Good Morning PCM world,
Another reader sent in questions with respect to the article 2012 revenues of the Product Cost Management market. However, this question was a little more broad:
Is there any difference between Project cost management and Product cost management from your your point of view?
That’s a very simple but good question. We had not considered addressing it before the question came in. The short answer is “YES!,” there is a big difference. The big difference is as simple as the two words:
PRODUCT vs. PROJECT
We have defined Product Cost Management before here as:
Product Cost Management – An agreed, coherent, and publicized system of culture/goals, processes, people, and tools following the product lifecycle, that ensures the product meets its profit (or cost) target on the day that it launches to the customer.
The definition of “Project Cost Management” is more murky. The wiki entry on Project Cost Management is less than satisfying. Here is the main definition portion of the entry:
“Project cost management (PCM) is a method which uses technology to measure cost and productivity through the full life cycle of enterprise level projects.[citation needed] PCM encompasses several specific functions of project management that include estimating, job controls, field data collection, scheduling, accounting and design.”
Other resources for a definition are Ecosys EPC, the Project Smart blog, Hard Dollar Software, and TutorialsPoint. Based on the knowledge from these sources, we would define Project Cost Managemenet as:
Project Cost Management – Project cost management is a group of techniques, including budgeting, forecasting/estimating, change control, field data collection, scheduling, accounting and design, and reporting that are used together to ensure that a project is completed at its target cost and on schedule. It is most often associated with the construction industry. In construction projects, it would include tracking of both project costs and the costs of the materials for structure being built. In the world of manufacturing, it would only include the costs of the project such as R&D and SG&A.
Note that in the definition we make a distinction between two very different industries: Manufacturing vs. Construction. In construction, we are most often making one thing — some sort of structure WHILE we are in in the midst of the project itself. In manufacturing, we are undertaking the project in order that we make many copies of a product in the future (when production begins). In manufacturing, we call the project, “Product Development,” including sourcing, testing, design, manufacturing planning, etc. In manufacturing, which is our primary focus on this blog, there is a fundamental difference in Product vs. Project cost management that goes all the way to the income statement itself.
CLICK TO ENLARGE!
See the figure to above to understand the focus of Product vs. Project Cost Management on an example income statement for a manufacturing company. The question then probably arises in everyone’s minds: Do we need both and which one is more important? That’s beyond this article, but maybe we can talk about it further in the future, if there is interest. We’ve left you some clues to answer those questions yourself in the figure above.
In the meantime, somebody call the Project Cost Management guys and tell them they are infringing our acronym! Everyone knows that the *real* PCM stands for PRODUCT Cost Management!
13 Responses to “Project Cost Management vs. Product Cost Management”
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Moderator re-posting from Linked in Group:
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Carine Baillie SAYS:
Forget the cost for recycling / reusing or the impact of Corporate social responsibility?
Carine, do you mean in the Income Statement diagram?
Charges for recycling/reuse would also be included in Cost of Goods Sold, but only if they are paid by the company. If the consumer pays them, that does not appear on an corporate Income Statement.
Corporate “social responsibility” probably depends on what it is. If it is general charity and other community outreach, I would think that appears under SG&A.
Carine Baillie SAYS:
Thanks Eric. I was more thinking to include it partially in the R&D. It could be also a part of marketing and promotion and/or an inclusive service to collect the products that can’t be used more, or to provide some go-between events or a web platform to connect clients with second hand buyers.
Well, if it’s marketing, that’s definitely SG&A (at least in American GAAP rules)
Carine Baillie SAYS:
Yes, marketing is also included in SG&A in Europe. I mean that if the company is developing biodegradable components, for example, or less polluting process for manufacturing, it’s included in R&D, right?
So, I think it would break down like this:
R&D – cost of the engineering to develop the biodegradable components or manufacturing processes to make them
COGS – cost to make the biodegradable components
SG&A – cost to tell the customers how wonderfully environmentally friendly your company is with it’s new biodegradable components
Carine Baillie SAYS:
That’s exactly the way I was thinking this stuff could work 🙂
Moderator re-posting a comment from Linked-in Group here:
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Franck Ramaroson SAYS:
In the PMBoK standard for Project Management, it is explained that a Project might deal with a subset of Product Life Cycle Phase (s) because this could be the only mandate given by the Sponsor. For example, a product development could be a Project and from the result of this project, a decision to carry on to a “Production Phase Project” could be decided. Therefore, we might say that the project cost is a subset of the Product Cost. Having said that, I have to emphasize that the categorization of these costs in an Income Statement is a little bit more complicated as we would need to draw a line between Project and Operations (in a manufacturing company, production is operation, while for the customer to whom the Product will be delivered, it is still a Project!).
I suppose that you could put the cost of the project as a subset of Product Cost. It just depends how you bucket things. I am certainly NOT a fan of having FINANCIAL accounting standards force us to look at things in less helpful ways in MANAGERIAL/COST accounting. Certainly, the cost of R&D (“the project” as your framework calls it) is a cost that the customer must bear at the end of the day).
But, in reality, these targets are born by different people. The VP of Engineering is likely the guy that owns the budget for R&D. The VP of Mfg or the business owner is the one that owns Cost of Goods Sold (product cost). The VP of Engineering might see the product cost as really important… even though it is only 3-5% of the total Revenue of the project. However, the organization should focus where the real money is: product cost.
Thank you for your description Product vs Project cost management. Please note we should consider followings:
1- there are many manufacturers that are Customer Oriented and producing customized products for customers. in this case each product is manufactured only one time for the special customer,
2- for general contractors, GC who are working on the project development, each project is as a product for them, they have construction assets, facilities and machinery. for example a building contractor after making a building goes to make another building.
3- from my point of view the only difference between Product and Project is: Manufacturing Products are manufactured in one place i.e Factory but the Construction products are made in different places.
the main question is : why do we differ Product Cost Estimation from Project Cost Estimation? is it mean we should use different methods and techniques for cost estimation? however the cost centers and cost elements are different in manufacturing and constructions nevertheless we use the same process and methods for estimating the cost such as resource allocation, Parametric, Analogy, capacity factored ,… do you agree?
would you please show me the effects on financial statements if we will make these two in one suit?
Sadegh,
To your points and questions:
1- there are many manufacturers that are Customer Oriented and producing customized products for customers. in this case each product is manufactured only one time for the special customer,
***HA – Typically, that is construction, as I mentioned last time.
2- for general contractors, GC who are working on the project development, each project is as a product for them, they have construction assets, facilities and machinery. for example a building contractor after making a building goes to make another building.
***HA – True. However, that is not the primary focus of the articles on Product Profit and Risk
3 From my point of view the only difference between Product and Project is: Manufacturing Products are manufactured in one place i.e Factory but the Construction products are made in different places.
***HA – That is not the only difference. There are vast differences in how the product is conducted and the considerations and economics that lead to success. That is why manufacturing and construction are vastly different industries.
the main question is : why do we differ Product Cost Estimation from Project Cost Estimation? is it mean we should use different methods and techniques for cost estimation? however the cost centers and cost elements are different in manufacturing and constructions nevertheless we use the same process and methods for estimating the cost such as resource allocation, Parametric, Analogy, capacity factored ,… do you agree?
***HA – Yes, many of the methods (Parametric, Analogy, capacity factored) may be similar, but others are not. Product Cost Management in the manufacturing industry has very little to do with “Project Management” techniques, such as resource allocation. Product Development IS the project in a manufacturing firm. That is product dev and manufacturing are much more separated, whereas project management of a building project is going on CONCURRENTLY with the manufacturing in construction.
would you please show me the effects on financial statements if we will make these two in one suit and why we should separate these two from the point of financial calculation?
***HA – Could you please explain further? We are not sure that we understand the question. However, as we showed, R&D (“project management”) is only 3-5% of revenue in a manufacturing firm. We are not sure know what it is in construction industry, but it has to be much higher. Therefore, other techniques are likely more useful.
Firtsly a little about my experience before commenting on your question. I’m 54 years of age, worked within cost engineering most of my career, started in manufacturing as a craft apprentice, moved into technician type roles, then manufacturing roles within the cast metals technology sector, spent time as a contracts administrator before moving into the construction sector as a project cost controller, then joined an automotive company. Trained in Profit and Cost Management Techniques in Japan, became a Senior Cost Engineering for a large engine company, then into sports car manufacture, then spent time as a consultant engineer for a USA company making large high speed heavy duty engines, then back into construction in waste water treatment role, then defence aerospace before ending up in the Nuclear sector as a Value Improvement Engineer. So, having experienecd both sides of the fence, working within project and product cost management areas from small companies to multi national corporations I have found that the best companies have an integrated approach – no islands of excellence where engineering project managers play against manufacturing product managers for slices of the budget. YES there are major differences between the two functions and I have worked in companies who have thrown money at projects to ensure launch dates are met so that product can be manufactured to bring significantly greater revenue into the company. I have also worked in companies who have made project cost targets king and sacrificed product quality and functionality to meet the product cost targets. The simple answer is both are needed, both are as important as each other, and the best Project Manager I ever worked for was one who was also sympathetic to Product Cost Management. Which one came first, or which has the better definition are quite simply redundant questions – Kaizen, Six Sigma, ERM, VEVA, etc. are great “Tools” and “Philosophies” to work to and there are best practices to be carried across both project and product cost management areas. However in my opinion they all come under “Total Cost Management” – however I have yet to see a truly integrated system that knits everything together – many claim to do it, and I have worked on automotive projects that have come close, there is always room for future improvement , and isn’t that which keeps us all in employment?
@ Malcolm — Perhaps, we are not writing as clearly at HA as we would like too. Certainly, we are not trying to pit engineering against manufacturing. The fact that these two function ARE typically pitted against one another (and let’s not forget purchasing!) is really the one of the biggest problems in cost management.
Your argument of sacrificing product cost (a.k.a. profit) to the god of revenue is also fair. However, we would say that companies do that far too often. Very rarely does that ever make sense. What SHOULD be sacrificed is the R&D budget targets. Let’s look at the numbers. If you are in a manufacturing company and R&D is 3% of revenue and COGS is 80% of revenue, and you can gain 20% more market share by getting to market faster, the priority seems pretty clear.
If you have to increase R&D budget from 3% to 5% to make COGS reduce from 80 to 75%, that is a deal you should take all day long. In fact, we would say the same of revenue. If going from 3% to 5% R&D gets you to market earlier for 20% more market share, do it.
Out point is, in a manufacturing company, project cost management (minimizing R&D cost) is far less important than EITHER (1) time-to-market OR (2) product cost.
You are very right, as well, that it is very rare to find a truly integrated system of Product Cost Management (or “Total Cost Management,” if you prefer). Hopefully, as you say, this will keep us all very useful and needed.
I’ll talk some more about this on Monday’s post, but thank you for writing!