The Total Cost Management (TCM) Framework

John Hollmann, PE CCE and Wesley R. Querns, CCE

Editors Note: The following article is being presented by the AACE International Technical Board. It provides a brief overview of the the TCM Framework project, and a digest version of Sections 1 and 2 of the TCM Framework. The complete versions of Sections 1 and 2 can be found at www.aacei.org. AACE members are encouraged to download and review the full versions in accordance with the directions found in this article. The Technical Board asks all AACE members that are interested in contributing in some way to this effort to contact John Hollmann, PE CCE at jhollmann@ipaglobal.com or 703-810-1296. sub-processes. The sections issued for review (1.0, 2.1, 2.2, 2.3, and 2.4) and the many TCM Framework sections to follow are the culmination of a series of development milestones including launching of the TCM Guide effort in 1995, publication of A New Look at Total Cost Management in Cost Engineering magazine in 1996, and establishing an appointed Technical Board in 1998.

Technical, Education, and Certification (TEC) and AACE Board Involvement

The Technical, Education, and Certification (TEC) Boards and the AACE Board of Directors have reviewed and endorsed the TCM Framework concept and its proposed development path. This development path is a long term endeavorno immediate changes are planned for key AACE International products and documents because of the TCM Framework development. The Associations priorities continue to focus on delivering the core products and services that the majority of our current members need.

PREFACE
Objective of the Total Cost Management (TCM) Framework
AACE Internationals vision as shown on the cover of this magazine is the Advancement of Cost Engineering Through Total Cost Management. TCM is defined in the AACE International Constitution as, a systematic approach to managing cost throughout the life cycle of any enterprise, program, facility, project, product or service.

General AACE Membership Review

At this time, we are requesting your review comments on the full TCM Framework sections found at www.aacei.org. AACE members have 60 days to submit review comments using the comment form on the website. At the end of the 60 day comment period, the Technical Board will address each comment and finalize the introductory sections of the TCM Framework. We request that comments be as specific as possible. Comments on specific text must clearly describe the document text in question. A separate comment form should be used for each substantive comment. Each comment must be accompanied by a signed copyright release form, a copy of which is also available on the website.

To help make our vision a reality and to better define this systematic approach, the AACE Technical Board is developing what is being called the Total Cost Management (TCM) Framework. The TCM Framework will be a process map and associated text that provides an overview of the scope of all the various sub-processes or functions of cost engineering and illustrates how all these sub-processes are related to each other using process management conventions. The TCM Framework will also provide a hierarchical structure that will guide Recommended Practices and Standards development. When complete, the process map and Volunteers supporting text will be a stand-alone text of about 250 pages. We are also looking for volunteers to participate in TCM Framework development. The full document on the website provides an annotated outline of the Framework. Please review this TCM Framework Development Approach outline and let us know if you would be interested in participating The TCM Framework is being developed in serial fashion, in developing any of the sections listed there (contact John section by section (i.e., sub-process by sub-process). A serial Hollmann, PE CCE at jhollmann@ipaglobal.com or 703-810approach is being used because of the size of the effort and 1296). because it facilitates a more meaningful review process. In the coming months, each section (i.e., each TCM subprocess) of the TCM Framework will be developed and issued for A Note on Terminology review until the entire text is complete. The first sections issued The TCM Framework includes some terminology definitions for review are currently available at www.aacei.org. These initial that are either new, or that differ from those in AACEs sections provide the purpose of the TCM Framework, the defini- Recommended Practice and Standard 10S-90, Standard Cost tion of TCM, and the the high level process maps of TCM. They Engineering Terminology. Revisions and new additions are needalso provide an outline of the entire text, listing the many TCM ed to reflect the integrated life cycle process perspective of TCM.
14 Cost Engineering Vol. 43/No. 3 MARCH 2001

The review documents on the website separately highlight each proposed definition revision/addition. AACE members are encouraged to comment on this terminology in conjunction with their review of the TCM Framework sections.

TCM FRAMEWORK OVERVIEW

Definition of Total Cost Management
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 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 plan, build, maintain, renovate, 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 developer monitors building operating costs and profitability, evaluates alternative investment opportunities, initiates, plans and controls improvement projects. These activities are all within the scope of the total cost management process. Costs in TCM goes beyond the traditional monetary definition to include any investment of resources in the enterprises assets including time, monetary, human, and physical resources. Total refers to TCMs comprehensive approach to managing the total resource investment during the life cycle of the enterprises strategic assets. The enterprise can be any endeavor, business, government entity, group or individual that owns or controls strategic assets. Strategic asset is shorthand for any unique physical or intellectual property that is of long-term or ongoing value to the enterprise. 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. Finally, the 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.

TCM is based on Process Management Principles

TCM as described in the Framework is a process map that supports continuous process improvement while being flexible. It is not intended to be a set of rigid rules or work procedures. While each of the sub-process maps of TCM look rigid on paper, users will find that they may chose to emphasize those process steps that are most critical to their situation. Steps can be skipped when they are not applicable and information flows can be modified to suit the needs of the enterprise. If the enterprise or market is growing, the emphasis can be placed on asset creation and scheduling aspects. On the other hand, if the enterprise or market is mature, the emphasis may be put on asset maintenance and cost aspects. In practice, the processes are quite flexible. In addition, TCM supports cross-functional integration and multi-skilling. Few enterprises in a dynamic environment can afford to have cadres of functional specialists. However, multiskilling may come at the price of having less experience, skill and knowledge than desired in any one function. Weaknesses in individual skill and knowledge put a premium on having reliable defined processes like TCM.

The Basic TCM Process ModelPlan, Do, Check, and Assess (PDCA)
The TCM process model is based upon the PDCA management or control cycle that is also known as the Deming or Shewhart cycle. The PDCA cycle is a generally accepted, quality driven, continuous improvement management model. PDCA stands for plan, do, check, and assess, with the word, check, being generally synonymous with measure. The word, assess, is sometimes substituted with act as in, to take corrective action. The PDCA cycle is the framework for TCM because: it is time-proven and widely accepted as a valid management model; it is quality driven; and it is highly applicable to cost management processes that are cyclical by nature. Figure 1 illustrates the PDCA process steps.

The Asset Life Cycle

The PDCA control process takes place within the context of the asset and project life cycles. The life cycle describes the stages
15

Cost Engineering Vol. 43/No. 3 MARCH 2001

PLAN (plan activities) ASSESS (evaluate measures, act upon variances)

during the asset ideation, creation, operation, modification, and termination phases.

The Project Life Cycle

PDCA Cycle DO (perform activities) Within the life cycle of an asset, projects are temporary endeavors for the ideation, creation, modification, or termination of assets. Projects have a defined beginning and end. In the asset life cycle, only operation is not generally considered a project endeavor. However, there may be many projects within the operation phase of an asset to: maintain, relocate, modify, repair, enhance or otherwise improve the utility of the asset The elements of the project life cycle are often referred to as phases. Each phase yields one or more deliverables or outputs that become resources or inputs for the following phase. The deliverable may be a requirements document, a plan, a design document, a model, and so on. The life cycle of most projects can be summarized in the following four sequential phases. 1) Ideationgiven overall requirements of the project, the project team assesses alternative concepts for performing the project and selects an optimal performance strategy. Strategic performance requirements for the project are established. 2) Planningproject plans are developed that address the strategic requirements and selected performance strategy. 3) Executionthe plans are implemented through the execution of planned project activities. 4) Closurethe asset or deliverable is reviewed, tested, verified, validated, and turned over to the customer. The things learned are documented for future use in ideation. These phases are recursive; this means that each phase may be a project in itself that produces a deliverable but not the final asset. For instance, the ideation phase has a life cycle including planning for ideation, executing the ideation process, and closure of the ideation phase (e.g., completion of a requirements document). At this recursive level, the closure of a phase usually represents a hand-off of a deliverable and achievement of a project milestone, decision point or gate. If the deliverable does not pass the phase gate review, it is returned for correction, or the project may be killed or terminated.
Plan
PROJECT PLANNING (8)

CHECK (measure performance of activities) Figure 1The Plan, Do, Check, Assess Cycle or phases that occur during the lifetime of an object or endeavor. The stages or phases are sequential groupings of processes that result in an intermediate deliverable or progress milestone. While the life cycle for a given asset has a defined beginning and end, the process actions are not a straight linean asset is usually modified and recycled many times with ongoing ideation leading to changes and improvements. The life cycle of a strategic asset can be summarized in the following 5 stages. 1) Ideationrecognize an opportunity or need for a new or improved asset, evaluate, research, develop and define optional asset solutions that address the opportunity, and select an optimum asset solution. 2) Creationcreate or otherwise implement the asset solution through execution of a project or program. 3) Operationdeploy or put the new or modified asset into service, function, production, operation or other use. 4) Modificationimprove, modify, or otherwise change or recycle the asset through execution of a project or program. 5) Terminationdecommission, close, retire, demolish, remove, dispose or otherwise terminate the asset from the enterprises portfolio (often through execution of a project or program). Resource investments are made via the execution of projects
STRATEGIC ASSET PLANNING (4)

Plan

Assess
STRATEGIC ASSET PERFORMANCE ASSESSMENT (3)

Assess
Strategic Asset Management Process (2.3) PROJECTS IMPLEMENTATION (5) PROJECT PERFORMANCE ASSESSMENT (7) Project Control Process (2.4) PROJECT ACTIVITY IMPLEMENTATION (9)

Do
STRATEGIC ASSET PERFORMANCE MEASUREMENT (6) PROJECT PERFORMANCE MEASUREMENT (10)

Do

Check

Check

Portfolio of Enterprise Assets

Portfolio of Projects

Figure 2Total Cost Management Process Map

16 Cost Engineering Vol. 43/No. 3 MARCH 2001

Total Cost Management Process Map

As defined earlier, total cost management is the sum of the practices and processes that an enterprise uses to manage the total life cycle cost investment of resources in its portfolio of strategic assets. Furthermore, maximum value of TCM can only be realized when the enterprises practices are applied logically in an integrated process. The TCM process map is a generic outline of that integrated process. Figure 2 shows the TCM process map (note: the numbers in parenthesis correspond to chapters of the Framework that will cover each step). The figure shows how the PDCA model is applied recursively (i.e., in a nested manner) in TCMthe basic process is applied for each asset and group or portfolio of assets, and then again for each project being performed to create, modify, maintain, or retire those assets. The two levels of the TCM process in figure 2 are referred to respectively as the strategic asset management (SAM) and project control processes. Project control is a recursive process nested within the Do or project implementation step of the strategic asset management process. An enterprise will have a portfolio of assets in various stages of their life cycles, and during each assets life cycle, many projects will be performed to create, modify, or terminate that asset.

gram, SAM is not concerned with day-to-day project tasks; SAM focuses instead on initiating and managing the overall portfolio of projects in a way that addresses the strategic objectives of the enterprise. To paraphrase an old saying, the SAM process is more concerned with doing the right projects than with doing the projects right. The main financial objective of many enterprises is to maximize the total long-term economic return or profit from its asset investments. The economic performance of existing and proposed assets is often difficult to measure, yet the pressure to improve performance is relentless. Resources available to invest in assets are often limited or scarce while various parts of the enterprise may be in competition for those resources. In addition, the business environment is highly dynamic and uncertain. The SAM process therefore attempts to balance opportunities and risks against demand and supply for resources in such a way that the enterprises objectives are met. As previously discussed, strategic asset management is built on the following PDCA cycle steps: (1) Planestablishing resource investment plans in assets; (2) Domaking measurements of asset and project performance; (3) Checkcomparing the measurements against the plan; and (4) Assess/Acttaking corrective, mitigating, or improvement action as may be determined. Figure 3 translates those overall steps into subprocesses that will be more generally recognizable by practitioners (the numbers refer to future sections of the TCM Framework that will elaborate on each sub-process). The SAM process starts with assessing enterprise objectives,
Project Control

Strategic Asset Management (SAM) Process Map

Strategic asset management refers to the macro process of managing the total life cycle cost investment of resources in an enterprises portfolio of strategic assets. The portfolio will contain many assets in various stages of their life cycles (including those assets that are nothing more than ideas). Although investments are made in an asset through the performance of a project or pro-

Enterprise Management Business Strategies, Goals, Objectives, Requirements Strategic Requirements Assessment (3.1) Improvement Opportunities (variance from baseline plans) Strategic Performance Assessment (3.2) Investment Options Development (4.1)

(4.2) Estimating, Parametric Analysis, ABC Economic & Profitability Analysis Problem and Decision Analysis Iterative, concurrent processes Analysis Basis & Feedback Value Engineering & Management (8.5) Risk Analysis & Management (8.6)

Strategic Scope, Requirements, and Budget Decision (Resource Allocation for Selected Options)

Project Performance, History & Learnings (6.1)

Project Implementation (5.1)

Asset and Project Accounting Asset Performance Measurement

Analysis Basis & Feedback

(4.2)

Baseline Asset Mgmt. Plans

Asset Performance Asset Performance, and Valuation Measures History & Learnings Asset Life Cycle Operations

Figure 3The Strategic Asset Management Process Map

Cost Engineering Vol. 43/No. 3 MARCH 2001 17

requirements, and resource constraints and from those determining strategic asset performance requirements (Section 3.1). Benchmarking and other means are used to identify improvement opportunities for new or existing asset performance (Section 3.2). Considering the requirements and opportunities, asset investment options are identified and developed (Section 4.1), and then evaluated and decided upon (Section 4.2). The investment decisions are part of an integrated asset portfolio management plan (Section 4.3). Asset investment plans and requirements are communicated to and executed by project teams (Section 5.1). Asset performance measurements usually include profitability, but quality or other performance measures may be used (Section 6.1). Asset performance assessment includes techniques for determining if the profitability, quality, and other parameters vary from established plans and benchmarks. Also, adverse or positive trends or changes in performance are evaluated (Section 3.2). If everything is according to plan, the process continues on. If there are performance deviations noted in assessments, action should be taken to correct or improve the asset performance trend. If performance corrections will affect asset portfolio investment plans, or changes to enterprise requirements or resource availability occur, then asset portfolio investment plans must be managed to incorporate the changes (Section 4.3.)

Project Control Process Map

Project control is a process for controlling the investment of resources in an asset. In TCM, project control is the recursive process cycle that is nested within the do step of the strategic asset management process cycle. A project is a temporary endeavor that an enterprise undertakes to create, modify, maintain, or retire an asset. Being a temporary and therefore unique endeavor, projects are by nature uncertain and that uncertainty puts a premium on control and discipline. As previously discussed, project control (or control of any process for that matter) is built on the following PDCA cycle steps. (1) (2) (3) (4) Planestablish a plan; Domake measurements of performance; Checkcompare the measurements against the plan; and Assess/Acttake corrective, mitigating, or improvement action as may be determined.

Figure 4 further illustrates project control as a process (the numbers refer to future sections of the TCM Framework that will elaborate on each sub-process). A project starts with assessing strategic asset requirements and determining project performance requirements (Section 7.1). Based upon the project requirements, the strategic asset scope description is expanded to a project scope (Section 8.1) and

Strategic Asset Management Strategic Asset Scope Description, Project System Requirements, & Budget (5.1) Project Requirements Assessment (7.1) Asset, Project History & Learnings (6.1) Forecasting, Corrective Action, & Change Management (7.3)

Planning & Scheduling (8.2) Cost Estimating & Budgeting (8.3) WBS

Schedule Baseline (Activities) Cost Baseline (Budget) Communicate, Execute Plans (9) Project Accounting (10.1)

Scope Development (8.1)

Resource Planning (8.4)

Iterative, concurrent processes

Resource Baseline (Quantities)

Performance Measurement (10.2)

Analysis Basis & Feedback

Improvement Opportunities (variance from baseline plans) Project Performance Assessment (7.2) Value Engineering (8.5)

Analysis Basis & Feedback Risk Analysis & Contingency (8.6) Baseline Plans

Expenditure and Progress Measures

Figure 4The Project Control Process Map

18 Cost Engineering Vol. 43/No. 3 MARCH 2001

integrated plans for cost, schedule, and resource management are developed (Sections 8.2 to 8.4). The plans are time-phased baselines against which performance is measured. Value engineering (Section 8.5) ensures that the scope and plans consider the functional importance of scope relative to costs. Risk analysis (Section 8.6) ensures that the scope and plans address uncertainty. The plans are communicated to and executed by the performing parties (Section 9.1 and 9.2). For work in progress, performance measurements include accounting for cost expenditures and commitments, as well as physical progressing that includes measures of the work and resource quantities that have been completed (Sections 10.1 and 10.2). Performance assessment includes evaluative techniques for determining if the expenditures and progress vary from the plans and if there are adverse or positive trends, or changing performance (Section 7.2). If everything is according to plan, the control process continues on with more measurements. If there are performance deviations or trends noted in assessments, action should be taken to correct or improve the performance trend. Forecasting techniques (scheduling, estimating, and resource planning) are used to determine if corrective actions will achieve plan targets. If performance corrections will affect the project scope, or changes to the requirements or scope are initiated by the strategic asset or other stakeholder, the project baseline plans must be managed to incorporate the changes (Section 7.3.)

How would you like to have your annual membership in AACE free, or order a new book from the AACE online bookstore (or other AACE products) absolutely free? For each new member of AACE you sign up, you will be issued a credit coupon good for AACE products; it will be redeemable for any and all AACE goods and services up to 12 months from the date of issuance. Check your dues bill for a form, or contact us at 800-858-COST or 304-296-8444

s should be evident by the number of sub-processes identified on the process maps in this overview article, there is much work to be done to complete the TCM Framework. The Technical Board asks all AACE members that are interested in contributing in some way to this effort to contact John Hollmann, PE CCE at jhollmann@ipaglobal.com or 703-810-1296. Also, please visit www.aacei.org and review the full version of the above material including the annotated table of contents of the TCM Framework. Thank you for your support!N

Cost Engineering Vol. 43/No. 3 MARCH 2001

19

Reader Response Number 207