Overhead Charges and Flat Fees
by Richard Kimura
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A manufacturing team was to be charged a flat overhead charge (fee) for corporate Information Technology (IT) services. This overhead charge was to be paid whether they used them or not. The overhead charge was going to be proportional to the operating budget. The accountant suggested a proportional fee because it made accounting of IT projects and maintenance easier, and the IT manager needed to pay for his staff. Any upgrades, maintenance work orders, or other tasks would be taken care of under this overhead charge. There would be no cost or budget tracking needed.
As management debated this, we realized that plumbers or dentists do not proportionally bill us whether we use them or not, but we pay for services rendered. In our personal finances, we carefully weigh the need for spending money on repairs and upgrades. It seemed much better to "pay as you go,” or PAYG, for project and maintenance work performed by service groups. If equipment breaks down, manufacturing can count the cost of repairs, and justify upgrades if the frequency of failure and cost of the repair warrant it. If new upgrades are desired, then it would be evaluated and justified on a case-by-case basis. The return-on-investment would be calculated. There are always exceptions, such as for city services where a flat fee to all residents is adequate since road and sewer maintenance costs are easier to predict.
With an overhead fee approach, the customer calls the service group and the work gets done. Costs do not enter into the equation, nor do they appear to affect the bottom line. New projects are done with little or no incentive to hold costs down. There are no apparent consequences for overspending, misdirecting resources, or for plant mal-investment. Overhead fee-based services can generate a "blank check" mentality.
PAYG leads to responsible use of services by the manufacturing groups, and better ensures an efficient delivery of services. The manufacturing group would have to justify upgrades to the process instead of just calling for help. The service group would have to give a quote and be held accountable for project cost, scope, and schedule. Manufacturing would cost counts against the profit.
Underlying this PAYG concept is a desire to be a good steward of resources entrusted to us. This process should come with accountability, transparency, personal ownership, and rewards of personal gain or punishment of loss. An annual incentive bonus for earnings can be very effective. With PAYG we can better determine profitability and make rational decisions based on need and return-on-investment. Strive to connect rewards for the diligent, and consequences for the irresponsible. Of course, all businesses have some risks that are hard to control, but properly managing controllable expenses gives us an advantage. Succumbing to formulas and fixed overhead charges must therefore be minimized. It is tempting to not PAYG because it is easier, but resist it. Flat fees only give the illusion of stewardship. We should handle our own money, and “other people’s money”, with equal care. This means asking a lot of questions and figuring out what real needs and benefits are for spending that money.
Rich Kimura is a project engineering manager, freelance writer, and entrepreneur. He has numerous technical papers, 1 patent and 2 pending, and 24 years experience in the industry. He started numerous home businesses and has Crown Financial training. For more unique perspectives on personal finances, relationships, and spirituality, visit Cirrovista at http://www.cirrovista.com
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