Any project with a budget requires project business management. Many companies managing large, complex projects are very familiar with the work breakdown structure (WBS) as a way to plan the schedule for each project, essentially creating a hierarchical outline of the tasks required to complete the project.
However, many project solutions use the WBS to manage both the operational and financial aspects of a project. This is a problem because operating solely in the WBS poses a major project governance flaw. Projects that involve thousands of tasks will eventually get to a point where it becomes almost impossible to manage the project financials based on the schedule. The only solution is to employ a cost breakdown structure (CBS) parallel to your WBS.
The cost breakdown structure is a breakdown of the various costs in a project. More specifically, it represents the costs of the components in the WBS. When managing the financials of any project, the CBS is key to creating a structure for applying measurable cost controls.
The CBS is critical for any company managing project business. It’s 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.
Why Many Companies Don’t Use a Cost Breakdown Structure
Unfortunately, the CBS is missing completely in most project system tools such as project management, scheduling and the ERP. Oftentimes, company financials are managed in a spreadsheet which is manually updated and prone to error, which often leads to neglect simply because it’s difficult to keep it up.
Companies tend to use the WBS to manage both the finances and operations of the project. For example, SAP Project System, both the operations and financials are managed in the WBS. This includes process planning, cost planning, scheduling, capacity planning, and project controls. In the Oracle Primavera solution, revenue, cost, budget is also managed in the WBS. All the project’s top-level tasks and subtasks, along with the task’s actual and budged amounts are listed in the WBS. According to their website, for each project listed, it shows the total amount invoiced, the project’s accounts receivable, its unbilled receivables, and its unearned revenue.
The Problem with Managing Costs in the Work Breakdown Structure or Spreadsheets
Using a single hierarchy (WBS) is a major problem because it contains insufficient details for operational and planning. It also tends to be too granular for budget, estimation, cost collection, and variance management. As a result, both the financials and operational data are compromised, which ultimately means performance suffers.
Project Business Automation: See the Financial Impact of Operational Issues in Your Project
Project Business Automation, a new category of software solutions designed for companies who consider projects a critical component of their business, integrates all core project business processes into one comprehensive system. As part of PBA, a dedicated CBS makes it easy to manage your project financials at the required level for your business. The CBS is linked directly to tasks in the WBS so the schedule and costs are always up to date. By taking a project and breaking it into smaller financial positions, controllers can easily identify variations at the start of the project lifecycle.
A major component of project cost control is early detection. By periodically evaluating cost-to-complete and estimate-at-completion, controllers can predict and record variances before they become too big to manage or take corrective action. Adeaca PBA is built to meet the specific requirements of financial project management all within a single integrated solution. It provides the real-time availability of data and business processes so both your financial and operational data work hand in hand.
To learn more about Project Business Automation, download our PBA Quick Guide.