Use Cost Accounts to Manage Budgets with More Precision

Many projects have one overall budget that includes all of the project labor costs, equipment costs, materials costs, etc. This is fine for smaller and medium-sized projects. However, as a project gets larger it helps to have the overall budget broken down into smaller portions. This is a similar to the decomposition technique of breaking down project deliverables into smaller pieces using a Work Breakdown Structure (WBS). It is easier to understand and manage things that are smaller instead of things that are bigger. Having your budget allocated at a more granular level allows you to keep better control of the details and may point out potential budget trouble quicker than having everything rolled up into one consolidated project budget.

Cost accounts are used to allocate the budget at a lower level. Your budget is allocated in each detailed cost account and the actual project expenses are reported at that same level. The cost accounts can be established in a couple of ways.

• By resource type. One way is to create a cost account for each resource type.  In this approach, you could have a cost account for internal labor, external labor, equipment, software, training, travel, etc.
• By WBS work package. Another way to set up the cost accounts is based on the WBS. You may set up a separate cost account and budget for each phase,  milestone, deliverable or work package.
• By both WBS and resource type. If you set up cost accounts for work packages on the WBS, you can also track the resource types within each work package. these various resource types can be tracked with sub-account numbers within the cost account. Of course, the more detailed your cost accounts are, the more work you will have setting up, allocating and tracking the cost account budgets.

All of these techniques allow you to allocate and track costs at a more detailed level. If you manage the entire budget as one large chunk of money you may not see potential budget risks.

For example, let's say your estimated cost is one million dollars. You can allocate the budget into the different works packages on your WBS. For example:

• Work package A - $20,000
• Work package B  - $50,000
• Work package C - $100,000
• etc...

As the project progresses, it may turn out that Work Package A actually costs $40,000. Because your budget is allocated at this lower level, you can see immediately that you are trending over budget. This same $20,000 overage might be harder to detect of you only have one large one million dollar budget. You might end up catching this problem, but you may not see the trend early enough. Cost accounts give you a more detailed level of precision.