WBS and Project Control Using ERP
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WBS and the Role of Estimates
To understand WBS, first look at costs. Costs of the entire corporation can be compared from quater to quarter.
Costs designated by product determine where money is being spent. Labor costs can be compartmentalized by
employee grade.
Perhaps another individual wants to partition department costs. Contract and job shop manufacturers might want
their costs segregated by customer or job order on a project. The latter want the ability to monitor the actual
procurement and production of a project or job against an estimate. They want to determine, through any given
period, their earned value.
In order for this project cost system to have such a capability, it must capture and record costs and budgets
through the end of each period for each cost element, as well as the estimate for each period. This means that
each cost charge must be stamped with a time period. Plus, the program or project manager must make sure
there is a budgeted amount for each cost element for each time period.
Therefore, the enterprise resources planning (ERP) system must not only be able to indicate that a widget flange
costs $30 but that the company spent this $30 during May and had budgeted to spend $X oon it by a certain time.
Now the element of time has been added to the establishment of a standard. With this date, a company can
determine earned value and calculate variances.
At-A-Glance
Companies that manufacture in a make-to-order environment often find establishing cost and resource estimates
to be a daunting challenge.
When employing a work breakdown structure (WBS) for unique projects, companies must develop budgets from
the standpoint of both time and cost, but estimates based on past experience are often wildly off target.
A project control module, added to the company's ERP, can provide greater budget accuracy by overseeing costs
and monitoring timelines.
Here's an example: Imagine a major aerospace company uses WBS is engineering, prototyping, and running full
production of a space shuttle. Engineering is comprised of software design, electronic engineering, mechanical
development, and more. Prototyping includes detailed design, electrical and mechanical plans, and final assembly.
In this environment, the company must establish budgets for each period for each of these subgroups and assign
a cost account manager responsible for each. Budgets are developed by both time period and cost element.
This hypothetical company has just entered the world of WBS. The scenario described above is of a three-level
WBS, where the top level reports to the program manager, the second level is the individual department
manager's WBS, and the subdepartment cost account manager level acts as the third. In this three-level WBS,
cost accumulation, the budget, and the cost performance measurement must be available to all levels for the
department manager.
This is how management will be individually measured, and if the company is a government contractor, this will be
the basis for how it gets paid.
Can ERP Work in a WBS Environment?
For ERP modules to support real-time benefits, they must possess four archetectural capabililties. And the system
must provide these capabilities without hindering other departments.
Inventories, costs, shop orders, purchase orders, requisitions, receipts, and sales orders must be maintained by
item number as well as by project and WBS account. (All ERP packages track by item and some also by project,
but only a few by item-project-WBS account). It is not enough for the ERP system to provide the capability of
denoting a standard solely at an item level. Project-oriented organizations need the ability to correlate the use of
material and labor to one key "manufacture" or "procurement" item number at a WBS level. In this way, the
computation and organizational review of the cost and schedule variances are simplified because they are
performed at the WBS level, based on BCWS, BCWP, and actual cost of work performed (ACWP).
Costed transactions, including all material movement and labor transactions, not only are the basis for
accounting's general journal entries, but are based on accurate estimates. They update the project/WBS cost
components of material, labor, overhead, subcontract, and other direct costs as well as selling, general, and
administrative, which are used in all ACWP and BCWP calculations.
A cross-reference must be maintained between the ACWP costed transaction and the general journal entry.
ACWP and BCWP costed transactions must be as to-the-minute for the project management department as the
journal entries emanating from other departments are for the general accounting department.
Thus, estimates are not used for tracking manufacturing and purchasing variances at an item number level, as
they are in standard, repetitive situations. In fact, in most WBS environments, this type of detail is not required.
Again, for a WBS environment, estamates must be at least recorded at a higher level and especially if prototyping
or significant engineering is involved in the WBS account. Estimates must be derived not only for measurements
of material and labor usage, but additionally for subcontract work and other direct charges expected to be
incurred, such as travel and expenses, toolings, and special inspection charges.
Estimates also must be used as the basis for formulating budgets by period. In a WBS environment, as estimate
by period by WBS account is known as the budgeted cost of work scheduled (BCWS) and is used in computing
earned value through a period known as the budgeted cost of work performed (BCWP). Resulting estimates, as
well as the derivations of the formulating budget and earned value, become the basis to substantiate billings and
performance.
The company must ask itself: "Do we know our projects' estimates to completion? What are the actual versus the
earned values through a given period?"
Odds are the company has answers to these questions but are they accurate? In most organizations, project
management teams are using BCWS estimates based on "after the fact" data, or they're relying on engineering
standards. Too often, the information is too late for corrections to be implemented before money and other
resources are wasted.
This goes a long way in explaining why a defense contractor's unique solution can run tens of millions of dollars
over budget, a bridge can cost 50 to 100 percent more than expected, or a movie can make its budget overrun
into headlines. Being over budget on projects is almost a self-fulfilling prophecy with a built-in excuse: "The
estimates aren't accurate."
So how do so many companies using WBS calculations end up with such poor performance? The data they get is
bad, old, and not in a proper format. Why? Many ERP systems used in WBS environments attempt to measure
variances at a work order or purchase order level, when they instead must be computed online and in real time at
a higher, WBS level. Too often, data are not only reported poorly, but are batched and forwarded to project
management long after the fact.
When variances appear, too much money and time already has been wasted. The lack of proper input, based on
accurate standards, to the project management group does not enable them to take corrective measures at the
time of variance, only later - often one or more months - when the variance finally becomes known.
Project Control: The Missing Link
If accurate standards were all that were needed, the solution would be quite simple. Send any data gathered by
standard ERP modues directly to the project management software. However, that won't work. BCWS and BCWP
need data different from modules designed to provide data from work or purchase orders.
That's why a project control module is required. It links inventory items, sales orders, work orders, purchase
requisitions, and purchase orders within each project. At the same time, it gives the user the flexibility to ignore
certain project restraints. For instance, some items - steel, lumber, cabling, and so forth - can be planned without
regard to the project to increase procurement or manufacturing efficiencies. As detailed, these are typically
subcomponents used throughout the organization's products. In these cases, the project control module simply
allocates material (or those finished subcomponents) to each specific project.
Ultimately, each manufacturing work order and purchase order line will be associated with an individual project.
Then, at any point, accurate online project status will be available, and the results are impressive.
For instance, an aerospace company or builder of telecommunication transmission systems can enter a specific
customer/sales order/project and immediately receive to-the-second status regarding purchase requisitions,
purchase orders, and production work orders. Working in concert with the project control module, the WBS
module will provide the WBS for each project and each level of the project.
As the user receives individual contracts or sales orders, they are entered into the system. Budget figues for each
account will be available in both dollars and hours. Multiple budgets, based on standards, will now be provided -
original, revised, and current. As transactions are processed throughout other modules, such as manufacturing,
the costs associated will get posted to the WBS structure.
With WBS processing, project/program managers can aggressively manage their projects. Project-to-date
reporting, actual versus budget, and estimate-to-complete reporting become readily available. Corrective actions
can be taken the moment variances occur.
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WBS and Project Control Using ERP - May 1998
