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Cost breakdown structure

What is a cost breakdown structure and how to create it

The Cost breakdown structure (CBS) divides the costs of a construction into elementary activities. Discover how to create one and manage construction costs effectively

Estimating works, materials, equipment, and labor necessary to carry out construction projects and the relating expenses is one of the most relevant and determining elements in the AEC industry, as well as one of the main obstacles to the successful project completion for many technicians.
In fact, when implementing a construction project, whatever it may be, there are always spending limits, to which one is bound, so much so that this constraint could even lead to a radical change in the original project plans.

The accuracy of cost estimating, which provides the most likely forecast of a project’s expenses before it is executed, is crucial to ensure that a project remains financially feasible and to avoid overruns.

But do you know how to accurately create it and to achieve your project and management objectives? Have you ever heard of the cost breakdown structure? Are you familiar with its peculiar characteristics?

In this article, we will explore how it works and how a construction cost estimating software can help professionals to optimize the estimating process, developing an effective and functional approach to the set objectives.

What is the Cost Breakdown Structure in the construction industry?

The “Cost Breakdown Structure” (CBS) is literally a  document in the form of a structured and hierarchical map that describes the cost analysis of a construction, detailing all the costs to be incurred for the implementation of a project.

This map is generally developed from a WBS to which the costs of the individual activities are associated, thus obtaining not a simple cost estimate, but a controllable and measurable estimating process in each of its small components. Based on the individual activities, it is a top-down analysis process, starting from the elementary details of the project and then it proceeds to obtain the overall estimate.

This method takes more time, but it turns out to be more accurate than other analysis processes as it provides granular information on the costs involved, allowing for greater overall cost precision.

What is the difference between CBS and WBS?

We have seen that a CBS is based on a WBS (Work Breakdown Structure), in fact, we could define a CBS as a detailed WBS with costs. In particular:

  • a WBS shows all the elementary activities and necessary tasks into which a certain work or project is broken down;
  • a CBS integrates the costs of each activity of the construction project.

These two tools are complementary, if a WBS is used to schedule, organize, and manage the activities to be developed, a CBS instead allows you to manage project costs, evaluating unforeseen events, deviations, and delays.

CBS vs WBS

CBS vs WBS

Types of construction cost estimates

Depending on the design phase and specific objectives to be pursued, it is possible to identify different types of estimates, specifically five. Each of them is functional at the time it is implemented, let’s see them all in detail:

  1. feasibility estimate: characterizes the programming phase or, as the name suggests, the construction feasibility study. Based on similarities with other past projects, it provides an approximate idea of the potential costs of a work, to try to understand if the design development is in line with the expenses or if it is too expensive to implement;
  2. intermediate estimate: it is not yet a very detailed estimate, it frames the maximum dimensions, scope, and complexity of the work, also identifying any problems;
  3. preliminary estimate: using the preliminary project, the quantities of the expected materials are defined, associating their respective costs;
  4. substantial estimate: it is developed as soon as the project is globally agreed upon by the parties. At this point, in fact, the costs of the various materials, equipment, and/or work are evaluated, and it is decided whether to make changes to limit expenses;
  5. definitive estimate: it is the most detailed estimate, which is obtained following the completion of all changes and with the signing of the construction contract. It is from this estimate that the construction company begins the execution of the work.

Generally, the following costs are included in a CBS:

  • labor costs: related to the workers who materially contribute to the construction or parts of it;
  • material costs: in order to carry out the construction, it is necessary to purchase supplies of raw materials, with which to proceed in the various works;
  • equipment costs: machinery, equipment, tools, and work and safety devices to be used during the work phases;
  • general expenses: these are the management expenses of the company, i.e. costs unrelated to the direct costs necessary for the production of goods or services.
Elements of the cost breakdown structure

Elements of the cost breakdown structure

How to create a CBS: here is a step-by-step guide

Developing a detailed cost breakdown structure and creating a detailed cost breakdown structure certainly requires more time in the planning phase, but this allows for a faster execution phase, greatly reducing obstacles.

To proceed smoothly with the correct implementation, follow this brief guide:

  1. create a WBS: the first step to identify costs is certainly to identify the work necessary to carry out a construction. To build a Work Breakdown Structure, you will need to analyze the construction as a whole and structure a breakdown of it into elementary activities;
  2. estimate the costs of the work: after the activities, all expenses and costs must be defined. For all the work, it will be necessary to consider direct costs, labor, materials, equipment, rentals, etc.;
  3. check the budget: once the analysis of the work costs is completed, always make sure that the total cost obtained is always lower than the budget planned, also because if this is very rigid, you will not be able to do anything else but reorganize costs and work;
  4. evaluate unforeseen events: once the costs of all activities have been defined, you will have created your CBS and will have defined the overall cost of the work, but it is important to preserve a margin for unforeseen events, taking into account errors or changes during the work and the direct and indirect costs that result from them.

How to manage construction costs?

To manage construction costs effectively, it is important on the one hand to organize the workflow and the design and execution process as a whole more efficiently and on the other hand to develop accurate CBS.

The application of well-established design and execution programs allows for greater control of the construction process, avoiding gross errors and unpleasant inconveniences that would cause delays and higher costs. These must be accompanied by the development of structured cost analyses, the implementation of which is currently optimized and greatly simplified by the use of construction cost estimating software; but this is not enough to achieve efficient cost management of a construction.

To significantly improve efficiency and accuracy in the financial management of construction projects, project management platforms are also essential. They offer a range of tools such as collaboration features that allow different team members to work simultaneously on the same file and store work in the cloud, without fear of losing important data and information. This improves internal communication and facilitates the sharing of crucial information among project stakeholders. Make informed decisions, avoid excessive costs, and ensure the success of construction projects by experiencing the support that these tools provide!

 

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