Cost Management Solutions (1)

There are two concepts which are central to change management and contracts management on projects: Cost Attribution and Cost Segregation.  These concepts relate to a systemic thinking of costs and promote a proactive approach to the treatment of costs including clarity in project reporting and decision-making.

Cost Attribution – This involves connecting costs to specific activities and/or sources.  It is the discipline of categorizing the causes of the costs; it facilitates a better understanding of the project status and direction.  For example, if you were managing the development of a hotel project, you would want to ensure that the causes of cost increases were clearly visible.  You might want to assign one of the following categories to each scope change or potential scope change – hotel operator, owner, retail, spa, food & beverage operator, site conditions, weather, adjacent properties, marketing, guest experience, errors & omissions, scope ambiguity, scope omission, scheduling error, coordination, et al.  By doing so, you could generate reports indicating the relative size of each of the attributes and their contribution to the overall project cost increases.

Cost Segregation – This enables project managers to connect specific costs with their associated activities or contractually stipulated group of activities.  Proper cost segregation involves  discipline and is consistent with good project management and contract management practice.  It also connects with the work breakdown structure (WBS) and earned value analysis (EVA).  For example, lets say your company has a cost reporting system which has a nine digit code which includes location, project number and a three-digit suffix.  It might read like this, LOC-JOB-XYZ.  The XY might denote the type of trade work (masonry, carpentry, electrical, plumbing, etc.).  The Z would indicate whether the work was contract work, an owner-directed change, a pending prime contractor claim, an unresolved subcontractor change, an approved change, overhead, force-majeure, marketing, an internal charge or a parent-company charge.  A number from 0 to nine could be assigned to these categories.  The project manager could identify the categories of work and make informed decisions regarding specific work types including whether or not to add resources or start/stop certain activities.  Executives would also be able to assess the health of projects based on the types of activities in progress and in the pipeline.

The implementation of cost attribution and cost segregation into the day-to-day management of projects is an important step towards increased clarity and better project management.  It also provides executives with the information necessary to make strategic decisions regarding projects, staffing and resources.



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