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).

The WBS represent all the tasks that needs to be done within a project. The CBS represent all the cost categories that needs to be purchased within tasks.

In this article, we will share some insight into what financial commitments are. We will also look at who benefits most from tracking financial commitments, and how you can get full value from tracking your financial commitments.

 

Why is it important?

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).

 

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.

 

4 – It helps you assess deviations from your plan

A good cost breakdown structure provides insight on overspend, or underspend, against your original plan. Having a good structure makes it straightforward 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. In 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.

 

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 getting 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