Project costs

Project costs are used almost exclusively in the construction industry. It is a natural way to summarize costs, and serves the construction industry very well.

Much of the funding in the relief and development industry is also controlled in a project framework ... and while this was appropriate when the projects related to construction activities, it was much less appropriate when the funding was flowing to government programs and the ministries controlling these programs. In the case of most World Bank projects, the structures are so complex that they are practically unmanageable and strong accountability for performance absolutely impossible.

What should it have cost?

Whether or not something is adequately profitable is a primary question in business analysis ... how much effort? How much investment? How much profit? But when we have the answer to these questions, the next question is how much investment should be needed? How much should the costs be, and how much profit could be made if everything was done in the best possible way. The answer to these questions is a function of understanding the behavior of costs ... how costs vary depending on the circumstances. But it is also a function of how prices and values behave ... and how effort and investment play into the equations.

Figuring out what matters?

Cost accounting is not simple ... in fact it is impossibly complex. How best to get the best possible results in the face of complexity? One trick that seems to work is to ignore everything except the few big things that matter ... and of course, it is critical that the big things that matter are those that are material. Cost accounting can be very helpful by giving some idea of what sort of cost profile the product has ... what really seems to dominate the cost ... and what seems to be the issues that impact value.

What impacts cost the most?
Aerosol Techniques

The company was doing well ... rapid growth, but direct labor costs were getting out of control. Why? What was wrong?

We concluded that the reason why labor costs were escalating was very simple ... the production schedule was optimizing use of production lines and then staffing the production lines based on the theoretical production ignoring the technical problems of production line downtime. When the production lines were being scheduled at about 75% of capacity the inefficiency caused by downtime was masked because people would move to another production line and keep on going ... but when all the production lines were fully scheduled and fully staffed, and there was downtime ... this immediately translated into higher labor costs per unit of production.

The quick solution was referred to as the “spare line” approach ... planning an underutilization of equipment in order to make best use of labor. A more sophisticated solution was to rebuild the production lines in a configuration that reduced downtime ... essentially doubling up in parallel the equipment that was prone to downtime. In the original configuration there were about 10 pieces of equipment, all about 95% reliable in series and the line was down almost 50% of the time ... with the improved configuration downtime was reduced to less than 10%.

The productivity of labor was improved by about 50% with the revised configurations ... the same labor hours resulted in 50% more production ... all arising from the reduction of wasted idle time.