The costing system in an enterprise serves a strategic function for the business. It plays a vital role as understanding costs leads to better decisions. Costing can serve proposal responses, acquisitions, vendor assessment, pricing, business transformation planning, and many other functions.
This guide takes an in-depth look at the four pillars that build a Best-in-Class Costing System. A costing system is more than a tool. It encompasses processes, workflows, and roles. This guide takes a deep dive into the entire process; how it looks today and what it may look like tomorrow.
Understanding the Role of Costing Systems
A costing system serves as a compass, offering valuable insights into the financial implications of various endeavors across diverse domains and sectors. Whether it’s estimating the cost of a machined part, a complex assembly, an information system, or even a spacecraft, a good costing system provides clarity on monetary expenses, effort, and scheduling.
A best-in-class costing system: Empowering decision-making at every turn
A best-in-class costing system is built on four pillars:
People: Stakeholders drive the system’s usage, consumption of information, and maintenance.
Data: The lifeblood of costings, data fuels continuous learning and improvement, whether structured or unstructured.
Process: A well-defined workflow provides the roadmap for seamless integration of people, tools, and data.
Tooling: Automation of computations, data handling, and workflow navigation ensures efficiency and accuracy.
Pillar #1: People
Skills for Effective Utilization and Contribution to Costing Systems
Effective utilization and contribution to costing systems require a blend of technical expertise, analytical skills, and continuous education. Here are some key skills and training programs necessary for team members:
Cost Accounting: Understanding the principles of cost accounting is fundamental to working with costing systems. Courses such as those offered by the Institute of Management Accountants (IMA) provide comprehensive training in cost accounting techniques and methodologies.
Data Analysis: Proficiency in data analysis tools and techniques is essential for interpreting cost data and identifying trends. Training programs in data analysis, such as those offered by Coursera or Udemy, can equip team members with skills in Excel, SQL, or data visualization tools like Tableau.
Financial Modeling: Building accurate financial models is crucial for cost estimation and forecasting. Courses in financial modeling, available through platforms like Wall Street Prep or the Corporate Finance Institute, teach skills in building dynamic models for cost analysis and scenario planning.
Project Management: Costing systems often intersect with project management processes. Project management training programs, such as those offered by the Project Management Institute (PMI), provide skills in planning, scheduling, and controlling project costs effectively.
Continuous Improvement: Encouraging a culture of continuous improvement is essential for optimizing costing systems over time. Team members can benefit from training in Lean Six Sigma methodologies, which focus on eliminating waste and improving processes.
Communication: Effective communication skills are vital for conveying cost-related insights to stakeholders across the organization. Training in communication and presentation skills can help team members articulate complex cost information in a clear and concise manner.
Professional Certifications and Association Memberships: The International Cost Estimating and Analysis Association is a nonprofit organization that promotes the profession of cost estimating and analysis. Joining associations like ICEAA offers an array of valuable training and knowledge building opportunities. Pursuing professional certifications such as Certified Cost Estimator/Analyst (CCEA), Professional Cost Estimator/Analyst (PCEA®), or Certified Management Accountant (CMA) can validate expertise in cost management and enhance credibility within the industry.
Pillar 2: Data
Ensuring Data Integrity
Data integrity is vital for the reliability and accuracy of costing systems. Implementing strategies aimed at maintaining data integrity safeguards against errors, inconsistencies, and biases in cost information. A good costing system facilitates data collection, which is essential to delivering reliable cost estimates. Here are other key strategies to consider:
Regular Audits: Conducting regular audits of cost data ensures compliance with established standards and identifies discrepancies or anomalies that require correction. Audits should encompass data sources, input processes, calculations, and output results to validate the accuracy and reliability of cost information.
Data Cleansing: Data cleansing involves identifying and rectifying errors, duplications, and inconsistencies in cost data. Utilizing automated tools and algorithms for data cleansing streamlines the process and minimizes manual errors. Regular data cleansing routines help maintain data quality and integrity over time.
Data Governance Frameworks: Implementing data governance frameworks establishes policies, procedures, and controls for managing cost data throughout its lifecycle. This includes defining data ownership, access controls, data quality standards, and protocols for data maintenance and updates. Adhering to data governance frameworks promotes consistency, reliability, and accountability in cost data management.
Version Control: Establishing version control mechanisms ensures traceability and accountability for changes made to cost data over time. Maintaining a centralized repository with version history enables users to track revisions, compare changes, and revert to previous versions if necessary. Version control mitigates the risk of data discrepancies and unauthorized alterations.
Cross-Validation: Implement cross-validation checks to verify the consistency and accuracy of cost data across different sources, systems, and stages of the costing process. Cross-validation techniques compare data from independent sources or methodologies to identify discrepancies or outliers, enhancing confidence in the integrity of cost estimates.
User Training and Awareness: Providing comprehensive training programs and raising awareness among users about the importance of data integrity fosters a culture of accountability and diligence in data management practices. Educating users on data entry protocols, validation procedures, and quality assurance measures empowers them to contribute to maintaining data integrity effectively.
Continuous Monitoring: Implementing continuous monitoring mechanisms enables real-time detection of deviations, errors, or anomalies in cost data. Automated alerts and exception reports notify stakeholders of potential issues promptly, allowing timely intervention and corrective actions to preserve data integrity.
By adding these data strategies into the design and operation of costing systems, organizations enhance the reliability, accuracy, and trustworthiness of cost information, enabling informed decision-making and strategic planning with confidence.
Pillar 3: Process
Developing Processes that Deliver
Process areas like developing technical baselines for costing and creating milestones for reviewing and evaluating costing are essential to building a best-in-class costing system. Efficient estimation hinges on industry-based methodologies, rapid creation, continuous learning, consistency, transparency, and adaptability. Here are a few other elements you may want to consider:
Maturity in Estimation Organization:A structured approach to estimation maturity, ranging from informal to continuous improvement, ensures consistent and reliable outcomes.
Unknowns and Uncertainty: Unknowns and uncertainties are part of the process. Ground rules and assumptions fill those gaps. As more is known, assumptions can be replaced with data.
Supporting Documents Capture and Reference supporting documents and other information. The costing system should be able to accommodate adding documents/references or links to such references for traceability.
Gateways and Histories: A costing system should support gateways and keep a history.
Define your Starting Point: Initiation is key to a good costing system. Ask the question How does a costing request get started? Where can a request be submitted?
Review and Approval: Upon submission, a review should be triggered. The review can result in the costing going back for changes/fixes or it can move on. Once reviewed and accepted the costing should be archived. This can be used for future change cycles or reference for other “similar-to” costing efforts.
Maintaining Confidence and Expertise: A healthy costing system instills confidence in stakeholders, captures expertise effectively, and manages risks associated with individual bias and turnover.
Adaptable and Flexible Systems: Costing systems should be designed to adapt to changing needs and evolving data, without disrupting workflows or integrity.
Pillar 4: Tooling
Technologies Enabling Best-in-Class Costing Systems
Embracing trends like cloud-based solutions, integration with design tools, enhanced collaboration, modeling assistance, robust audit trails, AI, and adaptive reporting ensures relevance and effectiveness of your costing system. Here are just a few of the technology tools impacting costing systems:
Cost Modeling Frameworks – Robust costing requires tools that facilitate estimation breakdown structure development, capture costing rules, offer robust reporting and the ability to capture both technical and cost data are vital to the costing process. While spreadsheets are often used for costing, they have drawbacks including the being easy to break and not very scalable. A cost modeling framework should be designed to minimize errors and offer the ability to document ground rules and assumptions surrounding the estimate.
AI and Machine Learning for Predictive Analytics: Artificial Intelligence (AI) and Machine Learning (ML) algorithms analyze historical cost data to identify patterns, trends, and correlations, enabling predictive analytics for future cost estimation.
Predictive models generated by AI/ML algorithms help anticipate cost variations, mitigate risks, optimize resource allocation, enhancing decision-making accuracy and strategic planning.
Cloud Computing for Scalability: Cloud computing infrastructure offers scalability and flexibility, allowing organizations to scale resources up or down based on fluctuating demand for cost analysis and processing.
Cloud-based costing systems provide real-time access to data from anywhere, facilitating collaboration among distributed teams and enabling seamless integration with other enterprise systems.
Integration Capabilities with ERP and PLM Systems: Integration with Enterprise Resource Planning (ERP) and Product Lifecycle Management (PLM) systems enables seamless data exchange and synchronization between different business functions. Integrating costing systems with ERP and PLM systems, organizations streamline data flows, eliminate duplicate data entry, and ensure data consistency across the enterprise, enhancing operational efficiency and accuracy.
These technologies revolutionize costing systems by automating repetitive tasks, augmenting human decision-making capabilities, and providing actionable insights for cost optimization and strategic planning. Embracing AI, machine learning, cloud computing, and integration capabilities, organizations can build agile, data-driven costing systems that adapt to dynamic business environments and drive sustainable growth.
Building a best-in-class costing system is not just about tools and processes; it’s about fostering a culture of transparency, adaptability, and continuous improvement. By leveraging insights from experts, embracing best practices, and staying attuned to industry trends, organizations can navigate the complexities of cost management with confidence and precision, ultimately achieving their strategic objectives with certainty and success.
A Word about Implementation Challenges and Obstacles
Implementing or upgrading costing systems can present challenges and obstacles for organizations. These challenges include:
Resistance to Change: Resistance from stakeholders, including employees, managers, and executives, can hinder the adoption of new costing systems. Employees may be reluctant to change established processes or technologies, fearing disruption to their workflows or job roles.
High Initial Costs: Implementing or upgrading costing systems often requires significant financial investment, including software licensing fees, hardware infrastructure, training programs, and consulting services. The upfront costs associated with these initiatives can be prohibitive for some organizations, especially smaller businesses or those operating on tight budgets.
Integration Complexities with Existing Systems: Many organizations already have established systems and processes in place for managing costs, such as Enterprise Resource Planning (ERP) or Product Lifecycle Management (PLM) systems. Integrating new costing systems with existing infrastructure can be challenging, requiring careful planning, customization, and testing to ensure seamless compatibility and data synchronization.
Advice on Overcoming These Challenges
Gain Buy-In from Stakeholders: To overcome resistance to change, organizations must communicate the benefits of implementing or upgrading costing systems effectively. Engage stakeholders early in the process, involve them in decision-making, and address any concerns or objections transparently. Demonstrating the value proposition of the new system and highlighting its potential impact on business performance can help garner support and buy-in from key stakeholders.
Explore Cost-Effective Solutions: While implementing costing systems may entail significant upfront costs, organizations can explore cost-effective alternatives to minimize financial strain. Consider cloud-based solutions that offer scalability and pay-as-you-go pricing models, reducing the need for upfront capital investment. Additionally, leverage open-source software, vendor discounts, or financing options to spread out costs over time.
Prioritize Integration and Compatibility: When selecting or upgrading costing systems, prioritize solutions that offer seamless integration with existing systems and technologies. Work closely with IT teams and vendors to assess compatibility requirements, define integration protocols, and develop migration strategies. Conduct thorough testing and pilot implementations to identify and address any integration complexities or data interoperability issues proactively.
Provide Comprehensive Training and Support: Investing in employee training and support is essential for successful implementation and adoption of new costing systems. Develop customized training programs tailored to the needs of different user groups, including end-users, administrators, and IT staff. Offer ongoing support, resources, and troubleshooting assistance to help users navigate the transition smoothly and address any technical or operational challenges.
Implement Change Management Practices: Adopt change management practices to facilitate organizational readiness and resilience during the implementation process. Establish clear communication channels, change champions, and feedback mechanisms to keep stakeholders informed and engaged throughout the journey. Encourage a culture of continuous learning, experimentation, and adaptation to promote acceptance and adoption of new costing systems effectively.
By addressing these challenges proactively and leveraging best practices in change management, organizations can navigate the complexities of implementing or upgrading costing systems successfully. With careful planning, collaboration, and commitment, organizations can unlock the full potential of their costing systems and drive sustainable business growth and profitability.
When in doubt, ask an expert
Leveraging the wisdom of industry experts such as a PCM Expert and GAO Strategy Consultant can offer invaluable guidance. The GAO Cost Estimating and Assessment Guide walks you through a meticulous 12-step estimation process, incorporating elements like defining purpose, developing estimating plans, and structuring estimates.
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