Part 21
A check on the measurement of the quantity of the work done is frequently obtained by the measurement of the quantity of the work left undone or of the material remaining in the stock piles.
COST SHOWING
The object of cost keeping is to furnish accurate and early information to those in authority, both as to where they stand financially on the work, and what necessities or opportunities there are for improvement in economy.
In order to accomplish the object of cost keeping, it is necessary that there be some efficient method of cost showing; and it is essential that the system of cost showing, in combination with the system of cost keeping, shall meet the following specifications:
1. It shall be accurate.
2. It shall be simple.
3. It shall be easy to study.
4. It shall be easy to compile.
5. It shall be capable of being compiled in a very short time after the receipt of the original figures.
It needs no argument to prove that the cost─showing system should be accurate. If it be full of errors, its usefulness is entirely obviated; and 1 per cent of error in it will do a great deal more than 1 per cent of damage to its efficiency, in assisting the manager to increase the efficiency of the work. There is, however, a limit to the desirable precision of such an affair. The cost of putting in ties on a certain railroad for a certain month, for instance, may have been 7.2143 cents. If the last two figures are interesting from the statistician's point of view, they are utterly useless to a practical manager. If the previous month's performance has been, we shall say, 6.94 cents per tie, this month's figures will have shown an increase in cost of O.27 cent, which is approximately 3.9 per cent of the previous month's figure. In other words, the tie─placing efficiency has decreased 3.9 per cent. It is very questionable whether the figure 4 per cent, although not quite so precise, would not be rather more useful to the manager than the figure 3.9 per cent; and, personally, the authors would favor the briefer work. The degree of refinement to which these records should be carried, is, in the last analysis, a matter for the individual judgment of the manager himself. The student should bear in mind the folly of unnecessarily elaborate figures.
[Illustration: AN EXCELLENT EXAMPLE OF THE MODERN FOUNDRY FOR SMALL CASTINGS The Moulding Machines are Shown in Operation. Note the Plentiful Supply of Daylight. The Michigan Stove Co., Detroit, Mich.]
The second specification, that the cost─showing system shall be simple, is almost as important as the first. If it be not simple, the chances for inaccuracy will be tremendously multiplied. It will take more work to carry it on; and the straightening─out of errors and discrepancies will be so difficult, and will require so much of the time of persons in authority, as to leave them no opportunity to do their other work. Plainly, it should not be necessary for a manager to do a lot of detailed work on cost─keeping or cost─showing systems himself.
Specifications Nos. 3 and 4 are more or less included in specification No. 2. Specification No. 5, however, is also of great importance. Information that is stale is about as useless as no information at all. If you tell a foreman on Monday that the work of his gang for the week ending ten days before was not up to the mark, he will not have much respect for your cost─keeping system; he will certainly not remember sufficiently well the causes that produced his bad work, to remedy them; or he will be able to pick out of the haze of history enough excuses to let himself out of the responsibility of his bad work, and to put his manager at sea as to where this foreman and his gang really stand. It is therefore of prime importance that the arrangement for showing the manager what his costs are, with the salient conditions affecting such costs, shall be so rapid as to be "red─hot" all the time.
The commonest arrangement of cost showing──and the only one ordinarily found at the present day on most contract work──is an abstract prepared on a piece of yellow paper by the time─keeper for the inspection of the manager each morning; and this has so few disadvantages that it would be very satisfactory, were it not that it is impossible from it to compare at a glance the work done, let us say yesterday, with that done previously. It is, however, far better than any other system which lacks any of the essentials indicated above.
USE OF CHARTS
The best method that has so far been devised is by the use of charts showing to scale the different unit─costs for the various days in the month. Such charts are illustrated in Figs. 7 and 8. They are from the records of the Construction Service Company. One of these (Fig. 7) indicates the cost of channeling rock. It will be seen from the line _A_, that during this month the number of square feet channeled varied from 75 to 375, and that the labor cost varied from a maximum of 62 cents to a minimum of 8 cents. On the 8th, the morning crew did not work, because, as it happened, of severe weather, which accounted for the low output on that day. On the 24th, the night shift allowed the pipes to freeze up. It may be mentioned that the foreman of the night shift, whose name appears in brackets on the chart, has since turned his attention to other fields of industry than channeling. On the 28th, the channeler had reached a point where the cut was frequently filled up by earth that slid in from the side and caused such a large amount of sludge as to cushion the blows of the blade; and the chart shows on that day a high cost, due to the cleaning away of this earth.
The chart illustrated in Fig. 8 is that for steam─shovel work on the same contract of the Construction Service Company. Line _A_ indicates the approximate number of yards moved per day. Line _B_ shows the pay─roll, ranging from $165 to $310 per day, and including a percentage for incidentals; while line _C_ represents the values of the _B_ quantity divided by the _A_ quantity, and gives the unit─cost in labor per yard for excavating and moving rock. It will be noted that the Sundays are skipped. These came on the 5th, 12th, 19th, and 26th of the month. There were some men employed on each of these Sundays; but their time was so distributed over the rest of the month as not to show for the Sundays, as the steam shovels did not work on that day.
[Illustration: Fig. 7. Efficiency Chart Indicating Cost of Channeling Rock.]
[Illustration: Fig. 8. Efficiency Chart Showing Costs in Connection with Steam─Shovel Work in Rock Excavation and Removal.]
These charts are of a size to be filed in one of the standard loose─leaf books, and their range is from zero to about 12; thus it is possible to show any quantity to scale for any day in the month. This company has not found it of advantage to plot more than 4 lines on any one chart.
Charts such as these may be marked each morning by the time─keeper upon a tracing prepared for this purpose; and at the end of the month the lines connecting the points may be inked in, and the chart blue─printed and the blue─print filed in a convenient place for immediate reference.
There are several ways of working out the unit─cost from the figures, such for example as:
1. Performance per time unit
2. Performance per dollar;
3. Cost per unit of performance.
The first of these is not, properly speaking, a cost statement, although it is a function of a cost statement and for certain purposes is more convenient. The number of feet of rock drilled per drill hour, is a very convenient form for record.
When drilling under conditions of snow and ice, more muckers have to be employed than at other times. If the cost of mucking is included in the cost of drilling, as it frequently is, the true index of how well the drills are getting on is the number of feet per drill hour, rather than the cost of the operation to the contractor.
The second method is the reciprocal of the third. Other systems will suggest themselves by virtue of the peculiar requirements of each case in practice.
=Checking by Charts.= A great advantage of the chart system of cost showing, is that it acts as an automatic check upon the cost─keeping system in general. As indicated earlier in this volume, it occasionally happens that a punch─card is not turned in, or the time─keeper fails to get certain data. This is immediately discoverable by the gap on the chart, and thus the chart acts as a check on the cost─getting department. This will not entirely obviate the necessity for inspection to ascertain whether the time─cards are properly kept and the work is properly done.
The showing of costs should be made _daily_ for the men immediately identified with the field work; they should be made _weekly_ for the general manager, and _monthly_ for the home office. These monthly office reports are sometimes valuable in the planning of the financial arrangements for the work. On a job involving, say, a pay─roll of $5,000 a week, with monthly estimates, early information as to performance over the month is of very great value.
Showing the men certain charts and records will serve to increase their interest in their work, but this should not be overdone. It is as well that the men should not know the actual cost of their work to the contractor in dollars and cents. If, on the contract price, the contractor is making a handsome profit, the men want more money. If the contractor is not making a handsome profit, the men are apt to think that they are on a losing job, and become discouraged accordingly. The economy of the contractor's work should be private information, since it might do him considerable damage by becoming known to competing contractors. The charts showing the performance per unit of time, however, are not subject to the restrictions above mentioned.
COST KEEPING
In the foregoing there has been nothing that is a part of the regular bookkeeping, with the exception that part of the time─keeper's records are necessary to the bookkeeper. It should be appreciated at the start, that the bookkeeper's work is of great importance, that it cannot be superseded by a cost─keeping system, and that it should not be divided up with the cost─keeping system. The scoffers at cost analysis are inclined to take the ground that a bookkeeper, a cost─keeper, a cost─analysis engineer, are more or less clumsy substitutes for managerial intelligence; and they point to the proposition that in the last analysis it should be easy to let the office boy run the job with a textbook at one elbow and a calculating machine at the other.
It is insisted upon at the start, that cost keeping is as important as bookkeeping, but that it has an entirely different function; and in applying cost keeping to construction work, it is very important that a distinct line of demarcation be drawn between the two branches.
Another error that is frequently made by antiquarian students, men who are studying old methods of engineering and construction rather than those of to─day, is that a cost─keeping system is assumed to be complete by the man who runs it, when he knows how many feet of hole his drillers are able to average per hour, per day, or per week. The cost analyst will point to the fact that in the literature of the subject many false statements are made as to the costs of certain items of work, and will show that no allowance has been made for depreciation, repairs, etc., not to say profit, interest on the contractor's money, and a host of other things. The student is warned that a proper cost─keeping system must of necessity take into consideration _all_ the items of cost on the job; and, further, it should take them into account with such detail that it will be a real, living help to a man in estimating future costs on similar work.
Now, as a general thing, the essential similarity of items has been lost sight of when these items are parts of work which is not generally dissimilar. For example, the item of earthwork in the construction of a large dam may be very similar in its essential cost to, and may be of the greatest use in assisting a contractor or engineer to figure the cost of, earthwork under similar climatic conditions on a railroad embankment; yet those who are most interested in the subject are inclined to classify dams as an entirely different sort of structure from railroads. The designing of a dam is a different matter from the design of a railroad; but to build one will often involve the same kind of tools, the same kind of machinery, the same kind of men, the same kind of "horse sense," and the same general principles of construction, as to build the other. Therefore, if his costs are properly subdivided and intelligently kept on one kind of construction, the contractor or engineer will be materially aided, not only in estimating the cost of the work upon the other, but in being in close touch with his work after he has started.
Every construction organization ought to have a schedule of standard items which may be called _ledger accounts_; and its books ought to be kept in such a manner that the records of the total and of the unit─amounts for these items on past work and on current work may be immediately available for the benefit of its officers. No two contractors will have the same arrangement for distributing cost; no two will have the same items for the accounts; but there are certain fundamental items that will come into use on almost every large piece of work, and some of them have a peculiar significance, and should be treated with special care.
=Estimates on Ledger Items.= In making estimates it is important to have this list in sight, in order that important items may not be omitted. Such a list, which will cover a large portion of the ordinary charges, is here given:
1. GANG LABOR:
(_a_) Hourly rate; (_b_) Monthly rate.
The men who work by the month are apt to have to spend a good deal of non─productive time, on account of weather conditions, etc.; while the men who are on an hourly basis, as a general thing, do some profitable work whenever they are paid. It is feasible to figure a good deal more closely on the cost of work for those men who have practically no lost time to be taken care of, as _emergencies_ or _incidentals_. It will be noted, also, that the cost and the time of hourly and daily men can be figured and charted day by day; whereas it is impossible to know exactly what the charges will be for labor that is paid by the month, until the end of the month. In order to make report charts showing cost as completely as possible, it is a frequent practice to add a certain percentage to the cost of the known items, to cover the so─called _lost foremen's time_; and to make at the end of the month a correction of a greater or less size, in order to make the cost─keeping end tally with the bookkeeping end of the work.
2. GENERAL LABOR, ETC. This item will comprise the labor of the men who have something to do with more than a few parts of the work. A watchman's time is not spent in drilling, or on a steam shovel while it is running. Nevertheless a proportionate part of his salary should be divided among the different branches of the work. Sometimes this will be a very small item, sometimes a large item. For example, if a steam shovel is excavating 30,000 yards of material per month, the watchman's unit─charge to excavation may be very small; but if the shovel is tied up for nearly the whole month, the charge per unit for watchman's time may be alarmingly high. This is one reason why unit─cost and total cost should always go together. A blacksmith's time, part of which is spent in sharpening drills, need not be all chargeable to drilling, because he may spend a good deal of time in repairing the steam shovel or fixing hand tools, etc.
3. OVERHEAD LABOR. Clerks, bookkeepers, messengers, office force, and General Manager are ordinarily included among the items of _overhead charge_, as well as salaries of general officers.
4. OVERHEAD MATERIALS. In this classification, there are included stationery, office furniture, supplies, etc. When the office furniture is disposed of upon the completion of the work, its value should be credited upon this item.
5. OVERHEAD INCIDENTALS. These may include various items, such as telephone, office rent, telegraph messages, express charges on incidentals not directly connected with plant, etc.
6. PREPARATORY COSTS. These include the cost of getting ready to do the work, and, depending upon the nature of the job, may include any or all of the following items:
(_a_) Temporary roads; (_b_) Temporary trestles; (_c_) Clearing and grubbing; (_d_) Snow removal and drainage; (_e_) Traveling expenses to job; (_f_) Preliminary estimates, calculations, and surveys; (_g_) Freight and handling of materials to and from job; (_h_) Freight on preliminary supplies; (_i_) Handling of preliminary supplies; (_j_) Licenses and premiums on bonds, etc. (_k_) Legal expenses; (_l_) Loss on initial operations; (_m_) Right of way and cost of site; (_n_) Sheds, storehouses, and other temporary buildings; (_o_) Tools, less final value.
7. SUPPLIES. These are chargeable F. O. B. the job, or at the railroad station nearest to the work. They include all supplies for carrying on the work, as distinct from _material_, including explosives, coal, oil, waste, etc., and may include a _charge for water_.
8. INTEREST AND DEPRECIATION ON PLANT. This item is variously estimated by different people, and may vary greatly. It is impossible to establish an absolute rule; but on the average contractor's plant, it may be stated that 1/10 of 1 per cent per working day is a very fair general average figure. The average steam shovel, for example, will work perhaps 200 days, under favorable weather conditions; and on this basis the interest and depreciation charge will be 20 per cent per year, and is not far from a fair figure. Some contractors allow 33 per cent per year on such material as road machinery, including crushers, steam rollers, etc. This is a little high, provided that a reasonable charge is made for repairs.
9. REPAIRS TO PLANT. How much money it takes to keep the equipment in proper condition for performing efficient work, is a question on which the limits of space prevent a detailed discussion. On such a machine as a standard─gauge steam locomotive in constant operation to the limit of its capacity, repairs may run as high as 20 per cent per year; and on a rock drill the repairs may be 50 per cent or more per year.
10. RENT, STUMPAGE, ETC. The item of _rent_ includes the rental of ground and the storage buildings, if any, outside of the office expenses. _Stumpage_ is the cost of standing timber, the purchaser being privileged to leave the stump after cutting down the tree.
11. MATERIALS OF CONSTRUCTION. These are chargeable F. O. B. the job, or at the railroad station nearest to the work.
12. HANDLING OF SUPPLIES.
13. FREIGHT, when not included in item No. 11 or No. 7.
14. UNLOADING, HAULING AND STORING MATERIALS AND SUPPLIES.
15. RE─HANDLING MATERIALS AND SUPPLIES.
16. INTEREST ON CASH CAPITAL EXCLUSIVE OF PLANT.
17. TAXES AND INSURANCE ON PROPERTY (including boilers).
18. ACCIDENTAL INSURANCE, to protect workmen and the public.
19. ADVERTISING, MEDICAL EXPENSE, AND CHARITY.
20. DISCOUNTS ON BONDS, WARRANTS, OR NOTES.
21. CONTINGENCY LABOR.
22. CONTINGENCY MATERIALS.
23. CONTINGENCY SUPPLIES.
24. COST OF FINDING AND RECOVERING LOST FREIGHT AND SUPPLIES.
25. PROFIT.
COST REDUCTION
The ultimate aim of cost analysis is economic efficiency; and any system or method of cost analysis which does not result in the lessening of the total cost per unit of work performed, must necessarily be a failure.
After the costs on work have been partially analyzed, it becomes the province of the engineer to introduce methods and devices whereby the expense of obtaining the various data may be more than offset in the general economy of the work. It was long ago realized that shop practice could be economized by methods of systematization; and we have an early instance of the appreciation of this fact in the story of the struggles and methods re─sorted to by James Watt in the construction of the early steam engines. The troubles arising from incompetent workmen, drunkenness, and the necessity of doing work in different parts of the country far removed from headquarters, were as real then as they are now, with this disadvantage, that in the eighteenth century the press, the telephone, and the professional schools had not reached a development admitting of intelligent coöperation in the attack upon this problem.
Within the last score of years it has been found that cost─analysis applied to shop work problems gives most amazing results. When the piece─work system was introduced, it was believed that the final solution of the problem had been attained. The men were then placed upon the footing of contractors. A man got so much pay for accomplishing so much work; and it was most clearly to his interest to accomplish the maximum of work in order to get the maximum of pay. It was immediately evident that the good men would soon show such a contrast to the poor men on the work as to inspire a constant rivalry, thereby resulting in a very much higher output. In order that the desire to accomplish more work should not interfere with the quality of the work, all materials were systematically and rigidly inspected.
For a good many years the piece─work system flourished, and it is still flourishing as compared with its predecessors. It is vigorously fought by trades unions and by the less able among the men. It is tolerated by those of mediocre ability, and it is heartily endorsed by the most skilful. In order to remove the resistance of labor unions, a modification of the piece─rate system, known as the _bonus system_, has been devised. It will be described in a subsequent paragraph.