Cost Engineering is an Oxymoron!

Cost performance is a symptom of other management functions. It is impossible to ‘engineer costs’. The only way to change cost outcomes is to change the other processes that incur costs.

The three key areas of business operations and project management that incur costs and where a change in the process will cause a change in costs are:

  1. Changing the procurement / purchasing / supply chain processes that acquire the required inputs to the process being managed.
  2. Changing the way the work that transforms inputs to outputs is undertaken through enhanced management and leadership including skilling, motivating and directing the people involved in the work and ensuring they have the correct resources and equipment to undertake the work.
  3. Focusing on the quality of the outputs produces to ensure the ‘right scope’ has been delivered at the ‘correct quality’. Too low and there are cost consequences in rectification, too high and you may have spent money unnecessarily.

These three elements exist in a risk frame. Whilst risk management will not ‘control’ the future, it will allow opportunities to be identified and grasped and threats mitigated and avoided by changing the way the work is undertaken and as a consequence optimise cost outcomes.

The two key facets that permeate all of the above are stakeholder management and time management.

  • Stakeholder management both within the team and externally, (including effective communication) is central to achieving a successful outcome at the best price. Stakeholders are in the supply chain, include the project team and contractors and can have a major impact on the risk profile of the work. For more posts on stakeholder management see: http://www.stakeholder-management.com/blog/?cat=5
  • Time management focuses on ensuring the right people are in the right place at the right time, with the right resources and equipment to do the work in the optimum sequence. For more posts on time management see: https://mosaicprojects.wordpress.com/category/project-controls/scheduling-project-controls/

Both of the above need regular reviews and adjustment within the overall frame of the emerging risk profile.

Where ‘cost engineering’ adds value is via techniques such as Earned Value (EV). Applying EV effectively allows the symptoms of a deviation from the expected performance to be highlighted through Cost Variances and other reports.

As with medicine and diseases, it is capability to recognise and correctly interpret symptoms that allows diagnosis that leads to the effective treatment of the under-laying problem. In project and business management space, this should translate to the requirement for managers not only to report a cost variance, but also to identify the cause of the variance and to recommend and/or implement corrective actions.

Whilst it is impossible to directly manage or control costs; timely and accurate information on cost performance can be a valuable diagnostic tool to remedy the real issues. What’s needed is for senor managers to stop focusing on ‘cost’ and start asking deeper questions about performance and risk. I know many readers of this blog will say this already happens in their organisations, but I also know that far too many other managers focus on the symptom of cost performance rather than the under-laying problem to the detriment of their businesses.

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11 responses to “Cost Engineering is an Oxymoron!

  1. Impossible is too strong a word.

    There are several ways we “directly manage and control costs.” Starting with Firm Fixed Price contracts.

    Not all work is amenable t0 FFP, but many elements of project are.

    Next is Cost Not to Exceed, with fee incentive. The upper limit of cost is defined and the supplier is incented to delivery lower.

    These contracts are used in DoD, DOE, and heavy construction.

    • Contracts can help but alone won’t do any good.

      Wembley Stadium was a ‘Guaranteed Maximum Price’ contract that cost the client an additional $200million plus and the builder even more. And the Courts in the USA and every other ‘western’ country are full of contractors claiming extra costs on fixed price contracts.

      Cost is a symptom of management actions. Change the management and you change the cost outcome.

  2. I’ll say Pat that the experiences in the construction industry are different than US Defense. There are overruns on almost every defense program we work. Primarily from requirements changes, funding instability moving work to the right resulting in increased cost, and other well known reasons.

    But as a manager of both Cost and Schedule staff on moderate to large ($600M to multi-Billion) programs, the blanket statement that cost engineering is an oxymoron is lacking a domain and context.

    The “engineering” cost starting with the Basis of Estimate in the proposal to the monthly – and at time weekly – cost and schedule ETC/EAC, is well established in the DoD 5000.02 contract environment.

    Maybe a context and domain at the top of the post would bound the generalities.

    • EV systems report cost information in a valuable way to help diagnose the problems.
      Estimating calculates what the cost expenditures may be for work in the future.
      Both are important process, but neither changes any actual cost movements.

      Costs are incurred when money is spent. The processes that change expenditures are in the areas of HR, Procurement and the directing and leading or resources in the execution of work.

  3. I was thinking a business or technical context.
    I want context is cost engineering an oxymoron? Because it sure isn’t an oxymoron in NASA and DoD, DOE, and CH2M Hill Construction Management Services !

    • Whilst this is true, the question remains how do the processes we call ‘cost engineering’ engineer a change in the actual cost outcomes for a project? Engineering implies creating an outcome to solve a problem. Cost engineering diagnoses problems but without actions in other disciplines has no effect.

      The key is communication leading to management action!

  4. We answer that question in our domain through the guidance of GAO and NASA Cost Engineering Handbooks.

    Here’s a central source of cost estimating and cost engineering

    http://cost.jsc.nasa.gov/links.html

    I’d also start at the AACE http://www.aacei.org/ for some guidance on how “engineering of cost” is a critical success factor in many project domains.

    And yes, you are exactly correct – “Cost Engineering” is engineering (as a verb) of the cost aspects of the project to assure compliance with the cost performance targets.

    On our manned spaceflight avionics programs (~$700M of product development), cost engineering is performed in the same way as hardware ASIC engineering or power supply thermal engineering.

    You last two sentences are universally true be it CE or coaching professional baseball.

    I’ve become confused as to what you see as the problem from the title of the post – “CE is an Oxymoron.”

    How do you see it as an oxymoron in specific context and domain, because for NASA and DoD programs CE is NOT an oxymoron. Maybe looking at how CE is done in one of those domains would be helpful.

  5. Pat,

    There’s a professional org in your country
    http://www.icoste.org/
    maybe they can provide some insight into how CE is used.

    And as a counter statement, from direct experience in avionics, telecommunication (defense), heavy construction (DOE), IT (ERP), Phrama-test equipment, plup and paper plant construction (Boise Cascade), Oil&Gas platform construction (Exxon, Elf, Total, Mobile)…

    It is absolutely possible to ENGINEER the cost of the system and the project that delivers the system. In fact these is a key performance indicator for these projects. It starts with Price to Win (there are specialist on our teams with this title), and continues on to the Cost Engineers participating hand in glove with the development staff to hold the cost to the “price to win” award value.

    Example and references provides on request.

    • I think we are in agreement Glen. If you read what you have said it closely aligns with Lynda’s original post. Your ‘cost engineers’ are using actual or projected costs as a diagnostic tool to identify issues so that the ‘development processes’ can be re-engineered to achieve the desired outcome. You cannot change cost on its own, you have to change something else to cause a change in the costs.

      Good or bad cost outcomes are symptoms of other factors. Whilst mature organisations realise this and make appropriate use of the diagnostic information to re-engineer other elements such as design, procurement or workforce management far too many managers focus on the symptom ‘cost’ rather than the root cause.

  6. Sorry to see the term Cost Engineering misinterpreted (as is common). Cost engineering is not about engineering costs, but considering cost (which is any investment of resources including time) in the engineering and other scope defining activities leading up to the investment decision. That is the origin of Cost Engineering, but somehow many have come to see it as synonymous with project controls which it is not.

    • If you look at most of my writing, there is always a caveat ‘after the investment decision is made’. What you describe John is most often referred to as ‘value engineering’ or value management these days – the European meaning of this term = maximising value (the USA tend to use the term for cost cutting). Regardless of the terminology balancing: cost, quality, durability and buildability to create the most valuable outcome is vital.

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