A couple weeks ago we helped a client develop a schedule of rates for labor and equipment to be used on a cost reimbursable project.  The rates needed to “fully loaded” to include direct, indirect and overhead recovery costs.  Their client required substantiated backup for each of these rates. 

This is a relatively common project that we do with clients and is a very important for both cost reimbursable projects and for change orders.

There are several ways to go about this - one is the very simplistic way of taking a huge pool of costs and simply dividing them by the number of field hours and then calling that your “labor burden” or “overhead recovery.”  While this is simple on the accounting side I’ve never seen this stand up too well in a negotiating or claim situation. 

We prefer a much more granular approach where we break things down into much more detail and really look at the drivers of those pools of costs. 

For most companies we see this takes a lot of explaining and a lot more work to put together because there truly isn’t a great understanding about the “flow” of money. 

Too many people simply process transactions without actually thinking about what that transaction means.  This is true for accounting, project management, equipment management and estimating. 

Great software makes the problem worse because it allows someone to simply “enter data” and then the software supposedly takes care of everything else.  People run reports and they seem to have “good information” but when pressed they can’t truly explain how all the numbers got there or how they interrelate which is the critical part. 

One thing we consistently see is that estimators, project managers and accountants who have done the job manually (pencil and paper, graduating to Excel then to software) typically are much more in-tune with how things really work and can spot problems much more quickly. 

This is the reason why when we setup things like field production tracking systems we do them manually at first because the crew leaders learn more that way.  We may migrate them to an electronic system down the road but we always start with a manual system because it helps people learn faster. 

The book “The Toyota Way” talks about this in regards to the lean manufacturing process.  Automation of data is not always the most efficient way to truly share information. 

So, back to this client - the financial oversight was handled by the contractor’s mother who had been doing accounting for over 50 years!  She relied on hand “green sheets” for reconciliation and while that seems like it might be slow I can say that she had more access to relevant information quicker than we have seen with any other client. 

She truly “knew” the numbers and how they related to each other.  She wasn’t just giving us reports out of the system.  This was completely refreshing since it isn’t something we see often. 

Bottom line(s) -

• 1. We got the rate schedule done in about 30% of the time it would normally take
• 2. They were able to understand and articulate well each line item and backup worksheet that went into making up the rates
• 3. They got the job!

We see too many companies who believe that software is the solution and too many people who have “grown up” only using software and don’t truly understand the dynamics of the information they are entering or reporting on. 

Don’t fall into this trap - focus on knowing your data and how it relates to the operations of your business.  If you need to go through the processes manually for a while to learn this it will help you in ways you can’t imagine. 

Demand this from your team - if you ask what is “behind” a particular number you should be able to get quick, concise and detailed answers.  If you hear “I need to look into that” too many times that should be a big red flag.

This entry was posted on Tuesday, June 9th, 2009 at 11:23 am and is filed under David Brown Blog. You can follow any responses to this entry through the RSS 2.0 feed. You can leave a response, or trackback from your own site.