What is a Cost Breakdown Structure (CBS) and why is it important?

What is a Cost Breakdown Structure (CBS) and why is it important?

A vital part of project cost controlling is having a structure for estimating and following up project costs. A solid structure makes is easier understand how your project is tracking against plan.

In this article we will describe what a Cost Breakdown Structure (CBS) is and why it is important. Furthermore, we will look at tools you can use to ensure you have good cost control in your projects.

What is a Cost Breakdown Structure (CBS)?

A Cost Breakdown Structure (CBS) is a terminology within project management. It is closely linked to what is called a Work Breakdown Structure (WBS).

While the WBS represent all the tasks that needs to be done within a project, the CBS represent all the cost that will incur in the project.

A good cost breakdown structure provides insight on overspend, or underspend, against your plan. Having a good structure makes it easy to understand deviations.

When you see deviation from plan within a cost category early, it is easier to make the right decisions for improvement. Someone might have made a mistake. There can be cases where certain cost elements were out of original scope. If this occurs, the cost might be subject for recharge to the client. Furthermore, you will easily identify areas you can reduce spend to ensure you stay on plan.

Important considerations when establishing your CBS

When setting up you CBS there are a few practical issues you should consider.

First, it is important to be aware that all data needs to be entered to the lowest level of the CBS. The higher categories (summary level) are just a summarization of the underlying categories (input level).

You want a structure that provides good insight. This might mean good insight to evaluate deviations and in a logical way that makes sense for your business.

• What is the useful information that the structure is likely to provide?
• How can the structure be used when evaluating performance during and when assessing the project?

Another practical tip is that you want to make sure that the structure is aligned with other key processes. As an example, often a budget is created based on an approved quote to a client. Is it easy to convert the quote into the CBS?

Also, when placing purchase orders (PO’s) is it easy to place orders against the right categories? If you keep the structure aligned, it will be easier get useful information from the CBS that can be used to improve key processes in the organization.

If your project is made up in stages or work packages it would make sense to use these are part of the CBS. This will make it easier to evaluate financial performance during the project as you are closing of each stage.

Why is it important to use a CBS?

1.- You will get better control on your cost and budgets

Splitting spend into logical cost categories makes it easier to control cost. By doing this, you can easily see what you are committing to in relation to the spend within a cost category (as apart from the total budget) and on a more aggregated level (summary level).

2.- You get better insight

Allocating spend into cost categories also provides insight to how much you are spending within different cost categories. This insight is important to understand how you are tracking against a budget. You will have the insight you need to make important business decisions.

3 – You can use it as reference for pricing (also that you do not miss anything)

A sales quotation to a client is often based on a cost estimate broken down into cost categories. Having a good insight into actual cost from earlier budgets can increase the quality of cost estimate. It can also act as a security to ensure that all types of costs are captured. Making sure that the cost base is correct is important to ensure that you get the right profit margin.

Where should you structure your Cost Breakdown Structure (CBS)

Some companies use excel, others create a structure using their G/L accounts. Others use software such as a purchasing software or a project management software.

It is easy to get started with spreadsheets, but they come with several limitations. Typical limitations are data quality, on the structural side and sharing capabilities.

Using the accounting systems will provide you with the ultimate answer, but since the accounting system is structured to look at the history you would not get full visibility until your project is over. In addition, the purpose of the G/L accounts (nominal codes) is to ensure proper governmental reporting and tax treatment rather than providing insight into the cost in a project.  On the reporting side the accounting system focus mainly on fiscal years, rather than a project timeline.

Using a purchase order system will let you capture cost on a category from the time you approve cost internally helping you get real-time control on your cost throughout the project. You will also be able to capture any deviation between a purchase and invoice to ensure alignment with the accounting system. You will also get multiple other benefits such as capturing goods receipts, sharing relevant data with team members and on the reporting side.

CostTracker is a cloud-based purchase order system designed to make cost control easy. The system includes unique features for project-based companies. CostTracker is designed to be easy to use and get started with. You can use CostTracker as a stand-alone system or integrated with your accounting software.

CostTracker provides cost control to hundreds of companies all over the world.

Other relevant articles:

5 reasons to use purchase orders in your business

Benefits of using a purchase order system