Business Management :: Cost Management

Areas of Service

Example Processes

Cost Engineering

Cost Engineering is the application of scientific principles and techniques to problems of estimation; cost control; business planning and management science; profitability analysis; project management; and planning and scheduling. - Association for the Advancement of Cost Engineering


Job Costing

Job Costing systems allow a project manager keep track of cost of each job/project, maintaining data which is often more relevant to the operations of the business. A successful Job Costing system is the difference between knowing your company is profitable at the bottom line versus knowing which specific products/services/jobs are not profitable. Eliminating or re-pricing these would increase the bottom line.

Example: I often have multiple crews working on multiple types of projects throughout the course of a week or even single day. Single large purchases of lumber could be used by four or five different jobs. By implementing a job-costing system last year, I now know that three of my decks are over budget, but the remaining decks have high enough profit margins to make the bottom line look good. 


Work Breakdown Structure

The Project Management Body of Knowledge (PMBOK) defines the Work Breakdown Structure as a "deliverable oriented hierarchical decomposition of the work to be executed by the project team." This is basically a visual representation of all work to be performed broken out into manageable sections. A well-conceived Work Breakdown Structure (WBS) not only clearly visualizes your SOW for both you and your client, but defines how you capture the cost and revenues of the project, allowing you to budget and control costs at smaller levels of detail. Think of it like an personnel organizational chart showing who reports to whom, but for your costs.

Example: Before I begin my deck, I want to think through what level of analysis I want access to during and after the project - this will dictate to what level of detail I will manage the project costs. Do I want to know how much I spent on design versus building? Is there a fire pit or gazebo I want to separate in my reporting? Am I building multiple decks that will share resources, but need to be billed separately? Or is this a simple enough project where I don't care about the pieces and just need the total number?



Budgeting

Budget is a tool that owners use to plan and control the use of scarce resources, showing the company's objectives and how they intend to acquire and use those resources to attain those objectives. Thisis not limited to finances, but can and should be used for managing personnel, time, cost, revenue, and any resource. Once your Scope of Work(SOW) is defined and your Work Breakdown Structure (WBS)is decided, budgets are used to manage cost at those lower levels of detail.

Example: Based on my WBS, I want to track my costs to a Design Phase and Build Phase of my deck. Once my estimate is built, separating all costs into those phases, I can create subsequent budgets to manage each phase as well as the entire project.


Forecasting

Forecasting is a technique that uses historical data as inputs to make informed estimates that are predictive in determining the direction of future trends. Itis useful in areas such as purchasing (prepare for bulk orders or negotiate volume pricing), seasonal expenses or sales, cash flow, and preparing budgets.

Example: Based on prior years, I am forecasting sales of four decks this quarter and six decks next quarter. Using this information, I can negotiate pricing from my favorite lumber vendor, estimate my expenses and cash flow for the year, and prepare to hire additional labor.


Scope of Work

A project's Scope of Work (SOW) should encompass all milestones, reports, deliverables, end products and associated timelines that are expected to be provided. Defining a Scope of Work (SOW) is the most important part of the project life cycle. If you have an incorrect or incomplete SOW, you could be performing work for free, either due to miscommunication from your end or your clients'.

Example: I agree to build a deck for you, but fail to properly define my scope of work; you (my client) may be thinking it includes painting and staining. This can lead to a painful discussion on what has been paid for and what hasn't with an end result of me possibly staining a deck for free.



Change Management

A process that ensures potential changes to the Scope of Work are recorded, evaluated, authorized and managed. A poor Change Managementprocess encourages chaos and miscommunication. A clear and transparent process invites communication and follow-on work due to the improvement of the working relationship.

Example: Because my Scope of Work was well-defined, I can show you that staining was not included in our deck project. You request we add staining, so I provide a new estimate capturing those additional costs.


Cost Accounting

The recording of all the costs incurred in a business in a way that can be used to improve its management. A successful Cost Accountingprocess is the difference between knowing your company is profitable and knowing that actually only 60% of your product line is profitable. 

Example: I buy many types of wood from many different suppliers to build my decks. Since I don't differentiate any one lumber purchase from each other, I have no visibility on if I am spending too much or if I am marking my estimates up correctly.


Estimating

Estimating requires a thorough understanding of your Scope of Work, all applicable costs, and relevant work-load drivers. If you don't know what your unit costs are (not only what each widget costs you but every piece of every widget as well) or how long the work actually takes, your estimates are most likely inaccurate. This means you are either spending more on your jobs than you are billing, or are pricing yourself out of the market unnecessarily.

Example: I build an estimate to build a deck. My partner ends up executing the work and is considerably slower than I estimated. Moving forward if I bill based on his skills, I may be too expensive, but if I continue to bill based on my estimates, I'm losing money.