Cost Breakdown Structure

In the article below, the authors Jon & Steve will explain the Cost Breakdown Structure as a terminology in Project Management and everything improtant about it.

Project Cost Management

An essential part of project management is cost control, and before we can control the cost, we need to understand the cost breakdown structure.  Project cost management is the process of planning, monitoring, and controlling the budget of a project.

It involves estimating the costs of the project's resources (such as labor, materials, and equipment), creating a budget, and then monitoring and controlling actual costs as the project progresses.

The goal of cost management is to ensure that the project is completed within budget without sacrificing quality or scope expectations. Techniques used in project cost management include cost estimating, budgeting, cost control, and cost forecasting. Effective cost management requires close collaboration between project managers and project teams, as well as regular communication with stakeholders.

Work Breakdown Structure similar to Cost Breakdown Structure 

By introduction and a flashback, a Work Breakdown Structure (WBS) is a hierarchical decomposition of a project into smaller, more manageable components. It is used to define and organize the total scope of a project, and it helps identify all the tasks and deliverables that need to be completed to achieve the project's objectives.

Similarly, a Cost Breakdown Structure (CBS) is a hierarchical decomposition of the costs associated with a project. It is used to identify and organize the costs of the project, and it helps to ensure that all costs are accounted for and that the project stays within budget.

Why Use a Cost Breakdown Structure? 

The business case for the project compels the project to stay within an expenditure on behalf of the organization. The cost breakdown structure helps the project manager and the team to focus on the controls of the cost. A cost breakdown structure (CBS) is used to analyze and understand the costs associated with a project or product and to identify areas where cost improvements can be made. Some of the main reasons to use a CBS include:

1. Cost control: A CBS allows project managers and other stakeholders to see the breakdown of costs and identify areas where costs are higher than expected, so they can take steps to control or reduce those costs. 
2. Budget management: A CBS helps project managers to understand the total cost of a project and to manage the project budget more effectively. 
3. Decision-making: A CBS provides a clear picture of the costs associated with different aspects of a project, which can help stakeholders make informed decisions about how to allocate resources and prioritize different activities. 
4. Communication: A CBS can be used to communicate the cost of a project to stakeholders, such as project sponsors and other key decision-makers, in a clear and understandable way. 
5. Identifying cost savings: A CBS allows us to identify areas of cost savings by comparing the actual costs with the estimated costs and identifying the variances. 
6. Identifying cost drivers: A CBS allows us to identify the cost drivers and the impact of changes on the cost. 
7. Facilitates change management: A CBS allows to understand the impact of any changes on the project cost and facilitates change management.
8. Project closeout: A CBS can be used during the project closeout phase to review and analyze the actual costs of the project and to identify areas for improvement in future projects.
9. Project reporting: A CBS can be used to report on project progress and performance to stakeholders, including the project budget, actual costs, and any variances.

Two Types of Cost Breakdown Structures

Product Cost Breakdown Structure (PrCBS)

Some projects have the objective of delivering a product to the customer.  A successful project will stay within budget, but deliver the described product at the desired cost. That is the objective. The project team has the product cost breakdown structure (PrCBS) at their disposal.

The PrCBS is a hierarchical representation of the costs associated with a product. It is used to organize and classify the different costs that make up the total cost of a product. The PCBS typically includes the following levels:

1. Product level: This level includes the overall cost of the product, including materials, labor, and overhead costs.
2. Component level: This level breaks down the product into its individual components, such as raw materials, subassemblies, and finished goods. Each component has its own cost associated with it.
3. Sub-component level: This level further breaks down the components into specific sub-components, such as specific raw materials, parts, or subassemblies.
4. Bill of materials (BOM) level: This level includes the detailed list of all the materials, parts, and subassemblies that make up the product, including the quantity and unit cost of each.

The PrCBS approach can be extended to include manufacturing elements and to track and control manufacturing and product costs, identify cost savings opportunities, and make informed decisions about manufacturing line and product design and pricing. It is also used to communicate product costs to stakeholders and to report on product performance and profitability.

Project Cost Breakdown Structure

A project cost breakdown structure (PCBS) is a hierarchical representation of the costs associated with a project. It is used to organize and classify the different costs that make up the total project budget. The PCBS typically includes the following levels:

1. Project level: This level includes the overall project budget and any contingencies or reserves.
2. Work package level: This level breaks down the project into smaller, manageable components called work packages. Each work package has its own budget and is responsible for a specific piece of the project.
3. Cost element level: This level breaks down the work packages into specific cost elements, such as materials, labor, equipment, and overhead.
4. Sub-cost element level: This level further breaks down the cost elements into sub-cost elements, such as specific materials, labor categories, or equipment rentals.

The PCBS is used to track and control project costs, identify cost overruns or savings, and make informed decisions about project changes or adjustments. It is also used to communicate project costs to stakeholders and to report on project progress and performance.

How to create a cost breakdown structure

We will need our entire team to construct this breakdown, just like we would if we were to create the work breakdown structure.  We need a variety of domains and disciplines.  If historical records exist, this can provide some guidance for efforts in identifying typical costs breakdown.

Graphical Representation 

A graphical representation of a cost breakdown structure can be represented in various ways, it can be a bar chart, pie chart, or a hierarchical tree diagram. It depends on the type of the project, product and the company's preference. The structure will typically show the main categories of cost, such as materials, labor, and overhead, and then break down each category into subcategories and specific cost elements.

Steps:

1. Identify the project's objectives and deliverables.
2. Break down the project into smaller, manageable components.
3. Identify the cost drivers for each component and assign cost estimates.
4. Identify cost elements: Identify the different cost elements that make up the project, such as direct costs (e.g., materials, labor), indirect costs (e.g., overhead, administrative expenses), and capital costs (e.g., equipment, facilities). 
5. Create a hierarchical structure: Organize the cost elements into a hierarchical structure, with the highest level being the total project cost and the lower levels breaking down the cost into more specific components. 
6. Review and refine: Review the CBS to ensure that it accurately reflects the costs associated with the project and make any necessary adjustments. 
7. Update regularly: Regularly update the CBS as the project progresses to ensure that the costs are up to date and accurate. 
8. Link to project schedule: Link the CBS with project schedule to ensure that the costs are in line with the project progress. 
9. Communicate: Communicate the CBS to all relevant stakeholders, including project sponsors, project managers, and other key decision-makers, to ensure that everyone has a clear understanding of the project costs. 

Linking The Work Breakdown Structure and Cost Breakdown Structure 

Lastly, projects should have a Work Breakdown Structure (WBS). As the CBS is developed the two documents can be linked even though they serve different purposes.

The two structures can be linked by assigning costs to the appropriate WBS element.

This allows the project team to understand the cost of each deliverable and the cost of the project as a whole. This linkage helps project managers to understand the impact of changes in project scope, schedule, and resources on the cost.