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“About 8.5% of projects finish on time and budget. We have tested it across different sample sizes and it holds up. Now our colleagues have begun doing similar studies to ours and are finding similar results. So we trust the number as valid and reliable.”
~ Professor Bent Flyvbjerg, author of How Big Things Get Done
Projects have lots of moving parts that can make it difficult for agencies to create an accurate budget. But while that’s true, not having an accurate budget can result in negative consequences, like not having enough money allocated or being too optimistic and ending up missing deadlines — which can significantly impact client satisfaction.
Using a cost breakdown structure (CBS) allows agencies to wrangle budgets into submission and get a transparent view of project costs, helping you plan more effectively for future client work.
Below, we’ll unpack everything you need to know about using a CBS, including a step-by-step breakdown of how to create one for your agency.
What is a CBS?
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A CBS, also called a should-cost analysis, is a comprehensive document breaking down the expenses a project will incur. Each line item represents a cost type. By logging every piece that goes into the final deliverable, a project manager can accurately estimate the total actual cost.
A CBS breaks down values into direct and indirect costs, arming the project manager with a way to access granular information throughout the project’s lifecycle. This insight helps with cost control and risk management.
Common costs included in a CBS
Arriving at an accurate cost of the project requires taking several types of estimated costs into account.
Labor
Human capital costs may be a big chunk of your overall project budget, which is why they need to be accurately estimated. Otherwise, you could spend too much, and the project could go wildly off-budget.
Labor costs are broken down on a CBS by category, and then the hours and cost rate are added into the mix. Labor costs are direct costs since they can be tied to the final product or service.
Materials
Material costs include tangible and intangible items the agency purchases for the project.
Tangible material costs include raw materials that it takes to create the deliverable. These are things you can touch.
Intangible material costs include things like insurance, intellectual property, and freight. While you can’t physically touch these items, they’re necessary nonetheless.
Equipment
Some agencies choose to blend equipment costs into material costs, but we recommend separating them in your CBS for greater clarity. This line item includes all equipment used in the workflow throughout the project’s lifecycle.
Be sure to add any equipment components utilized during the project to the materials line item.
Overhead
At first glance, it might seem difficult for you to pinpoint a project’s overhead costs, since they may not be directly involved with the task itself. But to create an accurate CBS, these expenses must be included in the final analysis.
Overhead costs are the expenses agencies pay to figuratively and literally keep the lights on. These can include rent, electricity, internet, and other utilities.
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A step-by-step guide for creating a cost breakdown structure
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It’s interesting to note that not all companies use a CBS for project planning. Some opt for a work breakdown structure (WBS), which lists deliverables and tasks using a single hierarchy. While a WBS doesn’t require the considerable time it takes to build a CBS, it also doesn’t provide the granular detail and accurate costs that create an accurate project estimate.
A CBS works parallel to a WBS to create a real-time analysis for a more in-depth level of detail.
Here’s how to employ a CBS for your agency:
1. Define the project scope
Only 61% of organizations create a scope as part of planning.
What are those other 39% thinking?
Clarify what your project will cover and what it won’t. This definition ensures you can plan your budget and resources properly and give stakeholders (internal and external) an understanding of what they can expect. Above all, a clear project scope helps you avoid resource-sucking scope creep.
To define your project scope:
Outline its main objectives: Start by imagining what success looks like.
Draft a resource management plan: List all the resources that you need available and how you’ll use them.
Write a project scope statement: Succinctly explain what type of work the project does and does not include.
Secure stakeholder buy-in: Get approval from stakeholders before you set the scope in (almost) stone. This gives you a chance to tweak it if it needs it, which is much harder to do once the workflow’s underway.
Set a change process: Large, complex projects will inevitably need some changes and deviations as they move forward. Proactively eliminate confusion by creating a plan for requesting and deciding on changes.
2. Identify main cost categories
What are the areas of the project that will cost money? By identifying and segmenting those out, you can keep your finger on the pulse of the total costs of the project.
Some of the cost categories may be:
Raw materials: The cost of finite materials you’ll need to build and deliver the project should be in this category.
Equipment: Any equipment (laptops, copiers, etc.) you use goes here.
Labor costs: How many people need to work on this? How many hours will each one of them bill? This data goes into this category.
3. Assign monetary values to the categories
Once you determine the categories, it’s time to translate the work into a monetary figure. Break each task down and figure out the cost that should be assigned to it.
Understanding cost estimation is vital for this step to work. Choose from several estimation strategies to arrive at accurate numbers. Many times, you can plug in cost data from previous projects.
Some of the other cost-estimating methods are:
Parametric estimation: This technique adjusts previous project data to allow the differences that exist across every task.
Analogous estimation: By using previous project data, this technique estimates the completion time.
Expert judgment: The least scientific of all the others but still popular, the expert judgment strategy uses the project manager’s experience and gut feelings to arrive at a project cost. It tends to work best when estimating plans similar to ones that have been completed in the past.
Three-point estimation: This method assigns three numbers to a task, representing optimistic, most likely pessimistic. Then, you average the numbers to arrive at your actual estimate.
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4. Factor in contingencies and uncertainties
Project-based agencies should always build in a little cushion that can cover potential roadblocks in the workflow. It doesn’t matter how strictly you create a budget; issues can crop up and cause tasks to cost more than planned. Some examples are:
A critical team member could get sick, causing you to run short of labor hours. This issue could also require another employee (who may be paid more) to step in and take over.
The supply chain might hold up materials. Whether it’s manufacturing or shipping issues, your project timeline will need to change if you don’t have the material to create the deliverable.
Depending on your location, you may have to deal with hurricanes, snowstorms, or tornadoes that can rip out electricity and internet for several days. These natural disasters can wreak havoc on your project.
Even the best-laid plans can go awry, so your CBS should have cost and time allocations built in.
5. Utilize CBS software tools
Embracing project management automation in your plans can save you significant time and keep estimates accurate. CBS software tools facilitate your project cost management efforts by:
Keeping you organized: Being able to log every task in a single location, assign it to stakeholders, and monitor progress decreases the risk of something falling through the cracks.
Improving your accuracy: CBS software links estimates to the scope and available resources. You’re never getting that type of support from a plain Excel spreadsheet.
Encouraging collaboration: If everyone knows where they should go for information and idea sharing, it’s easier to communicate effectively with other stakeholders and mitigate potential issues.
Promoting smart decision-making: By pinpointing the project’s cost drivers, CBS software paves the way for solving problems and reaching solid data-driven decisions.
Find out how Teamwork.com helps with cost tracking
Agencies that put the time into creating a CBS reap powerful benefits like gaining better insight into project spending and managing costs effectively. Formulating a strong structure on the front end minimizes the chance of costs getting out of hand and the project going over budget.
Using project management software like Teamwork.com is essential for monitoring your assignments and keeping them on track.
From our user-friendly templates to our workload management and resource allocation features, you can save time, track costs, increase collaboration, and proactively address bottlenecks.
Amplify your next project’s success and exceed your clients’ expectations by getting started with Teamwork.com today.
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