The Client and our role:
Our client was managing large interior projects concentrating on soft furnishing. Typically, they would do civil works, furniture, painting, cushion, curtains, etc. They handled commercial and residential projects. At times, they would handle even international projects. In international projects, they would prepare all the things locally in the UAE and export ready to fit material with couple of workers to install and commission.
We were given the assignment to check costing and profitability of these projects as sometimes they would lose projects at a quotation stage due to higher costs.
The accounting was done on the basis of project accounting but there was no clear definition of fixed and variable cost. When, simultaneously two or more projects were handled and the accountant wasn’t able to allocate the cost accurately. In short, there were no policies in place for accounting resulting often incorrect presentation of project profitability.
We decided to check the costing of few projects which were completed in recent times. We chose one big residential villa project, one small villa project and one commercial office project.
All projects involved civil work including tiling and painting, furniture – partly outsourced from the market and partly made to order, and soft furnishing like cushions, curtains, some artefacts, etc.
Since all were unique products, purchase orders were made for at least 20% more material to cover any mistakes, additional work, etc. The entire cost of the material including additional 20% would be charged to the project. This was one of the reasons, on the major projects, they would lose on higher costs.
We also found that the contracts were not precise and often left gaps for interpretation. There were no clear milestones for payments which put unnecessary burden on the cash flow.
To arrive the project profitability, we had to look into many aspects of the project from quotation to implementation, from cost to profit and cash flow impact.
- We looked the various contracts and prepared a model contract. We added fixed milestones for payment and recourse for the delayed payment.
- For the items purchased directly, we reduced the margin just to cover interest expenses and other incidental expense.
- We arrived at formula to calculate per day and per hour cost for each grade of employees. We also specified minimum number of hours to be charged if actual work is less those number of hours.
- We prepared a log book and made HR responsible to maintain daily log book and all project managers shall approve the same on the next day; so that queries, if any can be resolved immediately and corrective action can be taken.
- We also prepared a policy document for allocation of cost and accounting.
We reworked on two previous contracts and rebuilt the project profitability. We did see some improvement in profitability but since we didn’t have full log book, there were limitations to arrive at accurate results.
We also did a new contract with adequate provision safeguarding our interest for delayed payments, cancelled orders, variations in the work order, etc.
We also realized that there were lot of free hours available to workers especially who were working on curtains and cushions. We also found that we have lot of fabrics stock, the cost of which has already been charged for individual projects. With some more studies, we made of list of all such inventory items – the cost of which already charged to the customers- including fabrics and accessories. We had already established that we have some excess labor hours.
From this we developed a new stream of revenues. By using idle manpower and excess fabrics, the company started making cushion covers, bed covers, curtains, etc. We did a sale or return contract with few local shops and started selling those items at reasonable price. Since we had recovered the cost of inputs in the other projects, the bulk of selling price turned into profits.
Call to action
In business, you need to look for opportunities and there is nothing called waste. In this case, we identified idle resources and converted those resources into net profit.
Most of the business owners would not know if there is excess capacity either by way of manpower or machine or material. In doing day to day business, the mangers would not recognize that idle capacity or managers may not bring to your notice. If you think you are facing a similar situation, please contact us and we can give you a solution.