Maintaining Your Profitability & Avoiding Fiscal Slippage

Feb 23, 2015

My last post was about a service based company and assisting the owner in determining her rates to help her become more profitable. We discovered that the owner did not consistently charge the rates she was supposed to be charging. As we continued to analyze her numbers, we recognized her charge rates were not her only issue.

This particular owner had a large number of subcontractors located all over the country doing work for her. Each added value to her various parts of her business. The work that these individuals performed was then billed to the end-customer. At face value, this process seemed like a win-win situation. The amount she was able to bill the customer when she charged her full rate was greater than the amount she was paying the subcontractor. So where is the issue?

Business_Budgethe unforeseen issue involves timing. For example, if a subcontractor establishes that a given job will take 4 hours, those hours are then billed to the customer. However, if the job takes 7 hours, the subcontractor will be paid for the entire time. But, the client has only been billed for 4. Depending on the job  and the differential in the billing rate and pay rate, at best the job will break-even.

In addition, the subcontractor is charging the four hours to meet the budget. However, they are charging the overage amount to a separate administrative code. This makes it appear as though they are meeting their budget, but that they are still getting paid for the entire time.

The difference between the expected price of a trade, and the price the trade is actually executed is referred to slippage. This dilemma was not initially recognized by the owner, nor to the extreme and frequency it was occurring. She now realizes that if the budgets are not being maintained, she will not be  profitable.

If she had been keeping track of each subcontractors productivity and utilization, she would have been able to notice this trend. Now that we have been able to reveal this dilemma, she has the necessary information to hold these subcontractors accountable.

Categories: Cost Accounting