A few weeks ago, a peer of mine and I had a working lunch with another colleague. A highly experienced cost engineer professional, well-versed in the challenges of project cost control, and well-respected in her industry.
With the three of us all having our feet in the project cost management world – our colleague from a practical perspective and we from the technology perspective – the discussion inevitably turned to the challenges of effective project cost control. For us on the “solutions” side, we wanted to hear her take on the golden question - “What is essential for managing and controlling project costs effectively? Is it accurate estimating? Is it complete and timely capture of actual cost data? What about proactive change management? And what about the effective use of earned value management in project controls?”
Now, obviously all of these are vital to controlling construction project costs and providing insight into just how well a project is really performing; so we were very interested in her perspective. So, imagine our surprise when our esteemed colleague put down her fork, turned to us and said, with absolute conviction – “It starts with the project cost codes.”
Cost codes are essential to providing the correct aggregation of actual project cost information to its correct place in the budget; which then provides project management and cost engineers with accurate budget vs. actual reporting required to run a project to a successful conclusion. Makes total sense. And with the provision of codes just about everywhere in most construction project management software solutions, using cost codes effectively in a project shouldn’t be much of an issue. Right?
But, as she went on to elaborate, it became very clear just how integral an effective cost code structure is for the successful cost management of a project – and just how dangerous it can become when the right structure is not developed.
She relayed to us her experience in one project she had been involved with. A major oil & gas producer, well into a long-term project, had come to realize they had NO visibility into project performance. They didn’t know if project commitments budgeted had been met. Or hadn’t been realized. Or had been exceeded. They literally were running a billion plus dollar project, completely in the dark.
With her positive track record of bringing complex mega-projects to successful conclusion, she had been brought in to literally save this ill-fated project after it was well underway. The classic hail Mary, come fix our disaster.
Day one of her rescue mission, the project team was shocked to see her head directly for details on their cost codes layout. Although their cost codes planning was poorly thought through, far too convoluted and detailed, it hadn’t occurred to them that there was any problem there. This was in spite of the fact that they were not getting the reporting they needed, and the cost code confusion was causing a massive drain on their time.
When a cost code is first developed, planning must be carefully done to understand just what level of detail is required for effective cost management, and how much is too much. Cost codes commonly include elements, or extensions, that identify the specific project, phase of project and type of cost account, such as labor, equipment or materials. Cost codes also include standard extensions that identify specific reporting needs, such as discipline or sub discipline involved with the work package, material codes, accounting codes, AFE or POs for specific phases or work packages, etc. And the list goes on. The challenge that project controls professionals face, is in defining the cost code structure that will provide all parties involved with the correct reporting of information that they require. And do that without creating a cost code structure that ends up providing unnecessary levels of detailed information no one requires.
Early on, when our colleague’s project-at-risk had first been developed, the cost code structure employed had over 15 elements. The project itself had already generated hundreds of thousands of cost transactions, all rolled up into a Cost Breakdown Structure that ended up with an aggregate of thousands of cost codes. In managing the project, the project managers had to wade through thousands of transactions that could have been aggregated at a much more useful level if the project cost codes had not been so poorly structured. It took several months for our colleague and her team to re-code every transaction to a new, much more well planned out cost code structure. But once they had completed that exercise, the project management team were able to generate far more useful and timely reports that enabled them to actually manage the project effectively. The project, fortunately for the producer and the project managers involved, was saved.
But a lesson learned, for all of us. Along with the development of an accurate, detailed estimate and ensuring that you are capturing all of your project costs in a timely manner, and using objective project management tools such as rules of credit and earned value management software – develop an effective cost code structure. A Cost Breakdown Structure, or CBS, that makes sense for your organization and your project will pay off dividends when you start capturing your project costs to those codes.
As our esteemed colleague noted, at the end of our lunch, “Up-front cost code planning avoids long-term headaches. Trust me.”