What is a Cost Flywheel?

A flywheel is a heavy, rotating mechanical wheel with substantial mass designed to store kinetic energy. As it spins, its mass accumulates rotational energy and the faster it spins, the more energy it can store and the smoother its operation by absorbing fluctuations. This concept can be applied to areas of business and what follows is a description of how this can be achieved with cost estimation and control of engineering projects.

Why Should you Consider Implementing One?

Maybe you are frustrated by uncovering repeat errors during the delivery stage of projects that were missed with the tender estimating process. Or perhaps much of the knowledge for estimating costs during the tender are held directly by individuals, not recorded or directly available for a wider team. Perhaps you have the goal of achieving more consistent project turnout profit performance. Initiating a cost flywheel will produce a self-reinforcing cycle of improvement that continuously enhances your project cost management practices.

Sold, Variations, Forecast and Turnout Costs

The nature and certainty of project costs varies throughout the lifecycle of a project and its import to understand this transformation, which as defined as follolws:

As Sold Value. This is the value that the tendered project has been sold at.
Contract Variations Value. As a project progresses into delivery a number of contract variations may be required where additional scope or responsibilities have been agreed with the client. These variaitons will have a cost to undertake, but should also increase the initial as sold price.
Forecast Value to Complete. As a project progresses its important to be forecasting costs to complete as and when more defined costs are identfied by obtaining quotes for work.
Turnout Value. This is the cost to have successfully complted 100% of the contracted work and closed out the responsibilities.

The cost flywheel will be looking to compare (As Sold Value + Contract variations) - Turnout Cost. Ideally the Turnout Value is equal to or less than the summation of other costs.

Feedback Mechanism

Levels of Perspective

The flywheel is ultimately about reviewing turnout costs from completed projects and feeding back to improve future tendering. It is essential to think about this from a place of multiple perspectives ranging from overview to granular. The flywheel should focus on level 1 and 2, with a full deep dive into level 3 only if there are substantial differences. The more granular the review, the more effort will be required to initiate the flywheel.

1 - **Highest level review**. This will involve the least amount of granularity and compare turnout Vs as sold costs.
2 - **Cost category level**. define broad categories of costs such as labour, purchase of instruments and cost of site mechanical installation etc.
3 - **Full deep dive.** The deep dive can burrow into a selected cost category to understand differences.

Implementing a Cost Flywheel in Your Organisation

1. Create a Baseline with Existing Data

Gather Historical Data: Collect historical cost data from past projects, including estimates, actual costs, and any variances. Historical data may be chaotic and not defined in a consistent way. Therefore a degree of normalisation of this data will be required and therefore potentially not always accurate. However, with the introduction of cost categories and language
Build High Level Baseline Reports: Create a list of projects showing what they were initially tendered / sold for, any variations placed during delivery and the actual turnout costs on completion of the project. How did the turnout costs compare with the as sold costs?

2. Set Scope & Objectives

Agree Scope. Your business may have several business activities such as consulting, selling technology products, construction and operation. Start by identifying the projects that are the core of the business where the is repeatability.
Identify Areas of Strength & weakness. List the areas that are likely over / underestimated. Feedback from teams whom have undertaken the delivery of these projects will be very important.
Identify Cost Categories. What are the categories of cost that your projects will involve such as procuring instrumentation, procuring valves and cost of mechanical installation? It is important to define and then use consistent language going forwards.

Set Clear Objectives: Determine timeframes for undertaking the work along with outputs.

3. Develop Standardised Tools

Project Estimation Tool. The development of a tool to compile and layout project costs using consistent categories and descriptions.
Project Forecasting Tool. The development of a system to monitor live projects and replace forecasted costs with actual costs as it progresses.
Contract Variation Tool. A tool to present and monitor contract variations to ensure that these costs are developed and recorded using consistent categories and descriptions.

4. Review & Adjust

Variance Analysis. Develop an automated tool to compare as sold + contract variations against the turnout cost at levels 1&2 of detail. Any larger discrepancies can be investigated separately with a deeper dive.

5. Document Lessons Learnt

Create a Lessons Learned Log: Use a log of lessons learned from each project. Document what went well and what could be improved.

Integrate Improvements: Apply the insights from this review to refine your estimation templates and processes, feeding them back into the flywheel for continuous improvement.

6. Encourage Team Involvement

Train Staff: Ensure that your team understands how to use the templates and the importance of accurate cost tracking.

Lets Work Together

Establishing a flywheel process for cost estimation and control is essential to improve project performance and reduce the risk of estimation. Promethean Engineering can work with you to understand your specific requirements and build automated systems to introduce a cost flywheel in your organisation.

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Introduction to the Cost Flywheel