Cost reduction refers to the real and permanent reduction in the unit cost of the goods manufactured or services rendered

INDEX

1. Introduction

2. Definition

3. Elements of cost control scheme

4. Essentials for success of cost control

5. Advantages of cost control

6. Cost control is effected through budgeting and standard costing7. 5 cost reduction technique

8. Planning and control

9. Control report

10. Standards11. Cost cutting for small businesses

12. Cost control and Cost control process

13. Importance of cost control

14. Importance of cost reduction

15. Differentiation

16. The purpose of cost control17. Cost, price and value

18. Contractual arrangements and their effects on cost19. Equation of Cost Control And Cost Reduction20. Implementing a cost reduction strategy

21. Conclusion22. BibliographyChapter 1

COST CONTROL AND COST REDUCTIONCost control and reduction refers to the efforts business managers make to monitor, evaluate, and trim expenditures. These efforts might be part of a formal, company-wide program or might be informal in nature and limited to a single individual or department. In either case, however, cost control is a particularly important area of focus for small businesses, which often have limited amounts of time and money. In a small business the focus is often on selling and servicing the customer. This leaves the task of purchasing slightly sidetracked. Even seemingly insignificant expendituresfor items like office supplies, telephone bills, or overnight delivery servicescan add up for small businesses. On the plus side, these minor expenditures can often provide sources of cost savings.

One of the primary functions of cost accountancy is control and reduction of cost. While cost control deals with not allowing the cost to rise beyond the planned levels, cost reduction involves a real and permanent reduction in unit cost of production rendered without impairing their suitability for the use intended.

Cost control ends when targets are achieved whereas cost reduction has no visible end, it is a continuous process. In other words achieving targets is the objective of cost control while cost reduction focuses on challenging the targets thereby identifying opportunities to improve them.

Though cost reduction and control are efficient tools of management, both the concepts are different from each other in the following respects

Tools used for cost reductionThere are various tools used for cost reduction. Some of them are listed below:

a) Budgets, standard costing and variance analysis

b) Standardization and simplification

c) Quality control

d) Work study

e) Job Evaluation and Merit Rating

f) Production planning and control

g) Inventory control

h) Business Process Re-engineering

i) Value analysis

j) Automation

k) Operations ResearchCOST CONTROLControlling how much is spent on a certain item or project. Anything above a certain amount needs approval of a higher authority.

E.g. You are allowed to hire anybody up to a salary of $X.

COST REDUCTION:Reducing the existing costs of items or services or salaries.

E.g. You must reduce everybody's salary by 5%

Cost reduction and cost control are two different concepts. Cost control is achieving the cost target as its objective whereas cost reduction is directed to explore the possibilities of improving the targets. Thus, cost control ends when targets are achieved whereas cost reduction has no visible end. It is a continuous process. The difference between the two can be summarized as follows:

i. Cost control aims at maintaining the costs in accordance with established standards whereas cost reduction is concerned with reducing costs. It changes all standards and endeavors to improve them continuously.

ii. Cost control seeks to attain the lowest possible cost under existing conditions whereas cost reduction does not recognize any condition as permanent since a change will result in lowering the cost.

iii. In case of cost control, emphasis is on past and present. In case of cost reduction, emphasis is on the present and future.

iv. Cost control is a preventive function whereas cost reduction is a correlative function. It operates even when an efficient cost control system exists.

In the current economic climate, most organisations must face up to a prolonged period of extreme competition and funding restrictions. This is particularly the case if the past few years have been focused on growth, service improvement or reorganisation (i.e. cost efficiency has not been a recent priority). Such pressures require an approach that reduces costs in a strategic, disciplined, and sustainable manner - delivered at pace.

In our view serious cost reduction is far more than a loose aggregation of individual, local activities. It is also more than a finance task, an operational task or a localised process mapping task. In our experience, successful cost reduction requires a programme approach, managed in full alignment with the corporate strategy, across all areas of the business. It relies on an educated, intelligent debate that recognises the need for change, the appetite for change and the ability to change.

Cost reduction is a challenging, high risk activity.

It must be recognised that cutting costs is a challenging, high risk activity, that executed badly can at the very least fail to deliver, and at worst significantly undermine an organisation's business goals and service integrity. Once there is the recognition that significant cost reduction is necessary, there are a number of pitfalls organisations should avoid Approach

Draconian Top Down Reductions. Indiscriminate, arbitrary reductions, normally in staff or high profile projects, must be avoided. Such action is often driven by a desire to be seen to act, (We must do something lets do this now), without taking into account downstream impact, wider dependencies or strategic impact.Inadequate Buy-in. Insufficient input, involvement and buy-in by employees who are best placed to identify savings and will later have to achieve them.Chapter 2

DEFINITION

The Chartered Institute of ManagementAccountants, London defines CostControl as: The regulation by executive action of the cost of operating an undertakingparticularly where such action isguidedby cost accounting.Institute of ManagementAccountants, London defines CostControl as: The regulation by executive action of the cost of operating an undertakingparticularly where such action isguidedby cost accounting.Cost Control aims at reducing inefficiencies and wastages and setting up predetermined costs and in achieving them.

Chapter 3

ELEMENTS OF COST CONTROL SCHEME:Set down a standard/ target.

Select a yardstick.

Ascertain the actual performance.

Compare the actual performance.

Analyze the variances by causes.

Take corrective action.

Periodically review the standards.

Chapter 4 ESSENTIALS FOR SUCCESS OF COST CONTROL:Firm should have definite plan oforganisation.

Costs should be collected for each of responsibility.

Report should draw managements attention.

Good performance should be rewarded.

Proper setting of standards.

Chapter 5

ADVANTAGES OF COST CONTROL:Achieving the expected return ofcapital

Increase in productivity of the available resources

Job opportunity

Economic use of limited resources of production

Chapter 6

COST CONTROL IS EFFECTED THROUGH BUDGETING AND STANDARD COSTING

BUDGETING:

A budget may be defined as a comprehensive and coordinated plan of action, express in monetary terms. It is prepared and approved prior to the budget period and may show income, expenditure and capital to be employed to attain the objective.

STANDARD COSTING:

In this standards are set and actuals are compared with the standard corrective measures are undertaken for any discrepancy found between the standards and actualsChapter 7

# 5 COST REDUCTION TECHNIQUESReducing operating expenses and supply costs are essential elements of successful cost reduction plans. The amount of money the business spends on raw production materials directly affects their profit margin. It is cost efficient to develop a competitive cost reduction strategy rather than increase profits through front-end sales. Reducing supply costs requires common sense and a bargain hunter's ambition, and the process is relatively straightforward.What is Cost Reduction?

Cost reduction strategies are geared towards generating substantial revenue from preexisting elements without making additional sales. The process identifies profitable procedures already in place and optimizes procedures to maximize profitability. Cost reduction enables businesses to identify their current needs, forecast future sales, and understand the factors that help or prevent their products from selling. A successful cost reduction strategy includes the entire organization and all levels of management.

#1 Cost Reduction Technique

Eliminate Paper Flow

Another great way to improve productivity while lowering costs is to eliminate paper flow. The average office worker prints 10,000 sheets of paper a year. The best approach is to place all documents online for employees to download, read, and make changes to. Also, instruct all employees not to print e-mails and other unnecessary documents that will usually end up in the trash upon a few quick glances. Have IT set all printers to print doubled sided.

#2 Cost Reduction Technique

Reduce Shipping Charges

Cost reduction strategies require advanced planning and efficient spending; thus it is essential to order supplies well in advance to reduce shipping costs. Attempt to purchase items in large groups based on the manufacturer or vendor to save on freight charges, utilizing merge-in-transit techniques to reduce transit times. When shipping to consumers, utilize bulk discounts by shipping multiple quantities of the same item. Choose carriers and form partnerships with them to reduce shipping charges. Order inventory early to avoid rush-processing charges and expedited delivery fees, which add up quickly for bulk orders.

#3 Cost Reduction Technique

Learn and Shop Smart

Supply costs vary depending on the time of year, market demand, manufacturer supply, and industry variables. Reduce supply costs by shopping around to find the best deal on office supplies, production equipment, and raw materials. Utilize bargain hunter services to find the best prices on electronics and everyday equipment. Consider hiring a procurement officer to monitor and maintain supply levels, as their training and knowledge are invaluable assets to your organization. Ensure that the decision makers within the company know how to find the best prices by using a variety of tools and resources. Monitor changes in pricing, purchasing the products when the price is historically low.

#4 Cost Reduction Technique

Ask for Employee Suggestions

Employee suggestions play a vital role in cost reduction and increasing productivity because employees have more experience regarding daily operations in a business. Every suggestion that your business implements improves your business in some way. Performance may be improved, customer satisfaction may increase, costs reduce, or some other positive impact improves your business in some way. The average employee suggestion saves the company $6,224 in operational expenses. The more ideas you implement the more your business will improve. These suggestions will add up over time and can be used as a competitive advantage.

#5 Cost Reduction Technique

Utilize Bulk Discounts

Contrary to some business sustainability policies, buying select materials in bulk reduces supply costs and increases productivity by lowering human interaction. Every company orders certain supplies more than other products. Consider purchasing non-perishable items with long shelf lives in bulk to reduce supply and labor costs. Ordering items less frequently reduces the costs associated with placing orders and saves money by lowering the cost per unit. Before placing the order, ensure the savings per unit are worth the risk, given current market demands. Never purchase more than one year's worth of inventory at one time, ensuring the warehouse has the ability to hold the products without finesse.

Chapter 8PLANNING AND CONTROL

Cost control refers to management's effort to influence the actions of individuals who are responsible for performing tasks, incurring costs, and generating revenues. First managers plan the way they want people to perform, then they implement procedures to determine whether actual performance complies with these plans. Cost control is a continuous process that begins with the annual budget. As the fiscal year progresses, management compares actual results to those projected in the budget and incorporates into the new plan the lessons learned from its evaluation of current operations. Through the budget process and accounting controls, management establishes overall company objectives, defines the centers of responsibility, determines specific objectives for each responsibility center, and designs procedures and standards for reporting and evaluation.

A budget segments the business into its components, or centers, where the responsible party initiates and controls action.Responsibility centersrepresent applicable organizational units, functions, departments, and divisions. Generally a single individual heads the responsibility center exercising substantial, if not complete, control over the activities of people or processes within the center, as well as the results of their activity.Cost centersare accountable only for expenses.Revenue centersprimarily generate revenues.Profit centers accept responsibility for both revenues and expenses. The use of responsibility centers allows management to design control reports and pinpoint accountability. A budget also sets standards to indicate the level of activity expected from each responsible person or decision unit, and the amount of resources that a responsible party should use in achieving that level of activity.

The planning process, then, provides for two types of control mechanisms: feed forward, which provides a basis for control at the point of action (the decision point); and feedback, which provides a basis for measuring the effectiveness of control after implementation. Management's role is to feed forward a futuristic vision of where the company is going and how it is to get there, and to make clear decisions coordinating and directing employee activities. Management also oversees the development of procedures to collect, record, and evaluate feedback.

Chapter 9

CONTROL REPORTS

Control reports are informational reports that tell management about a company's activities. Control reports are only for internal use, and therefore management directs the accounting department to develop tailor-made reporting formats. Accounting provides management with a format designed to detect variations that need investigating. In addition, management also refers to conventional reports such as the income statement and balance sheet, and to external reports on the general economy and the specific industry.

Control reports need to provide an adequate amount of information so that management may determine the reasons for any cost variances from the original budget. A good control report highlights significant information by focusing management's attention on those items in which actual performance significantly differs from the standard.

Managers perform effectively when they attain the goals and objectives set by the budget. With respect to profits, managers succeed by the degree to which revenues continually exceed expenses. In applying the following simple Formula, Net Profit = Revenue - Expenses, managers realize that they exercise more control over expenses than they do over revenues. While they cannot predict the timing and volume of actual sales, they can determine the utilization rate of most of their resources; that is, they can influence the cost side. Hence, the evaluation of management's performance and the company's operations is cost control.

Chapter 10STANDARDS

For cost control purposes, a budget provides standard costs. As management constructs budgets, it lays out a road map to guide its efforts. It states a number of assumptions about the relationships and interaction among the economy, market dynamics, the abilities of its sales force, and its capacity to provide the proper quantity and quality of products demanded. An examination of the details of the budget calculations and assumptions reveals that management expects operations to produce the required amount of units within a certain cost range. Management bases its expectations and projections on the best historical and current information, as well as its best business judgment.

For example, when calculating budget expenses, management's review of the historic and current data may strongly suggest that the production of 1,000 units of a certain luxury item will cost $100,000, or $100 per unit. In addition, management might determine that the sales force will expend about $80,000 to sell the 1,000 units. This is a sales expenditure of $80 per unit. With total expenditures of $180, management sets the selling price of $500 for this luxury item. At the close of a month, management compares the actual results of that month to the standard costs to determine the degree and direction of any variance. The purpose for analyzing variances is to identify areas where costs need containment.

In the above illustration, accounting indicates to management that the sales force sold 100 units for a gross revenue of $50,000. Accounting's data also show that the sales force spent $7,000 that month, and that production incurred $12,000 in expenses. While revenue was on target, actual sales expense came in less than the projected, with a per unit cost of $70. This is afavorablevariance. But production expenses registered anunfavorablevariance since actual expenditures exceeded the projected. The company produced units at $120 per item, $20 more than projected. This variance of 20 percent significantly differs from the standard costs of $100 and would likely cause management to take corrective action. As part of the control function, management compares actual performance to predetermined standards and makes changes when necessary to correct variances from the standards. The preparation of budgets and control reports, and the resulting analysis of variances from performance standards, give managers an idea of where to focus their attention to achieve cost reductions.Chapter 11COST CUTTING FOR SMALL BUSINESSES

A variety of techniques can be employed to help a small business cut its costs. One method of cost reduction available to small businesses is hiring an outside analyst or consultant. These individuals may be independent consultants or accountants who analyze costs as a special service to their clients. They generally undertake an in-depth, objective review of a company's expenditures and make recommendations about where costs can be better controlled or reduced. Some expense-reduction analysts charge a basic, up-front fee, while others collect a percentage of the savings that accrue to the company as a result of their work. Still others contract with specific vendors and then pool the orders of their client companies to obtain a discount. Some of the potential benefits of using a consultant include saving time for the small business owner, raising awareness of costs in the company, and negotiating more favorable contracts with vendors and suppliers.

Steps that a small business can take relatively quickly and can start them down the path of cost reduction include such things as printing or photocopying on both sides of the paper whenever possible. Securing supplies to which employees have access, like locking the office supply cabinet, to better track usage of these items. Canceling insurance policies on unused equipment and vehicles is another way to check unnecessary costs. Establishing a regular cost-cutting program can be done by setting aside time to review several months' worth of checks and invoices and make a detailed list of all monthly expenses. Then, decide upon a few areas that might benefit from comparison-shopping for better prices. If the small business owner is not inclined to undertake the comparison-shopping personally, a responsible employee can be assigned to the task.

Despite the importance of cost control to small businesses, and the potential for cost savings, cost reduction alone cannot guarantee success. For cost cutting to be effective, the sales and revenue end of the business must be healthy. "Only the most exceptional leaders of the most exceptional companies avoid getting sucked into a period of heady growth followed by desperate cutbacks," Alan Mitchell wrote inManagement Today. "These companies have learned the hard way that cost cutting alone doesn't guarantee customer preference."

Mitchell went on to explain that every business reaches a point in its growth when management recognizes a need to cut costs, usually in the face of a crisis. "Over time, you get a cost cutting culture," consultant Paul Taffinder told Mitchell. "Once you have, the types of people who are good at building thingscreating new values, new products, new servicesare driven out of the business because it is unpleasant for them to work there. Then, once boom time arrives again, the organization piles on capacity but doesn't solve the problem of creating innovative potential. It has to hire talented new people again." Many companies repeat this process of inefficient growth several times.

The effective implementation of a cost control and reduction program takes planning and time. It should be seen as a continuous process and one that will need ongoing attention. Instead of blindly trying to cut costs in the face of a crisis, Mitchell recommended that managers embrace cost cutting as a strategic issue and approach the task from a marketing perspective. "If you are going to talk about waste, you need to define what value is, because the opposite of waste is value," business school professor Dan Jones told Mitchell. "And you can only define value from the end customer's perspective. If you can really do thisif you really know what it is that doesn't add value to the customerthen you can start asking 'How can we get rid of that?' Otherwise, we are just saying 'Let's cut costs."

Chapter 12

COST CONTROL

Executive Action by given members of an undertaking to maintain the cost with budget and/or standards established

According to CIMA it is the regulation by an executive action of the costs of operating an undertaking particularly where such action is guided by cost accounting.

COST CONTROL PROCESS

1) Establishment of a Budget and/or standards.

2) Appraisal of performance

3) Corrective Action

4) Planning AgainChapter 13

THE IMPORTANCE OF COST CONTROL

There has in recent years been a great need for an understanding of construction

economics and cost control, particularly during the design stage of projects.

The importance of this is due largely to the following:

The increased pace in society in general has resulted in clients being less likely

to tolerate delays caused by redesigning buildings when tenders are too high.

The clients requirements today are more complex than those of their Victorian

Counter parts. A more effective system of control is therefore desirable from

inception up to the completion of the nal account, and thereafter during

costs-in-use.

The clients of the industry often represent large organisations and nancial

institutions. This is a result of takeovers, mergers and some public ownership.

Denationalisation has often meant that these large organisations remain intact

as a single entity. There has thus been an increased emphasis on accountability

in both the public and the private sectors of industry. The efciency of these

organisations at construction work is only as good as their advisers.

There has been a trend towards modern designs and new techniques, materials

and methods of construction. The designer is able to choose from a far wider

range of products and this has produced variety in construction. The traditional

methods of estimating are unable to cope in these circumstances to achieve value

for money and more balanced designs.

Several major schemes in the UK and abroad in construction and other industries

have received adverse publicity on estimated costs. Even after allowing for

inationary factors, the existing estimating procedures have been very inadequate. It is not a valid diversion to suggest that projects in other industries such as the Nimrod Early Warning System, Concorde or space exploration have produced considerably more inaccurate estimates than those in the construction industry.

Contractors prot margins have in real terms been reduced considerably during

the past decade. This has resulted in their greater cost-consciousness in an

attempt to redress possible losses.

There has, in general, been a move towards the elimination of waste, and a

greater emphasis on the use of the worlds scarce resources. This has necessitated

a desire for improved methods of forecasting and control of costs.

Enables firm to achieving defined objective

Proper utilization of firms resources

Growth and survival of a firm

Make the organisation efficient.

Chapter 14

IMPORTANCE OF COST REDUCTIONImproves the competitive capabilities and ensures survival, growth and prosperity

Optimum utilization of the resources

Provides reasonable prices to consumers

Preservation of the nations scarce resources

Keeps the price under control charges to consumer

Helps govt in controlling inflation.

Cost Reduction

It is a systematic effort to improve profit margins by eliminating all forms of waste and unnecessary expenses without, at the same time, impairing the generation of revenue.Chapter 15

DIFFERENCIATION

Chapter 16

THE PURPOSE OF COST CONTROL

The purpose of cost control can be generally identied as follows:

To limit the clients expenditure to within the amount agreed. In simple terms

this means that the tender sum and nal account should approximately equate

with the budget estimate.

To achieve a balanced design expenditure between the various elements of the

buildings.

To provide the client with a value-for-money project. This will probably

necessitate the consideration of a total-cost approach.

The client may stipulate the maximum initial cost expenditure, or provide a detailed

brief to the design team who will then determine the cost. Most schemes are a

combination of these two extremes.

Chapter 17

COST, PRICE AND VALUE

The terms cost, price and value will represent different interpretations to different

people. Their particular meaning generally lies in the context in which they are

being used. It must also be remembered that much of the terminology used in the

construction industry has a special interpretation appropriate only to this industry.

Cost, to the building contractor, represents all those items included under the

heading of his expenditure. His price is the amount charged for the work he carries

out, and when this is received it becomes his income. The difference between the

two is his prot. Cost is therefore reasonably clearly dened within this context.

It relates largely to manufacture, whereas price relates to selling. The term cost

price really means selling at cost. The price, however, that the building contractor

charges the building owner for doing the work is to the latter his building costs.

The Building Cost Information Service (BCIS) was designed and developed on

the basis of the building owners costs. These are in reality the tender price from

building contractors. A tender price index therefore attempts to measure the

building contractors prices (the building owners costs) whereas a building cost

index measures the building contractors costs. Although there is some relationship

between the two, they are not identically correlated.

It is not surprising, therefore, to realise how easy it can be to confuse these two

terms if used incorrectly. To adapt the famous quotation, one persons (builders)

price increase is another persons (building owners) cost increase.

Value is a much more subjective term than either price or cost. In the economic

theory of value, an object must be scarce relative to demand to have a value. Where

there is an abundance of a particular object and only a limited demand for it, then,

using the economic criteria, it has little or no value attributed to it. Value constitutes

a measure, therefore, of the relationship between supply and demand. An increase

in the value of an object can therefore be obtained through either an increase in

demand or a decrease in supply.

Aristotle identied seven classes of value that are still relevant to our modern

society. These classications of value can be summarised as: economic, moral,

aesthetic, social, political, religious and judicial. These bear some resemblance to

the way in which we identify building life as shown in Table 17.2. Economic value

may be seen as the more objective consideration, since it is measurable in terms of money. The remainder are seen as being more subjective. Maximum value is

assumed to be found when a required service or function is attained and when the

cost of providing that service or function is at a minimum. Value in this context

can be measured objectively, but any solution found through such a procedure risks

sub-optimisation. Any increase above the required level of either service or function,

for a small extra cost, would often be perceived by clients as better value. A more

meaningful approach when applied to the built environment considers the following

four components that when aggregated combine to provide a clearer picture of value:

Use value. This is the benet attached to the function for which the item is

designed

Esteem value. This attribute measures the attractiveness or aesthetics of the

item

Cost value. This represents the costs to produce or manufacture the item and

to maintain it over its period of possession or life. This relates very much to the

issues surrounding whole-life costing

Exchange value. This is the worth of an item as perceived by others who are

primarily interested in its acquisition.

Chapter 18

CONTRACTUAL ARRANGEMENTS AND THEIR EFFECTS

ON COSTS

The needs of the client in connection with a proposed construction project are

unique. A majority of projects are of a bespoke design even where ideas may be

copied from other projects or standard components are used. Even in the case

of an off-the-shelf project the site characteristics, and most likely the weather

conditions under which the project is constructed, will be unique to the project.

This means that achieving the right price for the project within the right timescale

is a challenge.

Many of the clients of the construction industry are not regular purchasers

of projects. A successful outcome is achievable only where the complexity of the

processes used is carefully understood and dealt with appropriately. Such clients,

through their networks, will paint a glowing picture of the industry where a project

has gone well in their eyes. They will thus act as ambassadors for the industry in

encouraging associated clients to modernise their premises or to build new premises.

The establishment of a clear procurement strategy is the key to a successful

outcome. This strategy will assist those who are involved in planning and

co-ordinating projects to prioritise key outcomes as well as reecting on risk

and establishing how the process will be managed and controlled. Six key steps

have been identied by the Strategic Forum Accelerating Change report. These

are

Statement of business needs. Priorities, outcomes, stakeholder and constraints

Business case. Encompassing all business requirements

Strategic brief. Expressed in clients terminology and an absence of industry

jargon

Selection of the team. This may incorporate the early selection of the

contractor and other specialist rms

Delivery of the business solution. Clearly focused upon by the client and

the team

Capture learning. Conrm benets and inform future projects

The execution of construction work on site necessitates the awarding of a

contract to a constructor. The promoter or client has many different options

available for this purpose. A successful contractual arrangement, however, will

generally require the adoption of some recognised procedures. The construction

industry is constantly examining new ways of contractor selection to combat bad

press reports on construction time, cost and performance. Methods used in other

countries were supposed to reduce the contract period. Further investigation

and research should enable performance generally to be improved. The quantity

surveyors skills are aimed at producing more economic designs and solutions

to construction work on site. For a descriptive treatment of the various methods

available, students should refer to Contractual Procedures in the Construction Industry

by Allan Ashworth (Pearson Prentice Hall 2006).

In addition to other objectives, clients prefer to pay as little as possible for

the construction projects. They also wish to know in advance, wherever this is

possible, the expected price they will be required to pay. Contracts can be broadly

classied as either measurement or cost reimbursement. The former type provides

for a reasonably accurate cost prediction, the latter does not. However, if the cost

reimbursement contracts can be shown to be less expensive then clients will often

be prepared to forgo the specic price prediction. Factors such as the costrisk

element, which is greater to the contractor in the measurement contract, must be

balanced with the cost control capabilities which are recognised as being weak with

cost reimbursement contracts. The following are generally held opinions based on

rule-of-thumb guidelines alone:

In the absence of any form of competition, tender prices are likely to be higher

than where several rms may be seeking the contract.

Negotiated tenders, under normal conditions, are typically 5% higher than a

comparable selective tender.

Open tendering should achieve the lowest possible tender sum for a project.

Unorthodox or unusual methods of tendering and contractual arrangements

generally incur higher costs.

There is an optimum contract period in terms of cost; where this is varied tender

prices will generally increase.

Fixed price tenders do not necessarily mean lower nal accounts. Where they

over-anticipate ination they will produce higher nal accounts than the

comparable uctuating price tender.

The economics of the contractual arrangements need to be measured in terms of

the total cost to client, inclusive of professional fees associated with cost. It must

be remembered, as in other types of evaluation, that economics is only one factor

to consider. Open-ended contracts which may produce the lowest nal accounts

can cause immense anxieties for a client, who may prefer to pay for peace of mind.

It is in reality very difcult to make realistic comparisons, even where it is possible

to examine two similar projects being constructed on different contractual bases.Chapter 19

EQUATION OF COST CONTROL AND COST REDUCTION

The old equation of

COST + MARGIN = SELLING PRICE

Has now been turned on its head to mean that

MARGIN = SELLING PRICE COST.

Of this, only one variable, cost, is under the control of the company while the market dictates selling price. Margin therefore is a function of how efficient the company is in controlling costs.

CHANGING PERSPECTIVE OF PROFIT

1 COST + PROFIT = SALES

In a sellers market cost and profits are reimbursed by the customer.

2 SALES COST = PROFIT

With more players in the market place, selling price is determined by the market forces ; having locked to a level of cost, focus is on cost control and reduction. Cost information is for tactical decision making.

3 SALES PROFIT = COST

Selling price is determined by market forces : profit is tactical decision making.

4 SALES PROFIT = COST

Selling price is determined by market forces: profit is determined by the risk/return profile of business with a focus on cost management to achieve the targeted results. Chapter 20IMPLEMENTING A COST REDUCTION STRATEGICThe business environment faced by Canadian companies continues to be difficult. Exporters have been hit hard by the rise of the Canadian dollar, energy cost have pulled back somewhat from their record highs but still have added significantly to the cost structure and the risk of further increases remains. Labour costs are another major issue especially when your competitors are taking advantage of low offshore labour costs.

In order to compete, Canadian businesses need to execute a strategic approach to their cost reduction programs. Many businesses take a shotgun approach to cost reduction. They implement across the board cuts such as reducing all budgets by 10% or cutting a certain percentage of staff. For public companies this is especially attractive as there is so much pressure on meeting the quarterly numbers. Unfortunately, all too often this type of action cuts not only the fat in the company but into the muscle. The result, over the longer term, is that the companys ability to compete is damaged.

E-commerce is another factor in the cost pressures facing business. Although e-commerce allows for increases in productivity, the other side of the coin is that it makes cost competitiveness a key competitive advantage. The advances in the internet and communication technologies empower both buyers and the sellers making business transactions easier.

For example, ordering problems and delays, searching costs or other imperfect information situations allow businesses to charge higher prices for similar quality of products and services. As ecommerce continues to develop, few profit margins will be protected from these improvements.To avoid this outcome, senior management needs to develop a strategic approach to cost cutting. This also means taking some of the savings generated and reinvesting them in the parts of the business that can generate future growth such as research and development and marketing.

So what is a strategic approach to cost reduction?

There are five components that will help to ensure that your cost reduction program delivers the desired outcome:

1. Set clearly defined objectives: The first step in the process is to clearly identify what you want this process to achieve. This can be accomplished by developing both quantitative and qualitative objectives. That is, the process needs to be about more then just numbers. It also needs to be about improving your employees work environment, instituting better and more cost effective processes. The nature of the particular situation will dictate the degree of cost cutting that is required.

For example, a developing company that has a cash burn rate that exceeds its current resources will need to implement drastic changes quickly until it can secure further funding. Companies that are more established will set objectives that are designed to remain competitive, while healthy businesses will look to improve their competitive position. Whatever your particular situation is, you need to be very up front about why the process is necessary and exactly what will be involved.

2. Communicate, Communicate, Communicate: Nothing kills this type of process faster than employees who dont understand why it is necessary and what the objectives are. One of the first steps is to establish a cost reduction committee. This group should draw it members from across the organization and have the direct support and involvement of senior management. Regularly update all staff on the successes that have been achieved and solicit feedback.

3. Align the Cost Reduction Strategy with your Business Strategy. The cost reduction objectives must be in harmony with the overall strategy to ensure that any cuts do not reach the muscle of the business. The process must enhance the strategic vision and the ability of the organization to reach this vision. This can be done by aligning the company's vision and objectives with its resources to determining the financial gap between current capabilities and the future needs of the company. With this information, the company can recognize and prioritize the areas that need to be strengthened and those to be restructured or eliminated. Aligning the strategies is a critical part of the process. Failure at this stage can put the company on the road to ruin, from which it may never recover.

4. Set Goals and Prioritize. Now that the objectives have been determined, the strategies aligned and the process has been communicated it is important what not to do. That is, as mentioned earlier, you must resist the temptation to make arbitrary cuts across the board. This approach assumes that all parts of the organization are equally inefficient and have equal input into the companies future success. As this is clearly not the case, the next step is to prioritize using the insights that have been learned throughout this process. Commence the implementation, evaluate the results and prepare for the next priority.

5. Reward your People for a Job Well Done: Let your staff know how the company has been successful as a result of their cost reduction efforts. Also, share some of the savings with those who have contributed to the process because you would not have gotten to where you are without them

Cost reduction is something every organization needs to be thinking about. You cannot rely on your past successes and old technology cannot protect companies from shrinking margins and strong competition. Building an organization with a strong cost control culture now will reap rewards for many years to come. The days of implementing cost reduction programs will be over forever as it will be part of the companies DNA and everyday will bring new ideas on how to reduce or eliminate costs.

How to implement cost reductions programs?

Cost reductions can come through technology improvement and process redesign

There comes a time in every business when you have no other choice but to reduce the costs once again. This is a reactive approach and not something that we recommend or approve of. When companies implement cost cutting initiatives in the reactive mode, they do things that do not always help them in the long run: layoffs, plant shutdowns, etc. When cost reduction is an ongoing activity (what the Japanese call as kaizen or "continuous improvement"), a firm is in control rather than being pushed around by competitors and market forces.

How to make cost reduction an integral part of your operations strategy?

Cost reduction triggers should be set along three dimensions:

Internally-driven: Keep improving your process. Have a good employee suggestions

program that works, that is, all suggestions are carefully evaluated and those that are

implementable are actually implemented, and if they work out well, the employee is

suitably rewarded.

Externally-driven: Stay on top of changes in technology and process. Even when a

technology is not directly targeted at your application/process, you need to evaluate it to

see if you can use it for cost reduction.

Competitor-driven: Benchmarking against your competitors is key here. You must

have real time data on your competitors' cost position. If you find that your competitor is

doing better than you, immediate action is needed.

Implementing a cost reduction program

1. After you have compiled the data from competitors and other industry benchmarks, set

realistic goals first, though it is perfectly fine to have ultimate goals as well. Ruthless

cost cutting can have negative consequences.

2. Develop a cost reduction program in consultation with each and every employee who

could potentially contribute. Do not limit the team to managerial types. In many cases,

the floor staff has a better understanding of what works and doesn't and how to make the

process better.

3. Always do a ROI analysis. No cost reduction program should be undertaken until the

ROI justifies it.

4. Explore all options for cost reductions and not just those related to business process

redesign or technology/equipment upgrades. Some of the other options that can be

considered are outsourcing, off shoring, etc.Chapter 21CONCLUSIONIn this project, I have delved into the important points of project cost control and cost reduction. Without proper planning of cost management, deliverables may happen, but chances of over shooting the budget always remain. So it is very critical that we need to keep a strict vigil on various processes involved in estimation, budgeting and control in a project so as to ensure its completion within the allotted time frames and budget.Chapter 22BIBLIOGRAPHY"Bain Study Outlines Strategic Importance of Continuous Cost-Reduction Program." The Controller's Report. February 2004.

Patterson, Perry. Cost Reduction and Control Best Practices: The Best Ways for a Financial Manager to Save Money. John Wiley & Sons, 2002.