15 Nov Real time cost tracking is the key to project success
Cost of Goods Sold- or COGS for short- should be familiar to anyone who runs a company or works in project management. It’s that greedy number that is always eating into a project’s profit margins. Most of the time it seems that our COGS number is always working against us. But when that number is kept accurate and reported often enough, we can actually use it to keep costs under control and profit margins where we’d like- in the green.
You might think that tracking materials expenses or COGS wouldn’t be particularly difficult or even particularly critical to a project’s success. After all, you prepared a budget or bid before the project even began. If you did your homework at that point, you got firm prices or solid estimates on everything you would need to buy from somebody else. So you might not expect much variation on the COGS line.
COGS, or “materials” in some organizations, covers a lot of different stuff. It covers actual materials, like the lumber for building a house or the sheet metal for the casing on a machine. It also includes any outsourced services. If your project is a marketing campaign, your “materials” might include the cost of a freelance copywriter or the services of a design shop. If it’s a new piece of software, “materials” could include chunks of the programming purchased from outside contractors. With so many different aspects to COGS, it’s easy to see how it can quickly spiral out of control.
As experienced project managers know, however, materials or COGS expenses are notorious as a source of budget overruns. Sometimes the reason is an incorrect budget estimate. Perhaps the printer gave you a quote for 10,000 brochures rather than the 100,000 you were planning on. Your engineers tell you the plan to use regular steel for a large structure won’t work; you need an expensive alloy instead.
Other times, unforeseen circumstances raise your costs. A job turns out to be more difficult and time-consuming than anyone expected. The marketing copywriter has produced six drafts, but the client doesn’t like any of them. Such things seem to happen on every project. The contractor and the client may eat part of the cost overruns on a project, but you’re likely to have to eat some as well.
Because unforeseen circumstances are an inevitable reality on any project, an accurate COGS estimate from week to week is essential. The reason is simple: a project’s key number is gross profit, and any project’s gross profit is directly affected by COGS. If your COGS estimates are inaccurate or outdated, then everything you calculate using those estimates will be wrong as well. Frequent and accurate cost reporting on a project is a critical step to keeping your projects profitable.
Source: Project Management for Profit by Roger Thomas, Joe Knight and Brad Angus, together with input from Joe Cornwell and Joe Van Den Berghe from Setpoint Inc. Setpoint has a 25-year history of successfully designing and implementing custom rides and attractions for the top amusement and theme parks in the world.
Manuscript info: Why you need careful tracking of materials: Pg. 31-32