Dear Travis, Glen et al,
Here is how we in construction use ABC.
Step 1- We either purchase or develop a cost estimating database which is DELIVERABLE or SYSTEM based. In the example below, I have used Cubic Yards of Concrete, (Unit Pricing) from RS Means Facilities Cost book, but I could have also used an assemblies estimating method as well. Or, I could have developed a similar looking in house cost estimating system, but it would look very similar to this.
Figure 1- RS Means Estimating Database
As can be seen from the above example, you can use either commercial databases or develop your own. RS Means currently uses CSI’s Masterformat (Unit in Place) or Uniformat, (Assemblies) however; these seem to be giving way to Omniclass, as we move towards Building Integrated Modeling (BIM)
STEP 2- The second step in the process is to convert the unit price estimate into an activity based costing model. From the quantity take off (“Bill of Materials” or BoM) we know that we have 200 cubic yards of concrete beam to form, pour and strip.
Figure 2- Basic Activity Based Costing Model by Gary Cokins
We now have the Activities (in this example, “Form, Pour and Strip 25′ of 5 Kip Beams”) and knowing that the crew assignment is a “C-14″ we can identify what resources are needed and what each of those resources costs us.
Figure 3- RS Means Standard Crew Composition
So we now have the activity and the resources needed to execute that activity, and knowing the costs, we also can project how much that activity will cost us, both “bare” (direct) and “fully loaded” including all overheads, contingency and contractor profits.
STEP 3-
Knowing the crew size and costs, knowing the unit costs and the unit productivity, and the total units required (200 CY) we are now positioned to calculate the duration of our activity and the total cost of that activity.
To calculate the duration, we know from our database that the daily output is 18.55 CY per day. And knowing from the quantity take off that we have 200 CY, by dividing 200/18.55 = 10.78 or 11 days duration.
Figure 4- RS Means Data merged with Activity Based Costing
Taking the same approach with the costs, we can see that if you are doing the work yourself (either as an owner or contractor) your COSTS should be 200 CY X $635.50 = $127,100, and if you are a contractor, for the purposes of using Earned Value, your “Schedule of Values” for this activity would be $179,000.
Obviously enough, as a contractor, I would have to have an in house accounting system capable to allow me to charge not only the direct costs, (i.e. concrete, equipment, labor) but also my INDIRECT (overhead) costs to this activity.
To conclude, what I share with you is not new. As a building contractor, I have been using this method since I got out of school during the 1960′s, and it was in use long before then. The challenge is how to get IT, Telecommunications, the Banking and International Development Sectors to adopt the same fundamental tools and techniques that construction has been using for well over 60 years now.
If anyone has any questions or better yet, would like us to conduct a 2 day course on integrated Activity Based/Earned Value Management, “have computer, will travel”- and there is NO place we won’t go. (Even Iraq, Iran and far-away places with names that end in “stan”,)
BR,
Dr. PDG, Jakarta
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{ 15 comments… read them below or add one }
Paul –
What are you doing here that is different from normal cost estimating? How would a non-ABC estimate be prepared?
As I noted in my comment on Travis’s post, ABC (at least as I understand it) was intended to more accurately capture overhead costs in an operational environment. I don’t see you doing anything different regarding overhead.
Duncan
Hi Bill,
Sorry, I didn’t realize I hadn’t responded to your question. Yes, ABC is intended to capture the “real” or “true” overhead costs. Which requires that when a manager or even senior manager is working on any single activity (as opposed to general business items) we too are required to charge our time.
The numbers I showed using the RS Means database was for illustration purposes only. Eventually, a company MUST create their own database of costs. We happen to like and use the RS Means TEMPLATE, but when we calculate our overheads, it varies from activity to activity.
BR,
Dr. PDG, Jakarta
http://www.getpmcertified.com
Paul –
What are you doing here that is different from normal cost estimating? How would a non-ABC estimate be prepared?
As I noted in my comment on Travis’s post, ABC (at least as I understand it) was intended to more accurately capture overhead costs in an operational environment. I don’t see you doing anything different regarding overhead.
Duncan
Hi Bill,
Sorry, I didn’t realize I hadn’t responded to your question. Yes, ABC is intended to capture the “real” or “true” overhead costs. Which requires that when a manager or even senior manager is working on any single activity (as opposed to general business items) we too are required to charge our time.
The numbers I showed using the RS Means database was for illustration purposes only. Eventually, a company MUST create their own database of costs. We happen to like and use the RS Means TEMPLATE, but when we calculate our overheads, it varies from activity to activity.
BR,
Dr. PDG, Jakarta
http://www.getpmcertified.com
Costing system that identifies the various activities performed in a firm and uses multiple cost drivers (volume and nonvolume based cost drivers) to assign overhead costs (or indirect costs) to products. ABC recognizes the causal relationship of cost drivers with activities.
Dr. PDG,
What troubles me with all cost estimating I see is that they are not project management driven. You have quantities, you have people, you have productivities and you work them up to get a result. No scheduling modeling for that.
I bring all the information you have in your database into the actual activities that will perform such work in my project. I then bring the crew description with their data into my schedule and then I execute my schedule base in the volume of work that I expect. It is the tool that will calculate the duration based in the data given and if I have unlimited resources, it will give me the same results as you would get in any spreadsheets.
The difference then is that I can actually resource level my CPM and I will find out that some of the resources applied are underestimated and others are overestimated based in the actual results of the application of such resources all through the project, not only at the activity level.
I bet the cost estimating world will be more precise when they go lower in their planning for estimating by creating computer modeled schedules for the deliveries they plan. ABC should be for first drafts, but just as you build up a database of cost elements, you can build up a database of project logics (fragnets) that once applied to a new project will give you better simulation of cost and time results.
Regards,
Peter Mello, PMI-SP, PMP
Peter,
Take a look at the NASA 2008 Cost Estimating Handbook to see how cost, schedule, and techncial performance are intergrated into the Performance Measurement Baseline (PMB).
Dr. PDG,
What troubles me with all cost estimating I see is that they are not project management driven. You have quantities, you have people, you have productivities and you work them up to get a result. No scheduling modeling for that.
I bring all the information you have in your database into the actual activities that will perform such work in my project. I then bring the crew description with their data into my schedule and then I execute my schedule base in the volume of work that I expect. It is the tool that will calculate the duration based in the data given and if I have unlimited resources, it will give me the same results as you would get in any spreadsheets.
The difference then is that I can actually resource level my CPM and I will find out that some of the resources applied are underestimated and others are overestimated based in the actual results of the application of such resources all through the project, not only at the activity level.
I bet the cost estimating world will be more precise when they go lower in their planning for estimating by creating computer modeled schedules for the deliveries they plan. ABC should be for first drafts, but just as you build up a database of cost elements, you can build up a database of project logics (fragnets) that once applied to a new project will give you better simulation of cost and time results.
Regards,
Peter Mello, PMI-SP, PMP
Peter,
Take a look at the NASA 2008 Cost Estimating Handbook to see how cost, schedule, and techncial performance are intergrated into the Performance Measurement Baseline (PMB).
Hi Peter,
Where to start?
First, based on first hand observations from some of our clients, especially those in the telecom sector, (and by extrapolation to the IT sectors) I believe the rather sloppy estimating came as a result of the very high margins telecom equipment were commanding. Because of such high margins, it really didn’t matter how accurate costs were.
Now with profit margins dropping down towards 10% or even into the single digits, many of the telecoms (and I suspect the IT sector as well) are approaching panic mode.
Now they are realizing what we learned in construction long ago. If you are dealing with single digit margins, the details become critical. It is the details which make the difference between profit and bankruptcy.
I think even PMI is pretty clear that the greater the level of detail, the more accurate the estimate? Well, this is where activity based costing comes into the picture. Looking at project management through the eyes of the contractor, the contract documents tell me WHAT is needed (the WBS) but with single digit margins, the ONLY competitive advantage that I have over other bidders is HOW I plan on doing the work……. (Keep in mind their materials and labor costs are pretty much identical to mine, so the ONLY real advantage is in how efficiently/effectively I can deploy my resources to maintain their productivity. The only other variable I have control over is my overhead. Which is why you see most contractors working out of industrial rather than fancy office sites.
One suggestion- I see by your credentials that you seem to be a PMI loyalist? If cost estimating, pricing and bidding are your interests, let me suggest you move beyond PMI and consider what AACE has to offer? http://www.aacei.org/technical/rp.shtml
I think you will find that AACE’s “open source” approach will be a refreshing change from PMI (we make our IP available at no cost) and not only that, you will find the technical products AACE has developed to be far superior to those PMI advocates.
BR,
Dr. PDG, in Boston…..
http://www.getpmcertified.com
Hi Peter,
Where to start?
First, based on first hand observations from some of our clients, especially those in the telecom sector, (and by extrapolation to the IT sectors) I believe the rather sloppy estimating came as a result of the very high margins telecom equipment were commanding. Because of such high margins, it really didn’t matter how accurate costs were.
Now with profit margins dropping down towards 10% or even into the single digits, many of the telecoms (and I suspect the IT sector as well) are approaching panic mode.
Now they are realizing what we learned in construction long ago. If you are dealing with single digit margins, the details become critical. It is the details which make the difference between profit and bankruptcy.
I think even PMI is pretty clear that the greater the level of detail, the more accurate the estimate? Well, this is where activity based costing comes into the picture. Looking at project management through the eyes of the contractor, the contract documents tell me WHAT is needed (the WBS) but with single digit margins, the ONLY competitive advantage that I have over other bidders is HOW I plan on doing the work……. (Keep in mind their materials and labor costs are pretty much identical to mine, so the ONLY real advantage is in how efficiently/effectively I can deploy my resources to maintain their productivity. The only other variable I have control over is my overhead. Which is why you see most contractors working out of industrial rather than fancy office sites.
One suggestion- I see by your credentials that you seem to be a PMI loyalist? If cost estimating, pricing and bidding are your interests, let me suggest you move beyond PMI and consider what AACE has to offer? http://www.aacei.org/technical/rp.shtml
I think you will find that AACE’s “open source” approach will be a refreshing change from PMI (we make our IP available at no cost) and not only that, you will find the technical products AACE has developed to be far superior to those PMI advocates.
BR,
Dr. PDG, in Boston…..
http://www.getpmcertified.com
Glen,
I have seen it. I am also sure that this approach is top of the market in the Americas. I have also been exchanging a couple of emails with people around NASA and the application of integrated risk to Earned Value Management. When more companies are into such approaches and best practices promoted by Nasa, we will see great improvement in general terms everywhere.
But this may come up as shocking to you, but there is more to be done than that! Some paradigms of the Western World I have found to be improved in the Eastern World and although some of it has been seen in some seminars in The US, it hasn’t caught the eyes to its importance yet. Have you heard of trends for success probability indexes? It may complement risk simulations as usually done with scenarios, monte carlo and others; it may even be created using some of the know tools (monte carlo / pert) but its application goes beyond what is seen because it deals with a truly integrated risk scenario in a schedule, capable of demonstrating not trends of what has happening (like EVM), but trends to what may happen (future risk probabilities). This is known as the Russian Resoucer Critical Path Method, or Success Driven Project Management.
I can point you some papers if you are curious about it.
Glen,
I have seen it. I am also sure that this approach is top of the market in the Americas. I have also been exchanging a couple of emails with people around NASA and the application of integrated risk to Earned Value Management. When more companies are into such approaches and best practices promoted by Nasa, we will see great improvement in general terms everywhere.
But this may come up as shocking to you, but there is more to be done than that! Some paradigms of the Western World I have found to be improved in the Eastern World and although some of it has been seen in some seminars in The US, it hasn’t caught the eyes to its importance yet. Have you heard of trends for success probability indexes? It may complement risk simulations as usually done with scenarios, monte carlo and others; it may even be created using some of the know tools (monte carlo / pert) but its application goes beyond what is seen because it deals with a truly integrated risk scenario in a schedule, capable of demonstrating not trends of what has happening (like EVM), but trends to what may happen (future risk probabilities). This is known as the Russian Resoucer Critical Path Method, or Success Driven Project Management.
I can point you some papers if you are curious about it.
Hi i am a studernt currently writing an assignment on ABC model and it doesn't make sense to me
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