When it comes to construction contracts, all roads lead to and from the work breakdown structure (WBS). Not only is the WBS the strategic backbone of a project, it also provides a common framework for the natural development of the overall planning and control of a contract.

A strong WBS allows the project team to monitor and track costs from estimating through project execution. It lays out the estimate, schedule, execution and buyout strategy, and it helps formulate a plan and path forward for the project itself. It also defines how the activities within the contract will be measured, including cost elements linked to a schedule of values for reporting budget versus actual against percent complete.

Following are insights into refining the WBS.

Conceptual Stage
At the conceptual stage of a project, the WBS is a high-level document. Then, during the course of a project, the WBS can become more refined to give leaders—procurement officials, estimators, project managers and owners—a clearer picture of trends and future conditions impacting costs. In other words, they can spot the cost trends. These early efforts provide a well-defined budget and cost structure, which is critical during the execution phase.

To receive the benefit of a refined WBS, first understand the job and how to assemble the project team. Second, know the buyout strategy by understanding stakeholders’ needs and requirements. Finally, assure that measurement of progress against those needs can be achieved. Projects that don’t carefully consider the WBS and cost control structure are guaranteed to have more change orders, with a resulting higher final cost for the overall project.

However, even with a preliminary WBS in place, that backbone needs strengthening. The two primary ways for doing this are spotting cost trends and understanding project needs. When does the WBS need refinement? How can a company apply the dual approaches of spotting cost trends and understanding project needs? 

Spotting Cost Trends
When a project needs better insight into managing contracts and budgets, it’s a sure signal that its WBS requires updating. In one such case, the original cost structure had been set up by a CSI standard code structure, but the CSI codes didn’t allow visibility on how to manage individual contracts and budgets. By incorporating an execution strategy into the cost system, the numbers were rolled up more easily for projecting into the future.

By refining the WBS in this way, all the costs line up. Because the estimate is created using a standard cost structure, the budget is set up using the same codes that tie into the schedule, showing earned value and performance evaluation on a monthly basis.

Another flag that calls for refining the WBS is the need to standardize. Being able to pull up historical information (e.g., to see the cost of a general contracting package in the automotive industry) helps develop costs on a new automotive project more accurately and earlier in the project. Past information, such as the sitework package costs, can aid in refining future estimates and costs for similar packages.

When developing a standard WBS and cost coding structure, estimators and cost engineers must work together to determine the best strategies. The cost engineer creates the standard cost structures and refines them for the project. These cost structures are forwarded to the estimator for coding. When bids are submitted, the same cost structure is used on the bid form to get back actual costs, analyze the bids and cost the bid prices to the estimates. This helps identify gaps in the bids and allows for an apples to-apples comparison across bids. This method also provides insight into the bidder’s understanding of the scope. Finally, the bid numbers can be used to validate current market pricing and close the loop on estimate versus actual.

With the next estimate, the historical data can be generated more quickly and can sharpen accuracy of future projections. If a refined WBS structure is not yet in place, data mining historical information is difficult to view when learning how to improve on the next job. Standardizing allows a project to be followed from estimate to buyout to actual pricing. A refined WBS provides a standard logic to see from start to finish.

Understanding the Needs
The following tips can help extract the maximum benefit from a refined WBS.
  • Understand the job and assemble the project team. Know the buyout strategy and understand the stakeholders’ needs and requirements, such as construction strategy, capitalization, equipment and depreciation. For example, phasing of construction causes production line interruptions, and so some planning is required to handle that smoothly. It may be necessary to stock up on inventory while that line is down. Therefore, learn the implications on operations and cash flow, and what part of the project to execute and when.
  • Make sure that progress can be measured against the needs defined. Break the WBS down into quantifiable pieces to evaluate the progress of work using either a cost-plus or lump sum approach. The cost-plus approach is a micro-level analysis of receipts, labor hours, daily time slips and cost analysis against initial cost projections. This approach is highly quantifiable. The lump sum approach is a higher level analysis of larger milestones, such as percentage of overall completion, a building finished or a roof completed. Payments are determined based on percentage of completion.
  • Understand the job and its ultimate destination—namely, the deliverable and the report to the owner that explains costs. To get buy-in from all stakeholders, talk to the leaders: procurement, estimators, project manager and owner. This is more productive than working in a box, where the cost engineer puts the budget together in isolation. Together, these four leaders should decide if the cost report makes sense by holding a cost review meeting, making monthly projections and revisiting them, and then making adjustments with each monthly cost review. In addition, they should examine where the project is versus where it was projected to be, what has changed since the last month, and note which change orders and work orders were approved. Finally, they should record progress of completion and adjust trends accordingly.
An example is cost for concrete. Suppose that three bid packages each contain concrete work. Having only one concrete code for all packages would make it difficult to measure the progress of the concrete work. A separate concrete code should be created to measure progress for each bid package.

To measure progress, codes for cost buckets should be small enough to represent easily identifiable units of effort or materials. On the other hand, if the code or cost bucket is too small, it may not be worth the time it takes to manage the code. Costs need to be placed into the right amount of codes, with an appropriate and measurable balance. It takes experience to know how many codes are needed.

For example, a $5 million code, spent in 50 increments of $100,000, is an appropriate 10 percent of the project that makes sense, but some codes may be less than 5 percent. A clearly defined progress rate depends on project scope. Good increments make for good measurability.

All of the preceding examples underline the importance of refining the WBS at timely intervals so the cost control manager cannot only gauge the progress of the current project, but also have better information when preparing for future projects.

Jennifer MacLeod is a department manager and senior associate at SSOE Group. For more information, call (567) 218-2415, email jennifer.macleod@ssoe.com or visit www.ssoe.com.