—both internally and with customers. You need good data to take care of both. Using a tool like Harvest can help you understand and compensate for your own biases, giving you a more accurate picture of what your work costs to produce. 

In turn, being able to share this data with clients and stakeholders can help them better understand your value. The more informed everyone involved is, the more profitable your project is likely to be.