1. The report is required to recognise key decisions and factors that contribute to any inefficiency of the current CMS within the SEG Ltd and investigate how cost management systems which are advantageous to improve the business efficiency by providing better clarity to the SEG Ltd Board.
1. I will provide a summary to the Board of the evaluation results. It will provide recommendations on improvements that can be made through new or improved Cost management systems in order to drive efficiencies throughout the business.
1. This report will look to address if there are problems of using traditional the CMS with the aim of generating greater competitiveness, business efficiency and result in growth on a continuing basis throughout SEG Ltd.
1. With looking into the structure of SEG Ltd, there appears to be no reason why newer Cost Management systems could not be implemented across the group.
1. Neville Construction Ltd can be split into these distinct departments who are responsible for numerous sub-departments. There are currently 120 full time members of staff with over 50% being based at head office with the rest being field based.
The main departments are: Procurement (Quantity surveying, Estimating and Costing.), Finance (Accounts) and Contracts (Contracts and Buying).
2.00 Cost Management Systems
Job costing involves tracking and recording costs incurred on a job against any revenue that has been generated in the job. The costs involved are recorded in a ledger during the program of works, costs of materials (indirect or direct), labour and any sub-contractor costs are recorded.
Before a job is set up a good control system will set up a budget, which can help facilitate comparisons of budgeted costs with actual costs as the project progresses.
Job costing software programs are available to ensure that all costs involved in a job have been properly established. It can also facilitate various reports being generated which will help in effective decision making.
Activity Based Costing
As construction projects will involve various activities, these consume different resources (labour and materials) with the use of these resources it adds to the overhead costs. Activity based costing (ABC) determines the activities cost without alteration. ABC identifies cost of each activity and its resource which is determined by using receipts. A cost per unit of material can be determined, and then lists of activities for a job to be completed are listed and resource consumption can be determined. Material unit cost is multiplied by material used in a job then gives a total cost of materials. Once direct labour and overheads get added then the total cost of material can be obtained. The ABC technique is used by construction companies because it recognises the relationship between activities and costs. This will then make assigning overheads less uninformed. The challenge when using ABC is identifying activities and the resources that are used.
Life Cycle Costing
Life cycle costing (LCC) is the costing technique for exploring and determining the costs of an asset through its life.
2.00 Management Advantages
1. Effective Cost management’s objectives are to ensure managerial efforts are directed to maximise profitability for the company.
1. Cost Management can help the company accurately determine estimated expenses and cost of projects and better projections of costing for future projects. Changes in costs whether positive or negative can be monitored and either incorporated into the project or eliminated.
1. Cost Management can be tailored and organised to provide a strategy for each individual project.
1. Cost Management can help minimise operational costs and expenses, review the cost of economic resource and other accounting information.
1. Cost Management can provide a better understanding to how much money it costs to maintain the business and how it can be used to analysis the quality of resources to produce the goods and services.
1. Cash Flow can be improved by analysing where company money is being spent and where there are necessary and unnecessary cash expenditures.
1. Business decision making can be improved by utilising Cost Management in the decision-making process. Instead of decisions being made solely by qualitative analysis, the managers or the board can use this information as a decision making tool.
1. Cost management systems can be used to increase company’s potential financial returns. Financial forecasting which relates to demand, sales or the effects of price changes in the economic market can be taken into account.
1. The information can be used to ensure enough goods or services are being produced in order to meet the demands of customers at current pricing structures.
4.0 Management Problems
1. The traditional practices used at SEG Ltd means there is limited or poor quality information available for management to make decisions. This has resulted in limited support or acknowledgement by the senior management of the available Cost Management Systems (CMS) that can be used.
1. When techniques for estimating are poor this will lead to insufficient results.
1. When starting and finishing of projects are not in sequence then this can lead to the Cost management system not being kept up to date or being able to be fully utilised.
1. If the work breakdown structure is inadequate and when any technical problems that cannot be foreseen.
1. Where escalation of material factors occur that are unrealistic, this is where manufacturing overheads represent any indirect costs that may affect the production or service that is required. For example where failure in the ordering of materials on time means that the company has to pay extra charges for a faster delivery.
1. Cost management can be a difficult task in the construction industry for numerous reasons; SEG Ltd will incline to have poor costing transparency and complex operating structures because of cultural issues and limited accurate management information.
1. In varying economic conditions where purchasers have greater power in negotiations then management need to understand and effective cost control to preserve profit margins.
1. Up-to-date information regarding individual companies across the group is not readily available for the board therefore analysis of problem areas is not as effective as it possibly could be.
1. Staff attitudes may be adversely affected by the inadequacies of the system and tensions can occur between staff and departments.
1. The Board cannot identify the issues that may occur and the company cannot be moved forward when SEG Ltd are unsure/unaware of any on-going issues and which areas to target for required improvement.
1. This will impact on the accuracy of information given to the board.
1. The current CMS in operation within Neville Construction Ltd is outdated and inefficient.
1. The benefits of cost management systems have been researched and if they are properly designed and implemented cost management systems will produce noticeable benefits by improving labour productivity, reducing materials surplus, reducing materials management manpower, and cash flow savings. The significant benefits will occur in improved labour productivity. A basic CMS has been found to produce up to a 10% improvement in labour productivity. When utilising refined computer systems then management can plan work around material availability.
1. The costs associated with system development and implementations are substantial, however Cost management is concerned with delivering best value in building and infrastructure.
1. The board within SEG Ltd has failed to maintain a current and up to date system which allows SEG Ltd to develop and grow with their own management, whilst retaining suitable control and direction over growth and investments.
1. SEG Ltd has had a lack of information when it comes to making informed decisions for the progress of the Group.
1. A staff training programme will be necessary following an implementation of the new system, from board level through to shop floor to ensure that staff members are expected to operate in the CMS system.
1. A cost management process should identify potential problems in advance so they can be avoided and if deadlines are missed then this can lead to additional costs.
In summary, the business needs to adopt a new CMS package in order to operate more effectively, efficiently and to provide the appropriate data that would benefit the future growth and development anticipated by the Board.
By gaining good costing techniques this will have a positive impact for Neville Construction Ltd. Job costing and activities based costing techniques help in taking right decisions and are implemented by other successful companies.
By introducing a CMS package across several departments this would benefit the planning of labour and resource to be more effective, by minimising wasted man hours and therefore saving money. The Quantity Surveying team could use it to work out project durations and associated costs.
Cost management software varies greatly and the need to understand what is required from the software and how it is used is the primary consideration for the cost management software. Numerous tools can exist in the software package and be designed to track projected costs against actual costs.
Prior to and following the implementation of the new systems there will need to be an intensive training programme devised to ensure that all staff are aware of how the new systems operate, and how they can benefit each individual in their workplace.
The installation of new CMS in any business is always a huge financial commitment and return on investment will be a consideration. However, the benefits in my recommendations should assure you of the longer term efficiencies the systems will provide, and the potential for streamlining the business once the systems are fully operational. A reduction in headcount would pay back the initial outlay within two years.
A consultancy specialising in CMS should be appointed to audit all departments to understand processes and working practices before specifying a package for implementation. The package should consider expandability, adaptability, flexibility and on-going maintenance and support before any final decision is made.
CEM (2006) ‘People and Information Management’, Paper 8289. Reading; The College of Estate Management.
CEM (2002) ‘Management Theory’, Paper 0121. Reading; The College of Estate Management.
CEM (2003) ‘Functions of Management’, Paper 5092. Reading; The College of Estate Management.
CEM (2003) ‘Case Studies and Problem Solving’, Paper 5101. Reading; The College of Estate Management.
Chapman, A. (2005-2010) ‘Business Balls: Change Management’ (WWW 2005-2010). www.businessballs.com/changemanagement.htm (Last accessed 14 Jan 2012).
Fayol, H. (2008) ‘Management Innovations’ (WWW 2008). www.managementinnovations.wordpress.com/2008/12/04/henri-fayols-14-principles-of-management (Last accessed 14 Jan 2012).