Cost Breakdown Structures: budgeting the easy way

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Categories: budget, video


Video transcript, for those of you who prefer reading:

Hello.

My name is Elizabeth Harrin from the Gantthead blog, The Money Files and today I want to talk about cost breakdown structure. You have probably heard about work breakdown structure and product breakdown structure before but I wonder if you have heard of cost breakdown structure. Effectively it looks very similar to a work breakdown structure and you need a work breakdown structure to start with.

Take your WBS, your work breakdown structure and add to each task your estimate of how much you think that task will cost to complete. Effectively, if you add on the values for each of those project tasks you’ll be able to work out at any level exactly how much the project will cost overall. The great thing about this is that you can add up the costs in chunks so you could create an overall cost for a work package or for a particular level of task.

The good thing about that is that you can then use that to help influence your scope. For example, if your scope needs to be cut because you don’t have enough money to complete everything in time you could look at your overall work breakdown structure with the costs, your cost breakdown structure, and look at what you could potentially lose.

Equally if you are including a change to the scope of your project you can look at what elements of costs would need to be changed as a result of adding something new on to the cost breakdown structure.

You might be thinking that all sounds great but how do you add contingency to a breakdown structure that is constructed in that way?

Risk Happens book coverYou’ve actually got a couple of options and Mike Clayton talks about them in his book, Risk Happens! I’ve got that here. There are two ways really that he talks about including contingency in a cost breakdown structure, either at the level of tasks so you could either add in contingency for every amount on every lower level task, or you can add it at the top level, or you could add it at a subsidiary, middle level on the structure as well. So that was one alternative.

But the option I like the best is this and his recommendation is this, to “add contingency at the level at which the budget will be managed. In this case” – in the example he gives in his book – “In this case the budget is managed at workstream leader level.” So what he has done in the example he has given here is to add contingency in the cost breakdown structure at the level at which somebody has responsibility for a chunk of work. So he has added contingency effectively to the task that is going to be managed by the workstream leader.  And that has given him the opportunity to be able to give someone responsibility for managing the budget and be able to track that and use the contingency as they see fit within the remit of what’s on their element of the work breakdown structure.

So I think cost breakdown structures could be a really good way to calculate your budget.

Posted on: May 10, 2012 02:01 PM | Permalink

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