The Use Of Non Standard Work Breakdown Structures And Its Effect Accounting Essay

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3. Abstract

One of the benefits of a Work Breakdown Structure, (WBS), is that it allows for a better estimation of project costs; since it breaks down the project into simple tasks/deliverables to which costs can be attached. The establishment of accurate, reliable and credible cost estimates has been a major challenge to Estimators, and, although several reasons are responsible for this, the focus of this study is limited to the effect of computing cost estimates that are based on a non-standard WBS.

This Paper establishes that there is a strong link between a project's cost estimate and its WBS, and also how this estimate is affected when it is prepared using a defective/non-standard WBS.

Statistical analyses were carried out on all the cost estimates associated with each element of the case-study, non-standard WBS for a project, by having their Standard Deviations calculated. Results of these standard deviations were further used to determine their Coefficients of Variation (CV). A total of 7 WBS elements analysed, and their Coefficients of Variation ranged from 32.6% to 91.6% inclusive.

According to Statistics Canada [1] , any estimate whose Coefficient of Variation is below 16.6 % can be considered reliable for general use; those that fall between 16.6% and 33.3% contain high levels of error - and users should be cautioned - while if the CV is greater than 33.3%, it is deemed to be unreliable. When compared with the results of the study, it is very clear that none of the estimates derived using the non-standard WBS is reliable.

The use of standard WBS should be encouraged and adopted for cost estimation purposes. Its benefits have been carefully highlighted in the Paper.

Keywords: Cost Estimate, Work Breakdown Structure (WBS), Standard/Non-standard WBS, Variance, Standard Deviation, Coefficient of Variation

TCM Processes:

7.1 Project Scope and Execution Strategy Development

Appendix A- AACEI Recommended Practice No. 11R-88, Section I-2

4. INTRODUCTION

A system of best practices has been laid out, which, when followed, will lead to the development of accurate and credible cost estimates. These best practices represent an overall process of established, repeatable methods that result in high-quality cost estimates that are both comprehensive and accurate; and that can be easily and clearly traced, replicated, and updated [2] .

Several methods of cost estimation exist, but the most reliable and accurate is the "bottom-up" approach [3] , which relies heavily on the project's Work Breakdown Structure (WBS). This shows that there is a strong relationship between a project's WBS and its cost estimate.

The WBS simplifies the cost estimation process, as it allows for the breakdown of the project into simple tasks / deliverables to which costs can be attached. As a cost estimator, the Author has witnessed several disparities in the figures presented as estimates for jobs: figures which are based on highly defective WBSs (a sample of which is shown in this Paper). In a particular case, an Owner asked Contractors bidding for a job to prepare and submit to her a WBS (based on the work scope issued to them), before project execution; contrary to the best practice where the Owner is supposed to develop a WBS before program initiation [4] . The consequence of this action was that different Contractors prepared different WBSs for the same job. Where the WBSs were similar, they did not have the same amount of depth or detail, since there was no standardisation of any kind. In my view, it is necessary to correct the wrongs caused by the use of non-standard WBSs for our projects.

This Paper seeks to establish that there is a strong link between a project's WBS and its cost estimate, and also show how the estimate is affected when the WBS is defective i.e., non-standard. Ultimately, the establishment or adoption of a standardised WBS is seen as a major factor that will help re-align cost estimates and ensure an increase in their accuracies and reliability.

An example WBS that was prepared for a real project has been adapted and presented in the paper, together with its associated cost data. This will be used as a case study, and will form the basis of the discussion.

5. STATEMENT OF THE PROBLEM

One reason for using a WBS is to allow for a better estimation of cost [5] . It will therefore be safe to presume that the budget estimate for a project will be as defective as the WBS used in computing it. This situation is laden with risks, as the possibility of making mistakes or omissions are high. For the Contractor, the chances of losing out in a bidding process will be high, while an Owner will scarcely have an accurate baseline WBS on which to compare the prices of different bidders.

Cost estimates have been said to serve two general purposes [6] : (a) they assist the Program Manager to evaluate the program's affordability and performance against plans, as well as guide in the selection of alternative systems and solutions, and (b) they support the organisation's budget process by providing estimates of the funds needed to efficiently and successfully execute a program. When an estimate cannot adequately meet these two requirements, it wouldn't be advisable to put it to use.

6. METHODOLOGY OF THE STUDY

The methodology adopted in this paper is a largely quantitative approach in studying the challenges that face the Cost Estimator when establishing the cost of a project that is based on a non-standard WBS.

The paper relies on data from a project which is used as a case study. The actual WBS for the project is presented, and the resulting cost estimates given.

The estimates of both the Owner and the Contractors are presented, from which the Standard Deviation of each WBS element is calculated. Use is then made of the relationship between standard deviation and the Coefficient of Variation, to estimate the reliability of the estimates.

The project being reviewed was carried out in the oil and gas industry, in the Niger Delta region of Nigeria.

7. THE WORK BREAKDOWN STRUCTURE AND COST ESTIMATION

7.1 What is a Work Breakdown Structure?

A Work Breakdown Structure (WBS) has been defined as "a tool used to define and group a project's discrete work elements in a way that helps organize and define the total work scope of the project" [7] . It has been described as "the cornerstone of every program" [8] due to its importance in stating a program's needs, defining the work elements that have to be done in order to develop the program, and, providing a platform for identifying all the resources and tasks required to develop the program's cost estimate.

A WBS breaks down product-oriented elements into a hierarchical structure that shows the relationships between the individual elements, and between the elements and the overall end product.

As a best practice, a WBS that will be satisfactorily used for cost estimation purposes is created using the 100% Rule [9] which states that "the next level decomposition of a WBS element (child level) must represent 100 percent of the work applicable to the next higher (parent) element" [10] . This ensures that the costs for all deliverables are identified.

Figure 1: An Example Work Breakdown Structure

WBS for Offshore Field Installations

Offshore Field Installations

Level 1

Substructures

Topsides

Level 2

Jacket

Wellhead & Riser Area

Gravity Base Structure

Drilling Area

Level 3

Outfitting

Jacket Structure

Concrete Structure

Mud Handling & Drilling Utilities

Derrick

Mechanical Outfitting

Riser Area

Wellhead Area

Pipe handling

Level 4

Source: Norsok Standards, Z-014, Rev. 1, October, 2002.

7.2 Types of WBS

There are two main types of WBS: the Program WBS and the Contract WBS [11] .

7.2.1 The Program (or Project) WBS (PWBS) [12] 

This type of WBS is structured to embrace the entire program or project. Its main features are:

It is usually made up of 3 levels of products / elements, with all their associated work clearly defined:

Level 1 comprises the entire program or project.

Level 2 elements represent the major product segments or subsections.

Level 3 contains definable components, or subsets, of the level 2 elements

b) The Owner's control of the PWBS normally stretches up to the top three levels.

c) It is a foundation on which Contractors establish their Contract Work Breakdown Structures (CWBS).

7.2.2 The Contract WBS (CWBS)

The CWBS is the complete WBS for a specific contract. The Contractor extends the appropriate elements of the PWBS and defines the lower-level products, starting from Level 4 and working downwards. Its main features are:

it is developed by the contractor in accordance with the contract Statement of Work (SOW).

it is made up of the WBS elements for the products/deliverables/services that are the Contractor's responsibility to produce and/or perform.

A CWBS provides a reliable and visible structure that facilitates uniform planning, assignment of responsibilities, and status reporting.

7.3 Standard and Non-standard Work Breakdown Structures

A WBS can either be standard or non-standard. A standard WBS has been defined as a "neutral work breakdown structure that can be used more than once and serves as a template for creating operative work breakdown structures" [13] .

A non-standard WBS is one which is neither neutral nor can be used as a template for subsequent operations.

7.3.1 Why standardise a Work Breakdown Structure?

The following are among the reasons for standardising a WBS:

It helps to simplify the development of the top-level program WBS

It helps ensure the systematic collection and sharing of data from common WBS elements across all programs.

It provides a basis for Program/Project Managers to have a better view of a program's status, and facilitates continual improvement.

It allows for more consistent cost estimates and efficient program execution

It facilitates both the development of cost estimating relationships and allows for the comparison of common cost measures across multiple contractors and programs.

It helps the collection and reconciliation of contractor cost and technical data in a consistent format

7.3.2 Examples of Standard Work Breakdown Structures

Examples of standard WBS systems which have gained international prominence include the Norwegian Standard (Norsok), the Omni Class and the MasterFormat.

The Norsok Standards are developed by the Norwegian petroleum industry to ensure adequate safety, value adding and cost effectiveness -for petroleum industry developments and operations, and are intended to replace oil company specifications and serve as references in the authorities regulations.

The standards are normally based on recognised international standards; however, provision was made to include the broad needs of the Norwegian petroleum industry [14] .

MasterFormat: this is the specifications-writing standard for most commercial building design and construction projects in North America. It lists titles and section numbers for organizing data about construction requirements, products, and activities. By standardizing such information, MasterFormat facilitates communication among architects, specifiers, contractors and suppliers, which helps them meet building owners' requirements, timelines and budgets [15] .

The OmniClass Construction Classification System is a new classification designed to provide a standardised basis for classifying information created and used mainly in the North America and Europe by architectural, engineering and construction industries throughout the full facility life cycle from conception to demolition or re-use, and encompassing all of the different types of construction that make up the built environment [16] .

7.4: An Assessment of the Case Study, Non-standard WBS

Figure 2: The Case Study WBS

WBS for a Piping Construction Project

1.0 Engineering

1.1 Detailed Construction Schedule

1.2 Detailed Field Engineering & Drawings, Work Procedures, HSE Plans, Quality Plan, etc.

1.3 Material reconciliation for the works

1.4 Other engineering Works

2.0 Procurement

2.1 Consumables

2.2 Piping materials and all associated fittings

2.3 Flowline support materials - plates, pipes, etc

2.4 Piping Valves

2.5 V-cone Gas meter

2.6 Other materials

3.0 Workshop Fabrication Works

3.1 Spools

3.2 Supports and structural members

3.3 NDT

3.4 Hydro test

3.5 Anticorrosion Works

3.6 Other prefabrication activities

4.0 Mobilisation & Demobilisation

4.1 Mobilisation of personnel and equipment

4.2 Mobilisation of prefabricated Structures

4.3 Demobilisation of personnel, equipment and materials

4.4 Other mobilisation and demobilisation activities

5.0 Site Works

5.1 Decommissioning works

5.2 Replacement / modification of the drain lines from xxx to yyy

5.3 Modification of the piping upstream of xxx

5.4 Replacement / modification of the drain lines from ppp to qqq

5.5 Modification of the lines upstream and downstream of xxx

5.6 Valve chamber for new valves

5.7 NDT and hydro test of field welds

5.8Touch-up painting for pipe supports

5.9 Pre-commissioning and commissioning works

5.10 Other site works

6.0 Mobilisation & Demobilisation

6.1 Mobilisation of personnel and equipment

6.2 Mobilisation of prefabricated Structures

6.3 Demobilisation of personnel, equipment and materials

6.4 Other mobilisation and demobilisation activities

7.0 As-built Documentation

7.1 As-built drawings and documentation

7.2 Project Quality Control documents

7.3 Other documentation

Source: Confidential. Tree arrangement by the Author.

The following flaws can be identified in the case-study, non-standard WBS above:

The highest level is Level 3, and its elements do not properly define the tasks

The Level 2 WBS element 4.0 is repeated as 6.0. Omissions, repetitions, etc. are consequences of non-standardisation.

It is a PWBS issued to Contractors for bidding, without the Contractors preparing their CWBS.

8. DATA PRESENTATION & ANALYSIS

8.1 Data Presentation

The data for the case study project cost estimation is presented in Table 1 below. The estimates shown are for Level 2 WBS elements as prepared by the Company (Owner) and 3 Contractors, A, B and C.

Table 1: Cost Estimates of Level 2 WBS Elements for the Case-study Project

WBS Code

WBS Element

Cost Estimate (N)*

Company

Contractor A

Contractor B

Contractor C

1.0

Engineering

6.00

3.14

7.00

3.61

2.0

Procurement

9.00

6.70

20.42

11.85

3.0

Workshop Fabrication Works

6.00

7.01

19.01

8.16

4.0

Mobilisation & Demobilisation

8.00

2.00

15.87

1.80

5.0

Site Works

8.00

16.60

48.67

9.42

6.0

Mobilisation & Demobilisation

0

2.00

5.33

1.25

7.0

As-built Documentation

3.00

2.06

5.00

1.90

TOTAL

40.00

39.51

121.30

37.99

*Currency is the Nigerian Naira, N. The units have been changed to maintain confidentiality.

Table 2: Mean Estimates for the Level 2 WBS Elements

WBS Code

WBS Element

Cost Estimate, x (N)

Estimate Mean , µ

(N)

Company

Contractor A

Contractor B

Contractor C

1.0

Engineering

6.00

3.14

7.00

3.61

4.94

2.0

Procurement

9.00

6.70

20.42

11.85

11.99

3.0

Workshop Fabrication Works

6.00

7.01

19.01

8.16

10.05

4.0

Mobilisation & Demobilisation

8.00

2.00

15.87

1.80

6.92

5.0

Site Works

8.00

16.60

48.67

9.42

20.67

6.0

Mobilisation & Demobilisation

0

2.00

5.33

1.25

2.15

7.0

As-built Documentation

3.00

2.06

5.00

1.90

2.99

For every WBS element, the Estimate Mean, µ is calculated from: µ =

where n = number of entries for the WBS element

xi = the ith item of the WBS element, represented by the respective estimates for each company

8.2 Data Analysis

8.2.1 Variance of the Estimates

The Variance, σ2 , for each WBS element is calculated in Tables 3 and 4 below, where:

σ2 = ∑ (x-µ)2 , n = 4

Table 3: Variance of the Estimates (1)

WBS Element

x (N)

Estimate Mean, µ

(N)

(X-µ)

Company

Contractor A

Contractor B

Contractor C

Company

Contractor A

Contractor B

Contractor C

Engineering

6.00

3.14

7.00

3.61

4.94

1.06

-1.8

2.06

-1.33

Procurement

9.00

6.70

20.42

11.85

11.99

-2.99

-5.29

8.43

-0.14

Workshop Fabrication Works

6.00

7.01

19.01

8.16

10.05

-4.05

-3.04

8.96

-1.89

Mobilisation & Demobilisation

8.00

2.00

15.87

1.80

6.92

1.08

-4.92

8.95

-5.12

Site Works

8.00

16.60

48.67

9.42

20.67

-12.67

-4.07

28

-11.25

Mobilisation & Demobilisation

0

2.00

5.33

1.25

2.15

-2.15

-0.15

3.18

-0.9

As-built Documentation

3.00

2.06

5.00

1.90

2.99

0.01

-0.93

2.01

-1.09

Table 4: Variance of the Estimates (2)

WBS Element

(X-µ)

(X-µ)2

σ2

= ∑(x-µ)2

4

Company

Contractor A

Contractor B

Contractor C

Company

Contractor A

Contractor B

Contractor C

Engineering

1.06

-1.8

2.06

-1.33

1.12

3.24

4.24

1.77

2.59

Procurement

-2.99

-5.29

8.43

-0.14

8.94

27.98

71.06

0.02

27.00

Workshop Fabrication Works

-4.05

-3.04

8.96

-1.89

16.40

9.24

80.28

3.57

27.37

Mobilisation & Demobilisation

1.08

-4.92

8.95

-5.12

1.17

24.21

80.10

26.21

32.92

Site Works

-12.67

-4.07

28

-11.25

160.53

16.56

784.00

126.56

271.91

Mobilisation & Demobilisation

-2.15

-0.15

3.18

-0.9

4.62

0.02

10.11

0.81

3.89

As-built Documentation

0.01

-0.93

2.01

-1.09

0.00

0.86

4.04

1.19

1.52

8.2.2 Standard Deviation of the Estimates

Standard Deviation, σ, is calculated as the square root of Variance. That is:

σ = [σ2]1/2 = [∑ (x-µ)] 1/2

Table 5: Standard Deviation of the Estimates

WBS

Code

WBS Element

Estimate Mean µ

Variance σ2

Standard Deviation

σ = [σ2]1/2

1.0

Engineering

4.94

2.59

1.61

2.0

Procurement

11.99

27.00

5.20

3.0

Workshop Fabrication Works

10.05

27.37

5.23

4.0

Mobilisation & Demobilisation

6.92

32.92

5.74

5.0

Site Works

20.67

271.91

16.49

6.0

Mobilisation & Demobilisation

2.15

3.89

1.97

7.0

As-built Documentation

2.99

1.52

1.23

8.2.3 Coefficients of Variation of the Estimates

The Coefficient of Variance, CV, calculated for each WBS element is given as the ratio of SD to the mean expressed as a percentage; i.e.:

CV = (100) %

Calculated values for CV are shown in Table 6 below.

Table 6: Coefficients of Variation for the WBS Elements

WBS Code

WBS Element

Estimate Mean

µ

Standard Deviation

σ = [σ2]1/2

Coefficient of Variation

CV = (100) %

1.0

Engineering

4.94

1.61

32.6 %

2.0

Procurement

11.99

5.20

43.4 %

3.0

Workshop Fabrication Works

10.05

5.23

52.0 %

4.0

Mobilisation & Demobilisation

6.92

5.74

82.9 %

5.0

Site Works

20.67

16.49

79.8 %

6.0

Mobilisation & Demobilisation

2.15

1.97

91.6 %

7.0

As-built Documentation

2.99

1.23

41.1 %

9. RESULTS & INTERPRETATION OF THE STUDY

9.1 Results of the Study

The results of the study can be summarized in the Table below:

Table 7: Summary of the Results

WBS Code

WBS Element

x (N)

Estimate Mean, µ

(N)

Variance, σ2

(N)2

Standard Deviation, σ (N)

Coefficient of Variation,

CV

Company

Contractor A

Contractor B

Contractor C

1.0

Engineering

6.00

3.14

7.00

3.61

4.94

2.59

1.61

32.6 %

2.0

Procurement

9.00

6.70

20.42

11.85

11.99

27.00

5.20

43.4 %

3.0

Workshop Fabrication Works

6.00

7.01

19.01

8.16

10.05

27.37

5.23

52.0 %

4.0

Mobilisation & Demobilisation

8.00

2.00

15.87

1.80

6.92

32.92

5.74

82.9 %

5.0

Site Works

8.00

16.60

48.67

9.42

20.67

271.91

16.49

79.8 %

6.0

Mobilisation & Demobilisation

0

2.00

5.33

1.25

2.15

3.89

1.97

91.6 %

7.0

As-built Documentation

3.00

2.06

5.00

1.90

2.99

1.52

1.23

41.1 %

9.2 Interpretation of Results

Standard Deviation is a measure of the dispersion of data from the mean value [17] , and varies directly as the degree of dispersion of the data set. As can be seen for the values of SD derived for this study (Table 5), the estimates for As-built Documentation have the smallest SD (hence the least dispersion or scatter from the mean), while those for Site Works have the largest SD (hence the most dispersion or scatter from the mean).

The coefficient of variation is very useful in allowing a comparison of the degree of variation from between data sets, irrespective of the difference in their means [18] . The following statements are true concerning the CVs of estimates [19] :

Estimates with a CV less than 16.6% are considered reliable for general use.

Estimates with a CV between 16.6% and 33.3% contain high levels of error, and users should be warned accordingly.

Estimates with a CV higher than 33.3% are deemed to be unreliable.

It can been seen from Sections 10.1 and 10.2 above that the calculated values of CV for the WBS elements range from 32.6 % to 91.6 %, and that when the results are interpreted based on the three statements above, the following inferences can be made:

There is no value of CV that is less than 16.6 %, hence, none of the estimates can be said to be reliable.

The CV for Engineering (32.6 %) has a very high level of error and cannot be trusted. Its use should be accompanied by a warning about these high levels of error.

The CVs of all other WBS elements (apart from Engineering), are higher than 33.3 %, considered to be unreliable, and cannot be said to have been properly estimated.

From the foregoing, it is very evident that none of the estimates under review is reliable enough to be used with any reasonable degree of confidence.

10. Conclusion & Recommendations

The establishment of a credible cost estimate using a non-standardised WBS remains a very great challenge. It is my opinion that the use of a standard WBS should not only be encouraged, but should also be adopted for cost estimation purposes.

Standardisation of WBSs, allows for (i) cost and schedule reporting to be made in a consistent manner and ensure standard formats across the entire portfolio of projects (ii) obtaining cost and schedule data by any level of management at whatever level as pertains to their needs (iii) development of a database to consolidate on the consistent and reliable cost and schedule data [20] .

Cost estimates are basically predictions of efforts, materials and time, and should be subjected to statistical evaluations to find out their most likely accuracies.

11. LIMITATIONS OF THE STUDY

The study looked only at the effect of using a non-standardised WBs and how it affects the establishment of cost estimates. It does not consider other factors that may equally affect the estimates.

The statistical population, n, for the analysis is 4. This is rather small, and may have affected the quality of the results. However, the presented figures and WBS are real.

The study is limited to initial estimates. Life cycle costs are not considered.

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