This is the second part of a two-part series of articles on cost engineering and project controls by Kevin Mattheys. The two parts are as follows:
- Part 1 – What is Cost Engineering?
- Part 2 – My five best Cost Engineering practices
In Part 1 I presented some background information and discussed how cost engineering differs from project controls. In Part 2, I share my five best cost engineering practices, based on many years’ experience.
Following on from last months article where I espoused my views on Cost Engineering and where it fits in, I will now discuss five particular practices, which if addressed correctly and diligently, generally lead to improved outcomes on projects. This is by no means an exhaustive list however it is practices in which I have experienced both the positives and negatives and have learnt enormously from them over the years.
The Database (or data model as some call it)
Crucial to the success of any endeavour is the ability to access information that is relevant, timeous and trustworthy and on which sound decisions can be made. An integrated database that is continuously updated, normalised with current project information, tested against international norms and standards and allows project teams to estimate, plan and control from early in idea development until final completion of the project is worth its weight in gold. This is reflected in Figure 1.
Crucial to the success of this continual data recycling is the use of a well thought out and structured set of ‘codes’ so that this myriad of information is able to be dissected and reported on efficiently and in a meaningful way. These ‘codes’ are crucial also for quickly assimilating data for storage back into the estimating repositories which leads to better future estimates. These codes typically relate to the Work Breakdown Structure (WBS), the Organisation Breakdown Structure (OBS) and the Cost Breakdown Structure (CBS). Another important code is what is referred to as the project Code Of Accounts (COA) which identifies equipment and other related costs into ever increasing levels of detail.
Unfortunately, too often an organisation is not willing to invest in the database as it is deemed to be ‘too expensive’ leading to a gradual degradation and decline of both the system and content over time. This is not a ‘nice to have’ anymore, it is an absolute essential and for a number of companies this is their competitive advantage.
There are systems out there but what happens far too frequently is that companies try and make financial systems do project control work with pretty disastrous results more often than not.
Figure 1: From integrated database to improved decision-making
A Cost Engineering team will usually have a mix of leadership/managerial, technical, analytical and administrative competencies on large projects or programmes. The team must work together and should possess at least two traits which are somewhat unique. These are the ability to be methodical and disciplined. These people are subjected to mountains of data and they need to be methodical in analysing and reporting this information. They also need to be disciplined as reports are required on time, every time. Reports need to be accurate and meaningful, otherwise credibility is compromised and that is tough to restore.
One critical success factor is the application of a disciplined process of Plan, Do, Check and Assess (see Figure 2 below) for all project phases and monthly reporting cycles. Once you have delivered a report late or the integrity of the information is suspect you will be continuously bombarded with queries of all sorts. One should also ensure you have an in depth understanding of the details behind the reports so that if a question is asked you have the answer.
Figure 2: The Total Cost Management Framework process (there are others as well)
An area within the team that frequently gets misunderstood by senior management, however, is the Project Control/Cost Control and Financial Control functions. This is because the word ‘cost’ is deemed to be common to both so they must therefore do the same work. Nothing is further from the truth. Project Control/Cost Control is the control of the project scope against a budget and time frame and then forecasting where the costs and schedule will end. It is forward looking and attempts to anticipate where the project is heading whilst proactively identifying possible future pitfalls and preparing risk mitigation plans.
Financial control (backward looking) is about making the requisite payments to contractors and suppliers timeously against signed off and approved invoices and then reflecting these costs correctly in company balance sheets, departmental cost centres and/or company asset registers. These two functions should never be confused with each other, yet, in practice this happens all too frequently.
As John Maddalena so eloquently put it: “Plan by commitment, not expenditure. In that one statement is captured the entire complexity of the project controls framework and the key difference between projects and business”.
The WBS and Change Management
I have found that if ownership of the Work Breakdown Structure (WBS) as shown in Figure 3 resides within the Cost Engineering or Project Controls team, the propensity to change the WBS is reduced significantly. This is because it can only be changed via a formal signed change request which is then clearly and regularly communicated to all stakeholders via the formal change management process.
It is also strongly recommended that regular formal meetings are held to discuss and sign off on proposed changes and that the business and project decision-makers attend. This stimulates constructive debate and forces a decision there and then with the obvious benefit of a consensus decision and speedy implementation. It must also be noted that each and every change introduced into the change management system has to be prepared, costed and possibly executed by individuals in the team. Studies have shown that the more these changes are introduced the greater the loss of productivity and hence schedule delays occur. Most people will also be reluctant to request changes for change sake as there will be numerous questions asked.
Unplanned or unnecessary scope changes have huge impacts on project cost, time and productivity. A strong change register and change management process is an absolute prerequisite. Studies conducted by IPA indicate that engineering changes, construction changes and schedule delays are primary drivers of increased costs on projects. Don’t underestimate the effect that good change management can have on a project.
Figure 3: A typical Work Breakdown Structure
We are all aware that there are many different forms of contract in the project world ranging from fully reimbursable to Lump Sum Turnkey; see Figure 4. Does the Cost Engineering team understand the pros and cons of each type? Does the team know why a particular type was selected for a particular scope of work on the project? Does the team have access to these contracts at short notice? Even better still, do they have them next to them in case they need to check some contract detail? Does the team understand the implications on the level of detail required in the corporate progress tracking and reporting systems for each type of contract?
The Cost Engineering team must have access to these documents and must also know and understand them intimately. Have them close by at all times. The Cost Engineer/s and the procurement team need to work hand in hand and must assist each other in their daily work. If this relationship breaks down, the project will inevitably be compromised as reporting becomes dysfunctional and difficult.
Remember though that the responsibility for using the contract information for analysis and reporting lies solely with the Cost Engineer and your integrity will be severely compromised if you share sensitive or confidential information with others who have no right to this information, especially labour rates. Never, ever, compromise yourself in this way.
Figure 4: Different contracting options
Processes and Procedures
Many hours are spent designing and implementing these standards. They are there to ensure predictability and repeatability which is so necessary in Cost Engineering / Project Controls. The last thing you want is the same set of data giving you five different answers.
Often during the application of these standards on projects, the team may add or improve on these standards if new or innovative ways of executing the work are discovered, or flaws are unearthed in current processes. It is crucial to these corporates or companies that they are able to quickly and smartly gather these new innovations or flaws and build them back into existing standards for the portfolio of future projects to benefit from them. Alas all too often this is not done. Staff members write up the close out manuals highlighting best practices developed on their projects but the manuals are then left on the shelf gathering dust and the staff move on to other projects before proper debriefing has taken place.
Lessons learned and process improvements must find their way back into the respective systems and procedures effortlessly and quickly.
The five best practices mentioned above have, based on my experience, tended to become difficult issues to manage especially on larger types of projects or programmes. I have, however, found that these practices are crucial for improved project outcomes.
In closing I would also like to suggest that, with the ever increasing availability and functionality of technology, I am convinced now, more than ever before, that the Cost Engineering or Project Controls team needs to have a dedicated database administrator/technical Information Technology (IT) person available to them. The complexities of database set up, reporting and maintenance is taking more and more time from the Cost Engineering/Project Control team who should be doing analytical type work and walking the site instead of trying to fine tune databases and spreadsheets in their offices. Being able to provide specialised, ad hoc, reports in an agile fashion tailored for the project is becoming ever more crucial as project complexities increase.
I hope you have found this article useful and I look forward to publishing further articles on Cost Engineering in the near future.
Maddalena, John – Director, Barsure
If you have any comments or suggestions on how to improve the article, please feel free to contact the author or leave your comment below.