Cost management is a method of managing an organization that is the antithesis of profit-and-loss management.
| Cost management actually works to prevent you from minimizing costs and having any profit. |
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Government and other not-for-profit organizations are normally cost managed. After all, they are not supposed to make a profit. (But they still should minimize costs. And herein lies a fundamental problem.)
Non-governmental entities* that try to copy the government's management practices are doomed to the same predictable consequences.
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e.g., government contractors
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Cost management inherently causes managers to make wrong decisions.
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With cost management, you do manage to have costs -- and lots of them!!!
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Here is how the game is played.
- Costs are planned.
- Costs are budgeted.
- Costs are tracked.
- Costs are compared (Actual vs. Planned).
In a cost-managed organization, it is a fundamental requirement to meet your cost targets.
After all, your integrity depends on you
doing (spending)
what you say (in your cost plan).
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- Points are lost where there is a variance.
| Actual Costs - Planned Costs = Variance |
- A variance is assumed to be a sign of poor management.
- The greater the variance, the more points are lost.
- A cost overrun is a positive variance.
A cost underrun is a negative variance.
| The penalty for a negative variance is almost always more significant than the penalty for a positive variance.
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- If you have a positive variance, i.e., you overrun your cost target, it is interpreted that the project was larger than anyone had realized.
| The typical consequence of this is to give you a larger cost target next time.
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- If you have a negative variance, i.e., you underrun your cost target, it is assumed that the assigned task was simply not as extensive as had been estimated.
| The consequence of this is to take away your unneeded budget and other resources.*
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* ... and give them to someone who has been exceeding their cost targets.
- In other words, you are rewarded for spending more than your budget and penalized for spending less.
This creates a de facto incentive program in which the best strategy is to make sure you reach your cost target - and a little bit more.
If in doubt, spend more.
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Hence the expression, "Spend it or lose it."
- Quod erat demonstrandum.
- Fully Predictable Resultstm.
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Government organizations invariably suffer from the "cost-management plague."
(So why would any company try to model its business after the government!!!)
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