The client was a sandblasting and painting company. The Company specialized in painting both the inside and outside of private and municipal water tanks. It was owned by a single individual who had a degree in engineering. The Company had three traveling crews that were each run by a Foreman. There was a one-person Office Manager who also maintained the accounting system for the Company. Finally, the Company had one estimator and an operations person to supervise the crews.
Firstly, the Chart of Accounts was set-up relatively well, but they needed to make some adjustments. The system was not reliably set-up for managerial accounting to assist them in the running of the Company.
The Company’s understanding of Overhead and how to recover it was limited, and they did not know how it could affect their pricing.
This was a fairly well-run Company. For example, the owner maintained “labor burden” spreadsheets concerning an employee’s benefits from the Company. However, the question then became: were they accurate?
An examination of the Company’s completed jobs revealed that several had exceeded their estimates by substantial margins. For a majority of cases, labor exceeded the estimates. On frequent occasions, this was not immediately known nor was it addressed in a timely fashion. Why did the Company wait so long after-the-fact? Was it the estimating, or was it the poor use of labor?
The owner attempted to review every job with each Foreman at the end of the year as part of an evaluation process. Unfortunately, this evaluation did not always work. In fact, too much time had passed between cases, which meant that the reasoning behind why things went wrong was not always remembered. However, the owner recognized that all Foremen were not good “managers” and that some did a better job of managing personnel and inspectors than others.
Another factor included the Company’s “shop rate” for travel in which they often had to pay the prevailing wage when on the job site. Was the higher rate incorrectly applied by the Foremen to the majority of the labor when it came to travel?
We had a backlog of work to do, and we had neither a budget nor any sales goals for the year other than what we had already booked. Finally, there was never any determination of vehicle or equipment needs for the future.
As part of our organizational work, we developed extensive job descriptions for key personnel. For example, we created one for the ‘Apprentices’ so that they better understood what was expected of them and the requirements needed to progress into a new position and obtain a pay raise. We created boxes for the Foremen to sign off on when each Apprentice had mastered the skill required to advance to the next level. The Foremen were tasked with the evaluation of the overall performance of the Apprentice. We then expected the Apprentice to move to a different crew where they would be evaluated by a different Foremen. If the evaluations were both within a certain range, then the training Foreman was rewarded with a nice bonus. This boosted interest in training people and helped with morale as well.
Additionally, we decided that the Foremen would be required to fax in a report every night. This report indicated the total amount of labor hours for the day, a project’s percentage of completion, and any foreseeable problems. Our intention was to get a head start on the jobs that might have the potential for trouble, either from labor overruns or productivity issues, that would cause further problems in the future. This would also allow us to verify who was working on a particular job so that we could monitor the pay rate and ensure that it was correct.
We also developed a ‘travel log’ for each of the drivers to fill out when using company vehicles to travel to job sites. We felt that those ‘shop’ hours were not being tracked accurately. Thus, full wages may have been claimed when they were only entitled to shop rates. Furthermore, we needed to gain better control of the gas expenses. By obtaining the information detailing who was driving and collecting the gas receipts, we should be able to control this problem.
Lastly, to help with crew productivity, we implemented a policy that stated each Foreman needed to conduct a “stand-up” 10-minute meeting each morning. This would enable the crew to both set production goals for the morning and any expectations for the balance of the day. The Foremen were asked to assign tasks to each crew member in the meeting so that they know what was expected to be accomplished for the morning. Finally, we let every crew member know that, “if you finish early, move on to this.”
We began by adjusting the Chart of Accounts so that we could decide the actual amount of Overhead and how to recover it. We found that, per diem, fuel and travel expenses needed to be re-allocated to the COG from the fixed expenses. After making these adjustments, we calculated the Overhead Rate that needed to be used. We found that it was at 30% once we included those direct costs into the bid process.
We next reviewed the accuracy of the owner’s Labor Burden worksheet. We found it to be well done except for two glaring mistakes: The Company’s share of the payroll taxes was omitted, and the “shop hours” (i.e., clean-up) were included in the total amount of hours a person worked, thus bringing down the burden rate. Once we made those adjustments, we found that the rate for the Foremen in the bids was too low but that most others were covered.
We then developed an operating cost for the vehicles that the crews used to travel to and from job sites. Some of the records were not very complete, but fuel was reasonably well-tracked from the credit cards. Next, in conjunction with the owner, we established a reasonable estimate of the costs for moving the trucks to the job sites. We discovered that this information was not being correctly estimated in the bids because the vans were costing $3.00/mile and the regular pick-ups were at $.60/mile. This, of course, did not include the cost of the personnel in the vehicles. Subsequently, we sought to adjust our bids to reflect the actual cost of doing business.
We developed an Excel-based spreadsheet for estimating, which included all the burdened labor, a separate sheet for prevailing wage rates, the vehicle travel costs, the amount of materials per diem, sandblasting, and disposal. These costs were combined into a final page where Overhead was applied to the COG. From there, a reasonable profit percentage was added. Moreover, profit was calculated when we divided the COG by the reciprocal of the desired profit. In other words, a 10% profit was reached once we divided by .90 for a true 10% profit. This spreadsheet helped ensure that all aspects we needed to account for were included in the bid, and that the estimator did not forget, or leave out, an important aspect of the bid.
A Budget was developed using expected expenditures for vehicles and equipment plus any increases in the fixed expenses. This enabled us to determine a sales goal for the year. Therefore, we could cover all the expenses and clear a profit. In turn, this gave us an estimated target to meet.
This Project ran for five weeks during the winter months which were not considered the busiest time of the year. The prior year’s profits were modest, constituting only 4% of total Revenue. After instituting the organizational changes, setting up a Budget, and creating sales goals, the revenue increased by $1.5 million and the profits rose by $375,000. Ultimately, this was a reasonably nice increase for the remaining nine months of work.
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