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Cost of Rework9/18
I would like to roll out a theory about job costing to see if anybody can poke a hole in it. This relates more to re-work than to happy production hours.
To keep math simple I am going to assume our companies operate on a 10% profit margin. What I mean by this is that at the end of the year after everybody has been paid and all owner salaries met overhead, depreciation, repairs funded etc, the shareholders get a 10% dividend.
You can check this for yourselves by simply asking if you do $500K in volume can you write yourself a check for $50K?
Owner salary under this scenario is not equal to what you agree to pay yourself but rather what you would actually pay someone else with your skills for the hours you actually work. If you work 60 hours one week the last 20 are paid at overtime rates etc.
If you sell something with a 10% profit margin for $100 you have $10 in profit and $90 in cost.
What is the cost of rework?
If overhead and salary is already captured (assume 30%) would the cost of rework be 70% of $90?
"If overhead and salary is already captured (assume 30%) would the cost of rework be 70% of $90?"
NO. Rework is job costed at the same rate as normal production work. It takes
This is how any 'job costing' program would work. If you are thinking that mistakes do not cost as much as 'normal' production, then your trying to kid yourself about your business.
If the owner is part of the 'burden' then figure it that way. If the owner is paid like an employee, then only include his time if he is part of the solution in doing the rework.
Rework for us is part of overhead, the labor portion is captured in hours worked portion, the material captured in the material part of overhead.
Rework has cost, as does all work in our shops. But rework has significant opportunity cost. This is harder to calculate, but the exercise has value.
Imagine if you have terrible systems, 25% of your labor resources go towards rework consistently. Let's say your throughput with this setup is 100k per month in sales. If you can reduce your rework to 5% of your labor resources, you may be able to increase throughput to 120k per month without adding any people. As you haven't increased your overhead, the only extra costs you've incurred would be material. If we assume 30% for the cost of materials, you will make an additional $14,000 per month! (if you can sell the additional capacity)
This is what makes LEAN and other continuous improvement systems so powerful!
Thanks for the input guys!
I hadn't really thought to quantify the opportunity cost like Gary posits. A 25% rework seems pretty high to me now but was probably not unrealistic when we were first finding our footing in this business.
I was thinking more along the lines of collateral damage from the re-work. The direct costs of re-work are easy to understand. The indirect costs are not.
The next part of this dialog would be how to keep re-work from happening, i.e., what kinds of systemic things can we do to celebrate the mistake?
I think of it as costing 3 times the cost of a normal product.
1 original cost
2 cost to undo the problem, to get back to square one.
3 cost to remake the product.
The problem with rework costs is they are not limited to OH, labor & materials. It is hard to measure "lost opportunity." Damage to your reputation if it causes late delivery or even if it doesn't and the customer finds out what happened your incompetence factor in his eyes grows. Typically it also takes more leader/office time to correct the error. Do you cover your A$$ by ordering extra material for every job, just in case? Especially costly if those are not your normally used materials.
I'd like to claim we don't have screw-ups BUT... I always make it a point to get to the root cause and make sure everyone knows i'm going to find it. Changes sometimes need to be made to the process to try and reduce/eliminate the cause. Those are always discussed @ the monthly employee meetings.
I know of a project that had shelf holes misaligned. They were hand drilled but nobody checked to see if the shelf would sit on the pins without wobbling.
The problem did not get discovered until the homeowner moved in. The solution was fairly simple in the beginning. Drill new holes, bondo the old ones and send the painter back in to refinish.
The work was installed on a mezzanine. Somehow the painter kicked the paint can over and it crashed on the floor below. It was more like a grenade. The paint went everywhere.
The homeowner's kid was hypo-allergenic. Contractor ended up paying to fix all this but also paid to put the family up in a hotel for three weeks while the floors were refinished.
All over some shelf pins that weren't drilled correctly.
Very interesting thread however I question how many posters are in the commercial vs residential realm. Our business is more than 90% commercial and the guys in our shop are sharp. That being said we deal with rework on nearly every job. On occasion the shop is at fault for cutting this or that with the wrong grain, putting the wrong pulls on doors because one room was different from the rest of the job, etc. Problems that could have been avoided with larger text on drawings in many cases.
Most of the time it has to do with poor coordination on the part of the Construction manager/ General Contractor. Over the years we've learned a thing or two about the submittal process and as a result we've spent a great deal of time and money improving our front end processes and submittals on every job.
Most submittals should be less than 5% of your price, maybe 7% if you're working for an owner/ architect that thinks they're the next Frank Gehry. That doesn't include the cost of changes made to shop drawings, it's understood by all that a deviation from contract documents will result in some kind of up charge or credit if items are removed.
Once drawings are "APPROVED" (or as we've seen lately " NO EXCEPTION TAKEN"), we get field dimensions and we start humming. Rework more often than not comes from what changes on site based on the needs of other trades or the lack of understanding by one party or another.
We usually measure off the studs as schedules don't allow us to wait for sheet rock to go up before we measure. We already have materials so we start cutting, the phone rings half way through the day saying this or that wall moved (its usually the plumber that put his pipe in the wrong place) and our run of cabinets shrunk 6 inches. While there are ways to work it out, it almost always comes at some sort of cost, whether it be throwing a few parts away and cutting new ones, reworking cnc programming to compensate (good engineers are not cheap) or simply the time spent on the phone or going to examine the problem. Regardless of the cause or solution, we expect it and are more often than not prepared for it when the phone rings.
Another unavoidable factor of the commercial business is the punch list. I've yet to figure out if a home owner with your cell phone number is worse that a project manager with your email address but they both share a very keen eye and it's always looking for your mistakes. There will always be someone that has a problem with something but the only thing that can be done is make it crystal clear what you are providing on the front end by building mockups, providing samples and even rendering certain complicated products to avoid any confusion or battles later on.
If you factor all of this into your price on the front end you won't get the job so our take on it is to expect it on every job and keep the equipment and human resources on hand to do it as expeditiously as possible. If you get a job you don't have to jump through the hoops on then it was a great job instead of a good one.
Chester brings up a good point about politics.
Nobody likes to be nickel & dimed. I still tell the story about how the Hilton Hotel next door to the Anaheim convention center charged everybody who just spent $120 to rent a room for coffee in the morning. Their restaurant didn't have capacity for all the guys getting off the elevator with hangovers at 7:00 in morning. We're business people. We understand that. To make us stand in line and pay $1.75 for a shitty cup of coffee out of a styrofoam cup was a bit much for a hospitality industry.
I can remember making an interim visit to a jobsite one time after cabinets had been built but not yet delivered. The HVAC that now went through the back of three drawer banks certainly wasn't there when I took digital pictures on measuring day. I had a choice to make. I could invoice the job site manager's boss for the $300 it would take to fix. I figured his boss would read him a riot act and it would somehow cost me $3000 over the rest of the job to collect my money. I decided then to figure out how to keep this from happening whenever possible.
If you think about it, the job site manager has a very stressful day. He will tell you anything if he can just get out of the meeting and have some lunch. Much better to show up with a bag of sandwiches and a proactive punch list. Tell him you'll call in a couple of days to see if the HVAC, Security, CAT 5 etc is all in place before you start fabricating. This won't solve all of the problems but if it just solves one it will be worth the money. You'll probably also develop an ally on the job site for just the price of a sandwich.
Change orders are a fact of life in construction. If I have to rework cabinets because another trade did not stick with the approved plans or the construction manager made a change to accommodate an owner or another trade, then they will need to sign a change order or accept what I have built according to our contract. End of story.
PS. We have a very detailed contract.
I put a fixed dollar cost on a return trip of $125 and 1 1\2 hours about 5 years ago. I'd have guys come back who forgot to take a $10 belt rack and we would have to make a return trip. By quantifying it I could say look, this week we had 5 follow ups that cost us $625 and 7 plus hours and we lost the opportunity to install another $3500 in work that we can't ever get back. We are still far from 100% but we work on it every week.