Framework: An Integrated Approach to Portfolio, Program and Project
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I. INTRODUCTION TO TOTAL COST MANAGEMENT - CHAPTER 1 - INTRODUCTION
1.1 Definition of Total Cost Management
1.1.1 Total Cost Management and Related Terminology
The Constitution of AACE International provides the following definition of total cost management:
"Total Cost Management is the effective application of professional and technical expertise to plan and control resources, costs, profitability and risks. Simply stated, it is a systematic approach to managing cost throughout the life cycle of any enterprise, program, facility, project, product, or service. This is accomplished through the application of cost engineering and cost management principles, proven methodologies and the latest technology in support of the management process."
Put another way, Total Cost Management (TCM) is the sum of the practices and processes that an enterprise uses to manage the total life cycle cost investment in its portfolio of strategic assets.
For example, a real estate developer may build, maintain, renovate, and then demolish an office building during its life cycleat each phase of the building life cycle the developer makes significant investments. To manage these investments, the building developer monitors building operating costs and profitability; evaluates alternative investment opportunities; and initiates, plans, and controls improvement projects. These activities are all within the scope of the TCM process.
Costs in TCM include any investment of resources in the enterprise's assets including time, monetary, human, and physical resources. Total refers to TCM's comprehensive approach to managing the total resource investment during the life cycle of the enterprise's strategic assets. The enterprise can be any endeavor, business, government, group, individual, or other entity that owns, controls, or operates strategic assets.
Strategic asset is shorthand for any unique physical or intellectual property that is of long term or ongoing value to the enterprise. For most cost engineers, strategic assets equate to "capital assets"; however, the term strategic asset is more inclusive (e.g., may include things that are considered expenses). The asset may be a building, an industrial plant, a software program, or a stage production. Strategic asset investments are made through the execution of projects or programs. Projects are temporary endeavors for creating, modifying, maintaining, or retiring strategic assets. Products and services may be considered strategic assets in that before a product can be made or a service performed, many investments must be made through the execution of projects for research, development, design, and so on.
As an example of where TCM fits within a companys undertakings, consider a company that designs and manufactures integrated circuits. The chips design is a strategic asset of the company created through the execution of research and design projects. In order to fabricate a new chip, the company develops a unique manufacturing process or layoutthat process design or layout is also a strategic asset developed through the execution of projects. Next, a project is performed to design, procure, and build the plant for fabricating the microchipsthe physical plant is another strategic asset. Finally, workers are hired and trained to operate the plant. Worker skill and knowledge are strategic assets and their initial training and plant start-up are executed as projects. The new plant must be maintained and eventually decommissioned. Each component of the chip makers strategic asset portfolio requires investments realized through the execution of projects whose cost must be managed. Each component of the companys asset portfolio has its own life cycle with cost investments to integrate over time. The complex interaction of the asset portfolio component costs over their various life cycles and during operations calls for a total cost management process.
One way that TCM adds value to the body of cost engineering knowledge is that it integrates areas of cost management that are too often treated as separate entities or fields. While AACE is not the caretaker or custodian of all this is covered in the TCM Framework, it is important that cost engineers understand the relationships between the various fields of practice with which they are likely to interact or in which they may be expected to perform.
1.1.2 Total Cost Managements Relationship to Other Fields
TCM is an integrating process that not only maps the fields of practice of cost engineering, but it also provides links to the fields of project management, resource management, and management accounting practice. TCM provides a unique technical perspective that is often missing from financially focused approaches (hence the term cost "engineering"). Figure 1.1-1 illustrates how TCM, with roots and emphasis in project management and project control, has a balanced focus on product and capital costs, project and operational work processes, and resources of all types. In other words, it covers the "total costs" of the business.
Figure 1.1-1 TCMs Place in the Cost Management Spectrum
Recently, project management models have been enhanced to better address pre-project processes, project portfolios, and consideration of overall business organization strategies. An example is the Project Management Institutes Organizational Project Management Maturity Model (OPM3). However, these models still do not cover production and operation management and costs to the extent addressed by TCM.
Product and operations costs have been the focus of the resource management and management accounting fields. Resource managements developments in enterprise resource management (ERP) and management accountings developments in activity-based-costing (ABC) are significant advancements that are incorporated in TCM. However, unlike TCM, those fields have focused on product costs and typically address capital project costs as an incidental cost (i.e., depreciation) as it affects products.
In summary, TCM is unique in that it integrates the best approaches from all the major fields that have cost management interests while emphasizing cost engineerings practices and major role in them all.
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