How best to describe the extra $550,000 cost of Forest Hub 2?
If, as we’ve been told by the Chief Executive, contract variation “is something that is common for major capital projects”, why wasn’t the $550,000, 20% of the original contract price, added to that cost or the cost presented as “$2.76 million + $550,000 contingency funding to cover contract variation”.
Why hasn’t “contract variation” and “contingencies” been used to explain previous cost overruns?
Whilst my business studies degree, which included economics, accounting and management, may be a few years old, I don’t recall “variations” of a 20% magnitude being encouraged. Cost accounting is, some say, the most difficult form of accounting, requiring significant expertise and experience. Variance of 1% or 2%, favourable or unfavourable, is acceptable and sustainable in business.
That prompted me to do a bit of research. I quote from the William Vaughan Company, a prominent American accounting firm. “I don’t believe cost systems should operate without any variances”. However, “very large variances (sometimes over 20%) indicate the costs to produce them are materially in error … If you have a fully functioning cost system, then variances of this magnitude cannot be tolerated and must be investigated …”.
So, normal variance or blowout?
Paddi Hodgkiss