Estimates are great, aren't they? They're quick and easy to come up with, applicable in a range of situations – and best of all, they're not expected to be completely accurate.
But do you know when estimates aren't so great? When they magically turn into approved budgets, and get presented to you along with a project deadline.
The good news is that there's a tool to help project managers regain cost control and bring order to the chaos. Whether you're planning for a new project, or working with a budget based on estimated costs, a cost breakdown structure lets you see exactly what you're dealing with.
In this article, we'll explain what a cost breakdown structure is, why it's important, and how to make one in five straightforward steps.
A cost breakdown structure (CBS) is a document that details all the costs incurred in a project. Each line or row in a CBS stands for a cost type or item, work or organizing activity.
Because a CBS works at the task-level first, it's a form of bottom-up analysis. These tend to take longer, but be more accurate, than top-down estimation approaches (where, for example, you might budget for a project based on the total cost from a similar project you already completed).
Cost breakdown structures are a key part of project cost management. Rather than just being aware of the total cost of the entire project, you get granular information on the costs involved in each of the workflow steps. This gives you insight into hidden costs that you might not have been aware of, and allows you to increase the accuracy level with which you control your project budgets.
The cost breakdown structure is a bit like the Work Breakdown Structure (WBS), but with a focus on cost. A work breakdown structure shows all the activities and tasks involved in the project. A cost breakdown structure complements this information by detailing the costs that will be incurred during the implementation of those tasks.
Although the documents are separate, a cost breakdown structure depends on a detailed and accurate work breakdown structure. After all, the cost items and categories you determine are based on the tasks and activities you identified in your work breakdown structure.
Some organizations don't use a CBS in project management, and instead incorporate a degree of financial information into the WBS. Technically, this means the WBS is functioning as both the operational and financial hierarchy of the project. The advantage of this single hierarchy approach is that it saves you from the tedious task of detailed cost estimating.
The disadvantage, of course, is that it's hard to be absolutely accurate in your project's cost estimate without the level of detail and careful planning involved in a CBS. Here are some more ways a CBS can help your project.
When you split your spending down to small tasks, it's easier to monitor and control your costs. As well as improving the accuracy of your project budget in the planning stages, the project cost breakdown allows you to compare your budget to the actual costs in different cost categories, so you can see exactly where any overspend is occurring.
A good CBS design makes it easy to see where your project is deviating from the plan, and helps you detect these deviations early on. This insight allows you to take action to improve cost efficiency, ensure the project remains on track, and avoid compromising project outcomes.
It's rare for a project to come in on-budget: additional costs or unexpected price changes often lead to variation between predicted cost and actual cost. A CBS allows you to pinpoint the cost category or categories where these additional costs are arising. Understanding changes in these cost drivers helps you adjust your expectations for current projects, as well as increase your budgeting accuracy for future projects.
Despite its importance and criticality, project managers often don't create a cost breakdown structure. This is because the CBS function is typically missing from most project management and scheduling tools, and it can seem daunting to create a CBS from scratch.
But actually, making a CBS doesn't have to be hard. Here, we'll break down the process into five easy steps.
Before you can identify your costs, you must first determine what your project entails. You can do this by looking at your work breakdown structure in detail, and work out the components that will contribute to the project costs.
The next step is to estimate the work cost for each task or activity you have identified in your WBS. These costs are called labor costs or direct costs. For example, the time it takes for your team members to finish each work package in the WBS contribute to your direct costs.
Estimating time for different tasks can be challenging, especially if you're not directly involved in the implementation of those specific tasks. Various cost estimation techniques exist to help you estimate these values, including parametric estimation, one of the formula-driven estimation tools based on data from previous projects.
Once you've estimated the costs of work for all the tasks, you can use them to work out the final cost of labor for your project.
The next step is to look at the cost of the materials needed to complete each task you identified in your WBS. These costs, referred to as material costs, include a few different cost types:
Whether material costs end up being one of the key elements of your CBS depends on the industry you're working in. For example, a digital agency might have low materials costs, whereas producing brochures and leaflets will lead to higher material costs.
No matter how accurate your estimates are, you should still allow for some contingency in your cost breakdown structure. A wide range of factors will affect your overall material and direct costs, some of which you might not even anticipate.
For example, it may take your carrier a longer time period to move your purchased materials from the supplier to you, thereby increasing logistics costs. Or, one of your team members may get sick, making them unable to complete a specific task on time.
Just as a good WBS identifies potential risks and contingency solutions, the CBS should also consider cost contingencies. This will improve the accuracy of your cost structure when changes occur.
Ensure your CBS also includes an appropriate allocation to overhead costs. Overhead or indirect costs include various costs that aren't related to specific tasks, but are necessary for the company to function and the project to take place. Administrative costs, for example, are an overhead cost that should be considered in the CBS.
The last step in creating a cost breakdown structure is to check your estimates against your available budget. In many project-based companies, the initial budget is set from a top-down analysis, which may not have a high accuracy.
So, once you've created your CBS, you need to check whether your total estimated cost correlates with the initial estimates. If it does, you can be confident that the financial aspect of your project will be smooth sailing. If your CBS comes in higher than the original budget, you can look at ways to control costs.
A cost breakdown structure (CBS) breaks down cost data into different categories, and helps you manage costs efficiently. It is a crucial part of the project planning and management process, as it allows you to gain better insight into how much you spend and what you spend your project budget on. When you have a solid structure in place, you can have better control of your project costs to avoid going over budget.
Creating a CBS involves starting with a detailed and accurate WBS, and then assessing the labor, material and other costs involved in each step. Although the process can seem daunting, modern resource management solutions can help in the process. Through categorizing and allocating resources to projects, and reviewing past data on project expenses, you'll be able to access the data you need for your CBS in a fraction of the time it would take to work it out manually. And that gives you more time to focus on the practical side of managing your project.
Managing a growing team is of course exciting. But, if we're being honest, it is also a little daunting. Fortunately there are steps you can take to keep the situation calm and controlled.