​​Cost Breakdown Structure: The Backbone to Budgeting in Project Management

​​Cost Breakdown Structure: The Backbone to Budgeting in Project Management

Sometimes in a project, the budget drips out like a leaky faucet, in steady, predictable amounts. At other times, the pace of the budget is more like a roller coaster. There are long stretches where almost nothing is spent, followed by short, fast intervals that consume huge portions of the budget in one go.

Understanding a budget’s cadence is key to successful project management. Without a firm grasp of a project’s costs, work packages and timeline, it’s easy to mismanage a project and have it go over budget.

A cost breakdown structure plays a significant role in successful project management. It keeps things from spilling out and going off the rails. Let’s see how a cost breakdown structure works, and how it fits in with other diagrams like the resource and work breakdown structures, to successfully plan and execute a project.

What Is a Cost Breakdown Structure?

As the similar names suggest, a cost breakdown structure (CBS) is like a work breakdown structure (WBS), except that it evaluates a project with respect to cost rather than work.

Like a WBS, the CBS begins at the highest level, the overall budget. Then it breaks down into increasingly smaller sections with each tier.

A CBS becomes more granular and specific at each tier. For example, say the overall project is a home remodel. On the second tier, this might break down into the cost for the kitchen, the bathroom and the deck. Each lower tier breaks costs down further into things like the materials and appliances for each space.

The CBS is a valuable tool for developing accurate estimates of work. As it’s almost impossible to know how much a package of work costs from a high level requirement, breaking the cost down into smaller packages allows the budget to hit closer to the actual mark.

Generally, the cost becomes more accurate with each tier. However, the tiers should align with the project execution, as at some point the divisions become too small and they’re useless. Once a cost is broken down into its separate labor, supplies and equipment, usually it needn’t be broken down any further.

How to Create a CBS

One way to create a CBS is to model it after the WBS. In this method, the CBS is created by breaking each work package down into their required resources (labor, materials and equipment), then totaling the cost for each resource.

A CBS can also be created independently from the WBS. Whereas the WBS breaks a project down by requirements and deliverables, the CBS can break the project down by other categories such as research, production and operation.

Each method provides a different perspective for evaluating a project and its correlating costs.

Regardless of how the CBS is constructed, the scope of the project in both the WBS and the CBS remains the same.

What Is a CBS Used For?

A CBS is used in both the planning and the execution stages of a project.

Planning: The objective at the beginning of a project is to evaluate the requirements thoroughly, from a variety of perspectives, in order to prepare for a fluid, predictable execution.

The cost breakdown structure analyzes the project at a variety of aggregation levels (between one and four, generally), and breaks it down by a variety of criteria (either deliverables or research, production and operation).

This depth and granularity creates accurate cost estimates, and provides inputs into the creation of an accurate budget.

Execution: The CBS is also helpful during the execution stage of a project. Tracking the progression of the project against the CBS is one way to gauge if the project is proceeding according to plan.

The CBS functions a bit like a fishnet or a corset in this sense. It’s a document that’s used throughout a project to keep things together.

The CBS is not used exclusively, however, but in combination with other key documents. Let’s examine how the CBS works together with other breakdown structures.

CBS versus WBS versus RBS

All these breakdown structures can start to feel like information overload when you don’t understand how they work together. However, the WBS and the CBS and the RBS (resource breakdown structure) really have a synchronistic function within a project.

Used together, the three charts complement and support one another, helping both in planning a project, and making adjustments during the execution stage.

Definition: Work Breakdown Structure

A work breakdown structure (WBS) diagrams of all a project’s tasks and activities. It’s hierarchical, and lists the project objective at the top, then breaks the work into increasingly smaller packages at levels 2, 3 and 4. At the lower levels, it’s possible to make accurate estimates around the resources required for each work package.

The WBS, principally, is an operational document. It isn’t intended for budget creation, although sometimes it’s misapplied for this use.

Generally, the WBS has more granularity than a CBS. Whereas the WBS might break one work package down into 50 individual tasks, this level of decomposition isn’t necessary with the CBS.

Definition: Resource Breakdown Structure

A resource breakdown structure examines all of the resources required to complete a project’s objective. Just like a work breakdown structure, it’s a hierarchical grid that starts with the project’s central objective. Rather than breaking things into work packages, however, the lower tiers quantify the labor, equipment, materials and facilities required to complete each requirement.

The resource breakdown structure, then, is a perfect mid-way document between the creation of the WBS and the CBS. Once the work is decomposed in the WBS, it’s then possible to calculate all of the labor, materials and equipment required to complete the work. When this is clear, and the package is small enough to assign accurate time and quantity estimates, then the CBS can be calculated as well.

The Three Charts Combined

Together, the RBS, the CBS and the WBS allow a project to stay within its central constraints of time, budget and scope.

Reign in the Budget: In order to properly monitor a project and stay within budget, it’s necessary to not only know the budget, but to also understand the cadence of the budget, or how much money is consumed when.

The WBS and the RBS identify central work packages. When this work is correlated to the costs in the CBS, it allows the project manager to monitor cost expenditures, and to know how much money should be spent and when.

Monitor the Deliverable Schedule: Monitoring a project also means evaluating progress in terms of the number of units completed, or percentage completion. Together, the WBS and the CBS allow the project manager to evaluate a project in terms of the percentage of deliverables completed alongside the percentage of budget spent. It works similarly to the idea of a burndown chart.

Stabilize Scope: Together, the WBS, the RBS and the CBS clarify the project’s scope. When all the work is known, it’s easier to identify when additional costs or work packages not outlined in these diagrams creep in and increase the scope.

In summary, each type of breakdown structure evaluates a project from a slightly different perspective, and each complements one another. Now let’s look at some key benefits the CBS provides in project management.

Benefits of Using a CBS in a Project

A cost breakdown structure helps with many aspects of a project, including risk management, schedule tweaking and scope adjustment.

Scope Management

Sometimes it becomes clear during a project that scope needs to be reduced in order to reign in costs.

Take a home remodel, where the project manager has gone over budget and must decide between adding new light fixtures and adding new wallpaper. The CBS comes in handy here. As it details the cost for each work package, it provides a clear indication for which item to cut.

This is a simple example, of course, and oftentimes a project is much more complicated. Generally speaking though, a CBS allows the project manager to identify which items bleed the most cost, and so it serves as a helpful tool for identifying where to cut away work in order to stay within budget.

Schedule Tweaking

A project manager is always concerned about keeping a project on schedule. One helpful technique for freeing up time is known as crashing. With crashing, a project manager doubles up on the resources for an activity in order to speed up its completion.

Say the project is painting a house, and with two painters the project takes one week. Possibly, by adding two more painters this task can be shortened to just a few days.

At the same time, the project manager also wants to stay on budget. In looking for the best activities to crash, then, it’s helpful to understand their costs relative to one another. The CBS allows the project manager to identify those lower-cost activities whose resources can be increased without making a huge impact on the project’s overall budget.

Risk Management

A risk management plan analyzes a project at the onset, and anticipates all possible occurrences, both positive and negative. The plan also considers the likelihood of each occurrence.

The CBS helps to focus the risk management plan around the high cost areas that need the most attention.

Take a construction project that plans to rent an expensive piece of equipment for one day. This CBS highlights this activity with respect to all of the other work packages, and notifies the project manager that it needs extra attention in the risk management plan.

As you can see, the CBS is a useful diagram to reference and assists with many facets of a project.