Standard cost and cost improvement

Understanding the nature of costs is key for improving the productivity of field operations. 

This article looks at the calculation of standard cost per hour to evaluate opportunities for improvement.

Standard cost is an accounting concept that evaluates the expected cost to deliver services in normal conditions.  For example, use this to understand whether cost increases were caused by more services delivered or inefficiencies in the way the services were done. 

A business's costs can be divided into fixed costs (also known as indirect or period costs) and variable costs (also known as direct or product costs).

Fixed costs do not directly fluctuate based on the amount of work performed, for example office building lease expenses, IT system costs, and administrative staff.

Variable costs can be directly linked to the work performed, such as the hourly wage of a field or facility worker (inclusive of on-costs, taxes etc) and the materials they need to use in the course of their work. 

There is also a chargeability factor.  There will always be some non-chargeable time, for example travel to sites, gaps between jobs, health and safety training etc.  For example, a business may calculate that 75% of their workforce total time is actually spent on the job site.

There are many ways to calculate a standard cost and write the formula, but for the purpose of this article:

Using this calculation for standard cost is interesting from two perspectives.

Firstly, slice and dice the calculation further to see where cost to serve is coming from, to evaluate any areas that seem irregular and opportunities to improve the cost.

Secondly, compare actual costs to standard (planned) costs to filter normal ups and downs from unexpected variances.  

For example, variable cost variances come from two sources: the actual hourly cost to deliver services (for example more overtime than planned) and the actual chargeability factor on the bottom, for example due to non-billable time like defect remediation.  

All this can be daunting, but it highlights the key opportunities to reduce standard costs:

- increase billable hours compared to non-billable

- decrease direct cost per hour

- increase total hours compared to fixed costs (doing more work for the same fixed costs)

- decrease fixed costs

Get in touch for ideas on segmenting this further for your teams, and for opportunities to transform your work processes and productivity.