A Cost Breakdown Structure (CBS) is a breakdown or hierarchical representation of the various costs in a project. The Cost Breakdown Structure represents the costs of the components in the Work Breakdown Structure (WBS). The CBS is a critical tool in managing the project lifecycle, especially the financial aspects of any project by creating a structure for applying measurable cost controls.
The image above is an example of a typical CBS. This one resides within the ERP and is directly linked to the WBS.
The CBS is required for Project Business to appropriately manage the financial aspect of any project. It is the planning structure financial controllers use to create budgets and calculate various financial metrics such as: estimate at completion, cost to complete, variances and earned value.
Typically, the Cost Breakdown Structure is missing completely in most project tools, including project management, scheduling and the ERP. Therefore, a CBS is either not utilized or it is created and managed in a spreadsheet.
CBS Related Problems You May Be Facing
Whether or not you use a CBS in your business, there are many common project cost management problems that project-based companies experience. Are any of these familiar to you?
Spreadsheets are at the core of your cost management processes.
To eliminate spreadsheets, gain real-time insight into your business, and achieve full financial control of your projects, you need an integrated project business system.
Your project estimates are not accurate, consistent, or timely.
You need a systemized way to produce project proposals that reflect how the project will actually go.
You don’t really know if a project is profitable and on budget until it finishes.
You need an automated way to do estimate-at-completion (EAC), so you consistently reevaluate your projects as they progress.
You have no way to track costs accurately as the project progresses.
You need a single system that integrates the operations and financials, so they work together seamlessly. As tasks are completed, costs are reported instantly.
Earned value analysis is just too difficult to do consistently.
You should be able to calculate earned value automatically and in real-time.
You don’t know when or how a project’s margin slips.
You need an automated way to monitor every aspect of every project and alert you to any deviations as they happen in real-time.
If a CBS is not used, then the WBS serves as both the financial and operational hierarchy of the project. This is a major project governance flaw for project-based companies. It is imperative to detach the cost and work breakdown structures, particularly for large projects. If your project involves hundreds or thousands of tasks, it will grow to a point where it becomes impractical to manage the project financials based on the schedule (WBS). At this point you need to employ a CBS parallel to your WBS. The CBS will enable you to manage costs at an appropriate account/GL level or category and create meaningful, real-time financial analysis directly connected to the WBS.
Companies attempting to manage projects financially and operationally using a single hierarchy (the WBS) are setting themselves up for failure. A single hierarchy contains insufficient details for operational planning and is too granular for budget, estimation, cost collection, and variance management. Therefore, companies compromise on both sides and performance suffers as a result.
If a CBS is maintained in a spreadsheet it is completely divorced from the operational aspects so much as it does not represent the current reality of the project. Changes from the WBS do not flow through to the CBS and vice-versa. Therefore, the CBS and WBS are almost always out of sync.
To learn how a CBS should be integrated into the rest of your project processes and systems, Download the Project Business Automation Blueprint. It is the definitive guide to creating a comprehensive business system for your Project Business that ties together your project operations and financials seamlessly.
Cost Breakdown Structure Example
Adeaca One Project Business Automation has a dedicated financial multi-level hierarchy, the cost breakdown structure (CBS). This is the central planning structure against which all project financial activities are planned and managed.
The CBS allows you to define the exact level of details required to efficiently and effectively manage a given project or contract. In order to provide one cohesive construct with the necessary level of granularity, the CBS manages and tracks:
- Change orders
- Revisions and transfers
- Estimate at completion
- Progress and productivity indicators
All budget positions are processed within dedicated budget versions against the CBS. Budget versions are subject to approval, capturing cost and revenue estimates, as well as cash-flow projections.
You can create project budgets using built-in templates and formula-driven estimation tools. Any changes to the original budget are processed as revisions, change orders, or transfers. Adeaca PBA provides a full audit trail of all budget versions including estimation of deliverables, contingencies, and undistributed budgets for rolling-wave planning.
Additionally, the CBS in Adeaca PBA can also be directly and automatically updated from the WBS and vice-versa. Therefore, if a change in the schedule affects the financial aspects of a project (such as EAC, margin, and cash flow), it is known immediately.