Consistent Allocation of Indirect Cost- Your Competitive Advantage Presented by CliftonLarsonAllen LLP Veit USA
Profile Bob Sniegowski is a principal and consultant with the CliftonLarsonAllen Construction and Real Estate Group. After working within the construction industry for 24 years, he joined LarsonAllen in 1998. He is the principal in charge of CliftonLarsonAllen s construction group consulting area. Experience in serving clients Bob specializes in operations consulting to construction companies, implementation of technology, dispute resolution support services to attorneys and project management training to various contractors and industry groups. He is a frequent presenter on operations management topics to various contractors and industry groups. Educational/professional involvement Bob graduated from Michigan Technological University in 1976 with a Bachelor of Science degree in civil engineering and is a registered professional engineer in the states of Georgia and Minnesota. Bob began his construction career in 1974 as a student engineer for Bechtel Associates, followed by a twenty-two year career with Al Johnson Construction Co. where he held the positions of estimator, senior estimator, office engineer, project engineer, project manager, vice-president and president of two different subsidiary companies. Bob has worked nationally on heavy civil works projects such as navigation locks, dams, bridges and tunnels; as well as regionally on grading, paving, and utility highway projects and commercial building construction projects. Bob is an active member of the Associated General Contractors and its Annual Meeting Steering Committee. R.J. (Bob) Sniegowski, P.E. 2
VEIT USA: Headquartered in Rogers, Minnesota Founded 1928 and in third generation of ownership Specialty Contracting: Demolition, Earthwork, Utilities, Foundations Waste Management: C&D/Industrial landfills, roll-off containers, and waste recycling/transfer facilities 600 Employees completing over 500 projects each year Viewpoint user since 2005, CLA Client since 1991 Brian Volk, Controller Maureen Ghassemlou, Cost Accountant Dwayne Kanzler, Systems Administrator veitusa.com
Objectives Articulate the case for accurate indirect cost allocation within your organization Identify areas for improving the management and allocation of indirect cost to job costs within your organization Understand the use of Viewpoint functionality and process improvements to allocate indirect cost within your organization 4
Best indicator of inaccurate job costing How does this happen? How do you attack the problem? How do you fix it? 5
It may come as shock to you but. With some contractors the cost components of the estimates are different than those included as job costs and In many cases, the job cost reports often cannot be easily compared to the original estimate 6
Inability to compare estimate to cost leads to... The masking of variances from bid assumptions Difficulty in proving and quantifying changed work Inaccurate forecasts of cost at completion False indication of profitability while in process Confusion and frustration for third party users of the financial statement (banker, surety, customer) 7
Why does this happen? No requirement to convert bid to a budget There is no quantifiable process for determining percentage of completion or production Consistent phase or task coding of labor or equipment use is not required or valued Limited understanding of unassigned costs that are driven by the magnitude of job activity Applied rates are not validated by actual cost Critical cost analysis has never been required in the face of competition or dispute 8
Gross profit has a limit to its absorption! Gross Profit Unassigned Labor Unabsorbed Equipment Small tools Consumable supplies General and Administrative Expense 9
Indirect cost- how big is your cushion? Indirect Cost Unassigned labor, depreciation, Small tools, general inventory, etc. Estimated Cost Equipment O&M Rented Equipment Subcontracts Material Mechanic time cards & P/R Invoices & A/P Invoices & A/P Labor Time cards & payroll 10
Indirect costs can be a monster Indirect costs are determined by each company s job costing practices e.g. if field labor is recorded in the g/l as cost of revenue but not in job cost, it is an indirect cost Expenses benefit several jobs and cannot be identified to one or more specific jobs Indirect cost is more closely related to job activity than the expense of operating the business or home office The magnitude of the annual indirect cost varies based on job activity 11
Attack the problem Evaluate the big picture Cost of revenue vs. sum of job cost? What is your variance? Drill down on the nature of the variances Magnitude? Types of jobs? Impact on revenue? Transactional work flow? What is the cost ( in time & money) to change? What are the consequences of inaction? Unintended consequences? e.g. Bidding? 12
Making the case, making it happen Pick your cause and establish a cost center Forecast the periodic (quarterly or annual) cost Pick the most likely cost driver Determine your allocation method and rate Know your technology (information system) Monitor accuracy of allocation vs. actual cost Assign management responsibility Adjust the rates periodically 13
Common indirect cost allocation strategies Indirect Cost Center Payroll Tax & Insurance Major Equipment ownership, service operation e.g. SHOP Unassigned Labor (e.g. General Superintendent or Shop Time ) Allocation Method % of labor or hourly rate Hourly rate based on hours of equipment use Policy of charging time to active projects or include in shop overhead and equipment rate Consumables/Hand Tools % of labor, monthly charge, invoicing from warehouse Inter job transfers or cost sharing-otr Trucking Consistent application of rule, regardless of bid assumption 14
Viewpoint functionality can help Job costing labor burdens through PR Setup Union Benefits-Setup PR Craft Classes Payroll Tax-Setup PR Deductions/Liabilities Insurance: worker compensation and commercial liability Equipment cost allocation through EM Revenue Rates applied to equipment hours from payroll entry Use of actual cost by category to establish rates Managing utilization profitability Allocating consumables, supervision and service vehicles to active projects using JC Process Allocations Identifying general ledger cost centers Weekly allocation process 15
PR Craft Classes Union Rate Setup
PR Craft Classes Union Benefits Setup This is initially setup in PR Craft Master but it will also need to be setup on the employee setup under Craft in order to calculate during payroll.
PR Deductions/Liabilities Payroll Tax Setup
PR State Insurance Codes - Workers Compensation This is initially setup in PR State Insurance but will also need to be setup on the employee setup under Insurance Code in order to calculate during payroll.
Equipment direct cost types Maintenance Repair labor: Mechanic wages, payroll tax, benefits Repair parts (including outsourced repairs) Tires and tracks Operating Cost Fuel Oil, grease, & filters Ground engaging components (cutting edges, bits) Ownership cost (depreciation or operating leases) 20
Equipment indirect cost types Shop supervision Shop and repair equipment Interest Transport Insurance Taxes, registration Replacement cost Storage Unassigned labor 21
Forecast annual equipment expense Shop Labor $750,000 17% Depreciation 1,200,000 27% Equipment Repair 900,000 20% Fuel and Lubricants 1,000,000 22% Outside Rentals 250,000 6% Tires 150,000 3% Insurance 100,000 2% Shop Supplies 150,000 3% Total Equipment Expense $4,500,000 100% 24
Set rates to fully allocate cost to jobs Units Hours per unit Total Hours Rate Job Cost Allocation Dozer, Small 2 1000 2000 80 160,000 Dozer, Medium 9 1100 9900 100 990,000 Dozer, Large 4 800 3200 150 480,000 Dump Truck 7 1000 7000 40 280,000 Excavator, Small 3 800 2400 80 192,000 Excavator, Medium 4 1000 4000 100 400,000 Excavator, Large 5 1300 6500 150 975,000 Excavator, Jumbo 3 1300 3900 200 780,000 Grader 4 1000 4000 85 340,000 Total Allocation to Job Cost 4,597,000 25
Setting equipment rates Accurate utilization estimates are essential Use historical costs and utilization as a start Budget to absorb 100% of annual equipment cost within a 10% tolerance +/- Same rate for all equipment in a category Consider reporting inaccuracies in setting rates Use published rental rates as a guide but also use your own good judgment Balance competitive rates and equitable compensation for use by the job/customer 26
EM Equipment Setup Individual Piece of Equipment This is to setup a piece of equipment and assign it to a type/category of equipment. You can assign it to a revenue code it should follow (hourly, daily, monthly, etc)
EM Revenue Rates by Unit Equipment Rate Setup
EM Revenue Rates by Category Equipment Rate Setup
Example - Small tools and consumables Determine your allocation method and rate Allocate a percentage of labor $150,000 / $3,500,000 t.l. = 4.2% Allocate a cost per labor hour $150,000 / 120,000 mh = $1.25 per mh Other ideas? 30
Example Tools & Supplies Setup These items are setup in Job Cost under JC Cost Allocation Codes. Then they are processed manually through JC Process Cost Allocations. You can run it for a specific date range to allocate the costs. When setting up the allocation codes you can select it to calculate based on costs, hours or revenue. You can also make it specific to a select set of jobs or departments. You can also setup a specific phase code/cost type for the allocation or let it follow where the hours were originally coded.
Example Tools & Supplies Cost Allocation So for example you want to allocate costs for tools and supplies for payroll week ending 8/17/13 you can select the date range for the payroll week 8/11/13 8/17/13 and it will calculate the rate you setup with the payroll hours posted and allocate to each job. When you select the allocation code you want to calculate it will show you the date range you last ran that allocation so you don t run it twice for any given time frame.
JC Detail Report PR AllocationDetail
JC Detail Report JC Allocation Detail
In the end-what do we need to know? Are we making money as a company? Credibility Are we as productive as bid? Are all costs in the report? Resource utilization? Are all jobs equally profitable? Better Decisions Are we being fully paid promptly? Cash flow Contracted scope Changed work Timing and cash flow 35
Summary The case for accurate indirect cost allocation Knowledge and control of all costs is a competitive advantage Early identification of variances between estimate and cost Credibility with third party users of financial statement Identification of areas for improvement within your organization General and Administrative expense varies annually Under-allocated equipment cost Consumable, small equipment and hand tool expense is uncontrolled Use of Viewpoint functionality and process improvements to allocate indirect costs Establishing a basis for allocation Developing allocation methods and rates Viewpoint functionality to allocate indirect costs
Discussion Is indirect cost allocation worth the expense and effort? What is your perspective? Have your project managers resisted indirect cost allocation to their jobs? Why? Is there a complex indirect cost allocation issue that you have solved? How? Benefit? Is there an indirect cost allocation issue that you are reluctant to tackle? Why? Is there an indirect cost allocation issue that you wish had been raised in this session? What is it? 37
Questions?
Where to go from here Conference Community Vantage Point Self-paced training Knowledge Base Recorded webinar Support Consulting/ Technical Services Contact one or more of us
For more information contact: Bob Sniegowski- Job Cost Consultant Direct 612-376-4659 bob.sniegowski@claconnect.com Brian Volk-Controller Direct 763-428-6720 BVolk@veitusa.com Maureen Ghassemlou- Cost Accountant Direct 763-428-9505 MGhassemlou@veitusa.com Dwayne Kanzler-Systems Administrator Direct 763-428-9575 DKanzler@veitusa.com
Reminders Complete brief session survey now Complete post event email survey to access recordings
Consistent Allocation of Indirect Cost- Your Competitive Advantage