How to Calculate Actual Cost in Project Management

When managing a project budget, it’s critical to track the actual cost of the project compared to the planned budget. This gives you visibility into the total money spent on project expenses so far to determine if you’re over or under budget.

Monitoring these costs in real-time also allows you to identify potential cost savings and areas where you may need to allocate more funds, and gives you the power to keep costs on track and avoid budget overruns.

In this post, we’ll explore the actual cost in project management which is one of the key Earned Value Management metrics that enables you to monitor if your project is on track in terms of both budget and schedule.

What is Actual Cost in Project Management?

Actual cost (AC) is the total money spent on a project up to a certain point in time and represents the realized cost incurred for the work performed so far.

When managing a project, you must track the actual costs to ensure your project stays within the approved budget.

Calculating the actual cost involves adding up all labor, materials, overhead, and any other project spending expenses. It provides the true picture of the total funds expended on project activities.

Monitoring actual cost is key to identifying if your project is over or under budget. Comparing it against the planned budget helps you control costs, find savings, and avoid overruns.

Actual cost data is a crucial project management metric to track project performance and enable you to take corrective actions and optimize spending to keep your project on budget.

Actual Cost Formula in Project Management

Unlike other project management metrics, there is no fixed formula to calculate actual cost (AC). It simply represents the total money spent on the project so far.

To determine the actual cost, you need to add up all the expenses that have gone into the project until a certain date.

This includes direct costs like labor, materials, and equipment, as well as indirect costs such as administrative overheads, rentals, and utilities.

Any scope changes or additional expenses approved during the project should also be accounted for in the actual cost.

As a project manager, you can calculate the actual cost at any time by tallying all receipts, invoices, and other financial records for the project.

This gives you the precise, up-to-date figure spent on the project so you can compare it against the planned budget and take corrective actions if required.

How to Calculate Actual Cost in Project Management

As earlier iterated, calculating the actual cost is key to tracking your project’s spending against the budgeted cost.

Here are the steps to calculate the actual cost:

1. List all direct labor, materials, equipment, etc. costs incurred on the project so far.
2. Add all indirect costs such as administrative overheads, utilities, insurance premiums, etc.
3. Include any change requests or modifications that impact the project cost.
4. Tally all invoices, receipts, bills, and other financial records for the project to date.
5. Add up the costs for all completed and in-progress project activities.
6. Apply cost accounting principles to segregate shared or indirect expenses.
7. Exclude any sunk costs that do not contribute value to project objectives.
8. Remove any contingency reserves that are still unspent.
9. Consolidate the actual cost figures for all accounts related to the project.

Compare the total actual cost against the planned budget for insight into cost deviations.

You need to follow these steps periodically to determine the accurate actual cost of your project which helps you control spending, optimize the use of funds, and take corrective actions to avoid budget overruns.

Importance of Actual Cost in Project Management

Tracking actual costs is critical throughout the project lifecycle. Here are some reasons why it is an important project management metric:

Monitor Spending

Comparing actual costs against the budgeted costs lets you monitor if the spending is aligned with the cost management plan. You can identify any cost overruns and take timely corrective actions.

Control Costs

Analyzing actual costs helps you identify opportunities to optimize resource usage, improve processes, or negotiate better deals with vendors to control project costs.

Identify Trends

Reviewing actual costs over time can uncover spending trends and seasonal variances in resource rates. These insights help with future cost estimates.

Forecast Accuracy

Actual costs influence the estimate at completion (EAC) and determine forecast reliability. Accurate actual cost data improves the precision of project cost forecasts.

Performance Reporting

Actual cost metrics enable assessment of project cost performance and provide key data for progress and status reporting.

Actual Cost Example

Let’s say you are managing a software development project with a total approved budget of $500,000 spread evenly over 12 months.

After 3 months, the actual cost incurred on the project so far is calculated as:

• Software developer labor costs: $60,000
• Hardware equipment purchase: $15,000
• Software licenses purchase: $5,000
• Cloud hosting services: $3,000
• Electricity and infrastructure overheads: $2,000

Total actual cost after 3 months = $60,000 + $15,000 + $5,000 + $3,000 + $2,000 = $85,000

This actual cost of $85,000 is then compared to the planned budget for the first 3 months to determine if the project is over or under budget.

Since the budget in this scenario is spread evenly, the planned budget in 3 months = ($500,000 / 12) * 3 = $125,000.

You can see that from the actual costs so far, the project is running under budget.

Actual Cost vs Total Cost

While estimating project costs, it is important to understand the difference between actual cost and total cost.

Actual Cost

• Represents the real money spent on the project so far
• Calculated by totaling all expenses incurred to date
• Changes continuously based on work completed

Total Cost

• The overall budgeted cost for completing the project
• Includes all planned direct and indirect costs
• Defined at start and typically stays fixed for the project duration
• Equals the total budget at completion (BAC)

The actual cost keeps increasing while the total cost remains relatively constant for a project.

Conclusion

Tracking actual cost provides the true picture of money spent on the project so far and helps compare it to the planned budget.

By monitoring this metric, you can identify cost overruns, find opportunities for savings, and take corrective actions to avoid budget deficits.

Keeping a close eye on actual expenditure is key to controlling project costs and optimizing the use of funds to deliver projects within the approved budget.

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