Cost management is a very detailed process and includes many aspects that exist as their own detailed topic. This post attempts to evaluate the cost management process at the highest level. Consider it an introduction to cost for those with little to no exposure.
An integrated cost management structure is implemented on a project in order to facilitate and control the decisions a project team makes relative to cost generating activities. Cost management is not simply the task of reporting expenditures, but rather the process of developing, controlling, and analyzing budgets, forecasts, and cost reduction opportunities.
A high level model of the cost management process looks as follows:
The process begins with the estimating team, with input from the various project disciplines including project controls, developing a detailed cost estimate for the defined scope of work. From the estimate, each line item is cost coded in association with the established cost work breakdown structure (CWBS). Upon consolidating all the line items, the original, current and forecast budgets are loaded into the cost management system. At the time of project budget inception, all three budgets are equal until to one another until an approved deviation causes one or all to change.
Once your budgets are established, accurately coded, and loaded into your cost controlling system, comes the routine (typically monthly) of incorporating the actual expenditures from your accounting system. Each reporting period you will upload your actual commitments, expenditures and payments into your cost system while making sure all your systems reconcile with one another. At this time you will also calculate and load your accruals which is the value of all actual work completed but not yet booked.
During this time you are also coding, loading and reconciling your cost system with all deviations and change impacts that were approved during the period. Change management can often become a very cumbersome aspect of cost management, so it is reccomended you keep up with coding your deviations throughout the month as they approved.
Upon completing your uploads and reconcilations, you will then generate your cost reports. There are many many different cost reports that can and should be generated (where applicable to your project), including but not limited to:
- Total Cost Report
- In-Lieu Expenses
- Non-Billable Report
- Labor (with burdens) Report
- Expenses/Incidentals Report
- Change Management Report
- PO Detail & Summary Report
- Subcontract Detail & Summary Report
- Total CFM Report
Then comes the most important part, the analysis phase of cost engineering.
The real challenge for cost engineering teams is not managing and reporting current cost positions or forecasts, but rather providing the detailed analysis of actions that may be taken to reduce project costs and cost risk exposure. This requires cost teams to be actively engaged with the entire project team including change management, procurement, contracts, engineering, construction, and project management.
You were likely always told by your parents that “nothing in life is free” and “everything cost money.” Well in the project execution world, this could never be truer. Contractors, field material, tagged equipment, training courses, safety equipment, potable water, office facilities, camp accommodations and the chair you sit in, all cost money. It is how you control the cost that can make the biggest impact on project margins.