Ten Rules of Cost: Rule #4

Rule #4 – Look! Up in the sky! It’s a budget! It’s a forecast cost! It’s confusion galore!

When I started working on commercial construction cost management software, an early, hard lesson was how annoying cost people are, especially when they disagree with you. And disagree with me they did.

That’s not what budget means, they’d say. That’s not what commitment means. That’s not what forecast, actuals, spending, accruals, remaining to spend, bought or unbought, variances, unit cost, cost plus, or… well, pretty much everything.

It seems like everyone had a different take on the cost control lingo, even within the same company.  Back in the day, I was flogging software in the oil patch for a megaproject.  I mentioned I’ve stopped being surprised with all the different ways people think about the term budget.

• Oil Patch Big Wig: “That may be so, but we all agree on what budget means”
• Me: “What do you do when something is forecast to come in over budget?”
• The meeting: ninety-minute discussion about what budget means, what over-budget means, how to control it, report on it, etc.
• Oil Patch Big Wig: “well, maybe we don’t all agree on what budgeting for going over budget means…”

In hindsight, it should never have been a surprise.

Everyone’s context is different.  On the same project, each party has wildly different perspectives.  One party’s cost is another party’s revenue.  Some contracts might be lump sum, some cost-plus, some pay-as-you-go, some provide hired guns. Some are a mix of all the above. These different contexts change everyone’s risk profile.

Throw in all the different types of projects, different types of businesses and operating models, and it’s a wonder we get the alignment we do.  I still recall the eye-opening, throw-away comment from a VP managing the multi-billion annual real estate budget for an international retailer: “We are one line on the annual report.” Zoinks! All their real estate cost management was driven by how retailers do business. But, each of the builders who worked for them thought about cost control like a construction company.

The other aspect pushing all the different perspectives is how the various concepts are interrelated.  For example, defining “cost overrun” in your system creates an implied relationship between cost and whatever you are referencing, typically a budget of some sort. Whatever you count in “cost” influences what you include in “budget,” so you can compare apples to apples. I suspect some would even venture you should call it “budget overrun,” thus suggesting a change in the +/- sign as well. But I digress.

This doesn’t mean it’s all the wild west out there.  There are solid patterns in places like PMBOK, the Earned Value crowd, Cost Engineering Societies around the world, etc. There are also strong opinions in the accounting and finance practices, which cost controller types will run into everywhere.

The critical point is that I would have avoided a lot of long, painful discussions and misunderstandings if I’d started with understanding what people mean with their terminology.

To wrap up, here are some questions that I find help get to the bottom of what people are thinking for construction cost management:

• How do you manage and report on forecast overruns? Aka – how do you budget for going over budget? Who do you need to tell or get approval from, and under what conditions?
• What number informs your client is their all-in, best-forecasted final cost? Is it their current budget? Is it the Estimate at Completion? A subset of something else?
• What do you tell corporate the all-in costs are going to be? How do you compare them to plan?
• How do you calculate the profitability or net benefit of the project? Of a line item? Or when a project or line item is getting into trouble?

Opening up to different ways people interpret terminology will help square up the discussion on what cost control means to you and your team. It might not make you a less annoying cost control person – we all know we know we secretly love to be a little bit annoying – but it will help us all be a wee bit less misunderstood. Which is something we can all agree on.