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Cost Control &  Variance Analysis Grow Profits Get the Competitive Edge Obsolete Yourself Presented by Malcolm Campbell
Inspirational Quote #1 Who said it? "Nothing in the world can take the place of persistence. Talent will not; nothing...
“Silent Cal” said it? -Calvin Coolige 30th President of the United States
Inspirational Quote #2 Who said it? <ul><li>Nothing in business can maximize profit like Cost Control.  Estimating will no...
“Tile Guy” Mal said it -Malcolm Campbell  Tile Guy
Objective <ul><li>To define Cost Control in the Context of the Management Cycle </li></ul><ul><li>How Cost Control benefit...
Definition of Cost Control <ul><li>Cost-The total spent to deliver the goods </li></ul><ul><li>Control-1. Power to direct ...
The Management Cycle Basic Layer Organize Direct Control Plan
The Basic Layer is Effective for the  P/U Truck Guy and Small Business Principal “Great Risk Taker” Organize Direct Contro...
The Management Cycle Functional Layer Demobilizing Sales Estimating Logistics Transitioning Production Mobilizing Supervis...
The Functional Layer is Effective for Small to Medium Size Business Demobilizing Sales Estimating Logistics Transitioning ...
The Frictional Layer Demobilizing Sales Estimating Logistics Transitioning Production Mobilizing Supervising Purchasing Ma...
Our Punching Bag Asks <ul><li>Hey!  Where did all the money go? </li></ul>
Our friend looks for answers <ul><li>Looks though a mound of job cost reports </li></ul><ul><li>Finds cost overruns </li><...
With Variance Analysis <ul><li>Our Friend looks at one report </li></ul><ul><li>Our Friend looks at one graph </li></ul>
With Variance Analysis
With Variance Analysis
Let’s Dig a Little Deeper
Let’s Dig a Little Deeper
Conclusion <ul><li>Work with estimator on ways to improve </li></ul><ul><ul><li>“Take-off” accuracy </li></ul></ul><ul><ul...
Why you should care <ul><li>Any idiot can make money in an expanding market. </li></ul><ul><li>The market’s leader in cost...
Why you should care <ul><li>Find functional efficiencies and inefficiencies </li></ul><ul><ul><li>CANEI  “Constant and Nev...
Why you should care <ul><li>Transition from  </li></ul><ul><ul><li>a personality driven culture </li></ul></ul><ul><ul><li...
According to D&B <ul><li>The #1 reason businesses fail is lack of business experience. </li></ul><ul><li>Restated-Failure ...
Problems Unique to Construction <ul><li>Small craft based firms  </li></ul><ul><ul><li>Lack of overhead / Office staff </l...
What makes a service business investment grade? <ul><li>According to FMI Corporation – Provider of investment banking for ...
Variance Analysis a Cost Control Process
A variance is <ul><li>Any exception to the plan </li></ul><ul><li>May be </li></ul><ul><ul><li>Financial </li></ul></ul><u...
Management by Objectives (MBO) <ul><li>Focuses on planning & controlling functions </li></ul><ul><li>Measures performance ...
Management by Exception (MBE) <ul><li>Focuses on the exceptions to the plan </li></ul><ul><li>Use of variance analysis to ...
Get a perspective on your variances <ul><li>Quantifiable measurements of money </li></ul><ul><li>Assignment of accountabil...
Making a commitment to stomping out problems <ul><li>Leadership </li></ul><ul><li>Buy in from all employees.  </li></ul><u...
<ul><li>Variance review meetings </li></ul><ul><ul><li>Resolve accountability </li></ul></ul><ul><ul><li>Set goals for imp...
PO/WO’s the heart of the plan <ul><li>Purchase Orders (PO’s) and Work Orders (WO’s) are the essence of the plan </li></ul>...
Unique ID # Date information Job and work area info Project contacts Reference Items Reference PO’s Productivity expectati...
A Purchase Order Has Date information Shipping and Terms Vendor Info Delivery address and info List of Items Purchased  Re...
Tracking Production in Real Time Management by Exception
<ul><li>Management knows in advance what work will require a variance </li></ul><ul><li>Issue a Variance Order and assign ...
A universal Variance Order (VO) form should contain <ul><li>A unique # </li></ul><ul><li>An origination date </li></ul><ul...
Develop a Variance Coding List
Who may originate a VO? <ul><li>Anyone with responsibility for a functional part of the management cycle </li></ul><ul><ul...
Who tracks VO’s <ul><li>Office staff </li></ul><ul><li>It takes time to track the VO’s </li></ul><ul><li>When making a com...
Won’t this eat up all the profits gained through VA process?  <ul><li>It might in the short term, but </li></ul><ul><li>In...
Acknowledgements <ul><li>IMI Contractor College </li></ul><ul><li>Chuck Shinn from the Lee Evans Group </li></ul>
questions and discussion
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Cost Control

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Cost Control Concepts in the Trade Contractor Context - Example System Presented - Budget &quot;Variance Analysis&quot;

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Cost Control

  1. 1. Cost Control & Variance Analysis Grow Profits Get the Competitive Edge Obsolete Yourself Presented by Malcolm Campbell
  2. 2. Inspirational Quote #1 Who said it? &quot;Nothing in the world can take the place of persistence. Talent will not; nothing is more common than unsuccessful people with talent. Genius will not; unrewarded genius is almost a proverb. Education will not; the world is full of educated derelicts. Persistence and determination alone are omnipotent. The slogan &quot;press on&quot; has solved and always will solve the problems of the human race.“
  3. 3. “Silent Cal” said it? -Calvin Coolige 30th President of the United States
  4. 4. Inspirational Quote #2 Who said it? <ul><li>Nothing in business can maximize profit like Cost Control. Estimating will not; the most accurate quantity survey and the most detailed budget are pointless if the plan cannot be communicated effectively. Organizing will not; the most prepared plan and the finest resource allocation are irrelevant in the face of constant change. Directing will not; the most skilled field general can not realize the goals without knowing the plan and how to profit from constant change. Cost Control alone is the vehicle to bring them all together to “compel the events to happen according to the plan” and to thrive in the face of constant change. </li></ul>
  5. 5. “Tile Guy” Mal said it -Malcolm Campbell Tile Guy
  6. 6. Objective <ul><li>To define Cost Control in the Context of the Management Cycle </li></ul><ul><li>How Cost Control benefits you </li></ul><ul><li>Present a suggested Cost Control Process Variance Analysis </li></ul>
  7. 7. Definition of Cost Control <ul><li>Cost-The total spent to deliver the goods </li></ul><ul><li>Control-1. Power to direct or determine the events. 2. Verify by comparing to a standard. </li></ul><ul><li>Cost Control-Any action taken within the management cycle which enhances the likelihood that established goals and objectives will be achieved. </li></ul>
  8. 8. The Management Cycle Basic Layer Organize Direct Control Plan
  9. 9. The Basic Layer is Effective for the P/U Truck Guy and Small Business Principal “Great Risk Taker” Organize Direct Control Plan
  10. 10. The Management Cycle Functional Layer Demobilizing Sales Estimating Logistics Transitioning Production Mobilizing Supervising Purchasing Marketing Punchlist Accounting Unresolved I$$uses Paying Billing Engineering Warranty Organize Direct Control Plan
  11. 11. The Functional Layer is Effective for Small to Medium Size Business Demobilizing Sales Estimating Logistics Transitioning Production Mobilizing Supervising Purchasing Marketing Punchlist Accounting Unresolved I$$uses Paying Billing Engineering Warranty Principal “ Great Controller” Organize Direct Control Plan
  12. 12. The Frictional Layer Demobilizing Sales Estimating Logistics Transitioning Production Mobilizing Supervising Purchasing Marketing Punchlist Accounting Unresolved I$$uses Paying Billing Engineering Warranty Principal “ Great Punching Bag” CHANGE CHANGE CHANGE CHANGE Organize Direct Control Plan
  13. 13. Our Punching Bag Asks <ul><li>Hey! Where did all the money go? </li></ul>
  14. 14. Our friend looks for answers <ul><li>Looks though a mound of job cost reports </li></ul><ul><li>Finds cost overruns </li></ul><ul><ul><li>Asks the superintendent </li></ul></ul><ul><ul><li>Asks the project manager </li></ul></ul><ul><ul><li>Asks the estimator </li></ul></ul><ul><ul><li>Asks the accountant </li></ul></ul>
  15. 15. With Variance Analysis <ul><li>Our Friend looks at one report </li></ul><ul><li>Our Friend looks at one graph </li></ul>
  16. 16. With Variance Analysis
  17. 17. With Variance Analysis
  18. 18. Let’s Dig a Little Deeper
  19. 19. Let’s Dig a Little Deeper
  20. 20. Conclusion <ul><li>Work with estimator on ways to improve </li></ul><ul><ul><li>“Take-off” accuracy </li></ul></ul><ul><ul><li>Productivity assumptions </li></ul></ul><ul><li>Work with supervision to improve its process </li></ul><ul><li>Go play golf </li></ul>
  21. 21. Why you should care <ul><li>Any idiot can make money in an expanding market. </li></ul><ul><li>The market’s leader in cost control process will be the “last idiot standing” </li></ul><ul><li>Cost control will help you find and fix problems in real time </li></ul><ul><ul><li>Variance Analysis vs. Mound of JC Reports </li></ul></ul>
  22. 22. Why you should care <ul><li>Find functional efficiencies and inefficiencies </li></ul><ul><ul><li>CANEI “Constant and Never Ending Improvement” </li></ul></ul><ul><ul><li>Workflow Solutions </li></ul></ul><ul><li>Develop a great historical estimating basis </li></ul><ul><li>Improved overall financial and managerial decision making </li></ul>
  23. 23. Why you should care <ul><li>Transition from </li></ul><ul><ul><li>a personality driven culture </li></ul></ul><ul><ul><li>To a process driven culture </li></ul></ul><ul><li>Obsolete thyself </li></ul><ul><ul><li>So you can do more of what you want to do while staying in control </li></ul></ul>
  24. 24. According to D&B <ul><li>The #1 reason businesses fail is lack of business experience. </li></ul><ul><li>Restated-Failure to learn from costly business decisions. </li></ul><ul><ul><li>History repeats itself </li></ul></ul><ul><ul><li>If you keep doing what you are doing you will keep getting what you’re getting. </li></ul></ul>
  25. 25. Problems Unique to Construction <ul><li>Small craft based firms </li></ul><ul><ul><li>Lack of overhead / Office staff </li></ul></ul><ul><li>Project based / not product based </li></ul><ul><ul><li>Job cost / not process cost accounting </li></ul></ul><ul><li>Remote jobsites </li></ul><ul><li>Mobility and change in players at all levels </li></ul><ul><ul><li>Workers </li></ul></ul><ul><ul><li>Staff </li></ul></ul><ul><ul><li>Customers </li></ul></ul><ul><li>Lot of reporting is already required </li></ul>
  26. 26. What makes a service business investment grade? <ul><li>According to FMI Corporation – Provider of investment banking for the construction industry </li></ul><ul><ul><li>Reoccurring revenue stream. (POS work) </li></ul></ul><ul><ul><li>> 30% negotiated work. </li></ul></ul><ul><ul><li>< 30% bonded work. </li></ul></ul><ul><ul><li>5-10% earnings growth year over year </li></ul></ul><ul><ul><li>> $2 Million in pretax profit </li></ul></ul><ul><li>Is this you? </li></ul>
  27. 27. Variance Analysis a Cost Control Process
  28. 28. A variance is <ul><li>Any exception to the plan </li></ul><ul><li>May be </li></ul><ul><ul><li>Financial </li></ul></ul><ul><ul><li>Scheduling </li></ul></ul><ul><ul><li>Constructability </li></ul></ul><ul><ul><li>Marketing/Estimating/Sales </li></ul></ul><ul><ul><li>Purchasing </li></ul></ul><ul><ul><li>Customer Servicing </li></ul></ul><ul><ul><li>Production and Supervision </li></ul></ul><ul><ul><li>Quality </li></ul></ul><ul><ul><li>Etc. </li></ul></ul><ul><li>Categorize according to the functional areas of your business </li></ul>
  29. 29. Management by Objectives (MBO) <ul><li>Focuses on planning & controlling functions </li></ul><ul><li>Measures performance against the plan </li></ul><ul><li>Allows for correction of variances & documenting the cause </li></ul><ul><li>Creates a basis for checking progress against the plan </li></ul><ul><li>Creates a feedback system </li></ul><ul><li>COMPEL THE EVENTS TO CONFORM TO THE PLAN </li></ul>
  30. 30. Management by Exception (MBE) <ul><li>Focuses on the exceptions to the plan </li></ul><ul><li>Use of variance analysis to isolate problems </li></ul><ul><li>Variances from plans are problems </li></ul><ul><li>Directs management attention toward most critical problems </li></ul>
  31. 31. Get a perspective on your variances <ul><li>Quantifiable measurements of money </li></ul><ul><li>Assignment of accountability </li></ul><ul><ul><li>Keep it at the functional level / not personal </li></ul></ul><ul><ul><li>Allow for accountability reassignment when it makes sense </li></ul></ul><ul><ul><li>Allow for shared accountability </li></ul></ul>
  32. 32. Making a commitment to stomping out problems <ul><li>Leadership </li></ul><ul><li>Buy in from all employees. </li></ul><ul><ul><li>Cost control is everyone’s job. </li></ul></ul><ul><ul><li>Incentify the process. </li></ul></ul><ul><li>Universal variance tracking document </li></ul><ul><ul><li>Defines cost and cause of the variance </li></ul></ul><ul><li>Timely management reporting </li></ul>
  33. 33. <ul><li>Variance review meetings </li></ul><ul><ul><li>Resolve accountability </li></ul></ul><ul><ul><li>Set goals for improvement </li></ul></ul><ul><li>Having the spirit to see the cause as an opportunity to learn. </li></ul><ul><ul><li>Growing profits </li></ul></ul><ul><ul><li>Increasing competitiveness </li></ul></ul><ul><li>Train employees to operate within the process </li></ul><ul><li>Let lessons of Variance Analysis direct policy and procedure </li></ul>Making a commitment to stomping out problems
  34. 34. PO/WO’s the heart of the plan <ul><li>Purchase Orders (PO’s) and Work Orders (WO’s) are the essence of the plan </li></ul><ul><ul><li>These should be drafted as soon after contract award as possible </li></ul></ul><ul><ul><li>These will continue to evolve throughout the pre-construction process </li></ul></ul><ul><li>At no time may they absorb an estimating / engineering error or omission </li></ul>
  35. 35. Unique ID # Date information Job and work area info Project contacts Reference Items Reference PO’s Productivity expectation Description of the work A place for shop material and equip Authorization A Work Order Has
  36. 36. A Purchase Order Has Date information Shipping and Terms Vendor Info Delivery address and info List of Items Purchased Remark for Vendor Cost Tax Freight and Total Authorization Unique ID # Job Name
  37. 37. Tracking Production in Real Time Management by Exception
  38. 38. <ul><li>Management knows in advance what work will require a variance </li></ul><ul><li>Issue a Variance Order and assign accountability even though final cost is yet to be determined </li></ul><ul><li>Accountability and Management focus begets corrective action that can minimize the variance’s final cost </li></ul>Tracking Production in Real Time Management by Exception
  39. 39. A universal Variance Order (VO) form should contain <ul><li>A unique # </li></ul><ul><li>An origination date </li></ul><ul><li>A reference to a PO and/or a WO </li></ul><ul><li>An area for a brief description of the variance </li></ul><ul><li>A labor time record </li></ul><ul><li>A bill of materials record </li></ul><ul><li>A menu of functional assignments for accountability </li></ul><ul><li>A place for the originator to sign </li></ul><ul><li>A place for the accountable to sign </li></ul>
  40. 40. Develop a Variance Coding List
  41. 41. Who may originate a VO? <ul><li>Anyone with responsibility for a functional part of the management cycle </li></ul><ul><ul><li>Sales and Marketing Persons </li></ul></ul><ul><ul><li>Estimators/Engineers </li></ul></ul><ul><ul><li>Project managers/Purchasers </li></ul></ul><ul><ul><li>Supervisors </li></ul></ul><ul><ul><li>Forepersons </li></ul></ul><ul><ul><li>AP/AR </li></ul></ul>
  42. 42. Who tracks VO’s <ul><li>Office staff </li></ul><ul><li>It takes time to track the VO’s </li></ul><ul><li>When making a commitment to Variance Analysis, expect added overhead cost </li></ul><ul><li>An investment in computers can help </li></ul><ul><ul><li>Especially at the field level </li></ul></ul><ul><ul><ul><li>Data entry at the source by many individuals </li></ul></ul></ul><ul><ul><ul><li>Familiarity begets POS subroutine $$$$$ </li></ul></ul></ul>
  43. 43. Won’t this eat up all the profits gained through VA process? <ul><li>It might in the short term, but </li></ul><ul><li>In the long term you will be rewarded through your </li></ul><ul><ul><li>increased competitiveness. CANEI </li></ul></ul><ul><ul><li>making ever fewer of the same mistakes </li></ul></ul><ul><ul><li>ability to manage more sales effectively </li></ul></ul><ul><ul><li>getting to do more of what you want to do </li></ul></ul>
  44. 44. Acknowledgements <ul><li>IMI Contractor College </li></ul><ul><li>Chuck Shinn from the Lee Evans Group </li></ul>
  45. 45. questions and discussion

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