The Stimson Company
CASE STUDY
The Stimson Company
Henry Stimson, president/CEO of The Stimson Company,
a small engineering company and manufacturer of dust
control systems and equipment, explained the problem:
We have a considerable amount of tension present
in our professional staff now, with most of the dis-
satisfaction focused on the project budgeting sys-
tem. Everybody has strong feelings on the subject.
The project leaders and operations people feel
that the original estimates made by the sales engi-
neers are not very realistic and, therefore, not very
useful for planning workloads and schedules. The
sales engineers, on the other hand, feel that a lot
of the budget changes are motivated only to pro-
duce a zero variance, and that there is not enough
thought or effort invested to try to meet the budget.
The company
The Stimson Company (TSC) was founded by Henry
Stimson’s grandfather. The company was privately
held, with the Stimson family still controlling nearly all
of the stock. In 2015, annual revenues were approxi-
mately $15 million, and the company had just under
130 full-time employees. In the recession of the late
2000s, TSC’s fi nancial position was weak, but under
Henry Stimson’s leadership the finances had strength-
ened to the point where the company had no long-term
debt and was earning modest profits.
TSC’s personnel had a particular expertise in pro-
viding dust control systems for general industrial appli-
cations. The systems fi ltered the air from machines
which generated dust or particulate air pollution and
passed the clean air back into the plant. In the past
15 years TSC had generated most of its revenues and
profits from clients in the paper industry.
Exhibit 1 shows a picture of a core dust control sys-
tem component: the separator. Separators and some
other system components were more or less standard-
ized products, although they varied somewhat
depending on the type of dust generated, the size of
the application, and the desired methods of emptying
the dust bags. The other components, such as main
and branch pipes, hoods and conveyers, had to be cus-
tom-designed to fit the customer’s equipment and
plant layout.
TSC managers preferred to sell complete systems,
meaning that company personnel would handle the job
all the way from design through installation and test.
TSC was the dominant supplier of such systems to the
paper industry in the Northwest region of the United
States, but company managers were beginning to con-
sider diversifying both into other industries and into
other products that would utilize their engineering
expertise.
Project management
Because a large proportion of TSC’s revenues were
derived from a limited number of large-scale projects,
project management was very important to the com-
pany. Two roles in the organization were specifically
project-oriented: sales engineers and project leaders
(see organization chart in Exhibit 2). The sales engi-
neers were responsible for the initial customer contact,
analysis of the problem, defi nition of the system con-
cept, selling, original job cost estimating, and pricing.
The project leaders were responsible for the detailed
technical development (design) of the project and the
management of the job from time of order entry to
completion. Throughout the remainder of this case,
Project 14321 will be used to illustrate the functioning
of these roles and the company’s management systems.
Project 14321
In 2014, TSC was asked by the Oregon Paper Corpora-
tion (OPC) to submit a proposal for a complete dust
control system for the converting area of a toilet-paper
processing plant. The machines in the converting area
took tissue paper from the mill, rolled it into logs
96 inches wide, slit it into widths of 4½ inches, and
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Chapter 8 • Planning and Budgeting
packaged it for sale. OPC was interested in a dust control
system because it would reduce maintenance on the con-
verting machines, make a less dusty product, and keep
the plant safely within federal safety standards.
TSC submitted an estimate for the entire job, but for
their own internal reasons, OPC asked that the project
be broken into two phases. Thus, TSC submitted a
phase I proposal for part of the job. This proposal was
accepted and TSC began the work. The request for a
proposal for phase II, a job which eventually was
assigned number 14321, followed as expected.
Proposal
For all potential jobs where the customer was consid-
ered serious about adding equipment, the sales engi-
neer prepared formal estimating sheets. These required
detailed estimates for each element of direct cost, built
up by pounds of material and hours of labor for each
system component. These units were converted to dol-
lars by multiplying by standard costs, which the
accounting department updated every six months, and
by getting quotes for special materials or service.
To get to a full-cost estimate, overhead was applied
based on pounds of material or hours of labor. Account-
ing personnel updated annually the 16 overhead rates,
eight each for variable and fixed overhead categories.
The price was determined by adding a profit percent
onto the full-cost estimate. The company’s goal was to
maintain a 10–15% net profit margin on sales (before
tax). Because time was often limited, Jonathan Hem-
mer, sales engineer, used a rough rule-of-thumb based
on dollars per required volume of air (cubic feet per
minute) to estimate the total cost and price for Project
14321. For the breakdown in costs, Jonathan compared
this job with a similar, large job completed the year
before. Steve Davis, proposals manager, explained:
First of all, you have to realize that these estimates
involve a lot of guesses. This project is now being
installed, but portions of the new OPC building are
being remodeled, and the work is not yet finished.
Their equipment is not in location. So with this as
with many other jobs, we had to estimate it based on
their drawings. For more or less standardized com-
ponents, such as separators, those do not cause a
big problem. But for customized components, such
as branch lines, the estimates are only guesses.
To protect the company against these project uncer-
tainties, sales engineers typically added a “contingency” to
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the estimate. The contingency was done on an entire job
and not on an individual component unless the risk was
high on a particular section of the job, perhaps because of
lack of information about it. The contingency was intended
to protect TSC from cost uncertainties. It was not affected
by what the market would bear. However, some extra rev-
enue dollars might be added if TSC managers felt the com-
pany was in a strong competitive position.
The proposed price of $3,197,640 for the Phase II
work was presented to OPC. It was accepted on
November 12, 2014, and that is when the project was
assigned number 14321.
Project kickoff
On November 13, the project kickoff meeting was held.
The primary purpose of this meeting was to transfer the
responsibility for the job from the sales engineer, Jona-
than Hemmer, to the project leader assigned to the job,
Sanjiv Kumar. Also in attendance at the meeting were
Steve Davis (proposals manager), Bob Stimson (design
manager), Bruce McIntosh (operations manager), Mike
Giordano (plant manager), Gary Blasiar (a separator spe-
cialist), and Mary Fiore (job cost accountant). Most of the
discussion at the two-hour meeting was on technical sub-
jects, such as about what filter media and fan size were
required, and the expert team provided their inputs.
After this meeting, Sanjiv, the project leader, planned
the project, broke the tasks into work orders starting with
the design work, established the schedule, and began the
process of coordinating manpower and material needs.
Project control
Control of the project was an ongoing process, with fre-
quent communications required between Sanjiv, the
project leader, and personnel in both OPC and the vari-
ous TSC work areas: design, operations, and installa-
tion. Each month, Sanjiv was required to assemble a
Job Status Report which showed the percent physical
completion at the end of the month and the predicted
dollar variance to completion for each element of cost.
This report was built up from the work order level and
summarized by the project leader to the level of detail
provided in the original project budget.
The estimates of percent complete were an impor-
tant part of the control process because they directly
affected the percent of the budget used for comparison
with actual expenditures to date and, therefore, the
variances. In estimating the percent complete in the

design area, Sanjiv used drawings as his gauge. Draw-
ings represented a relatively small element of work, and
that work did not normally stretch out over several
reporting periods. It was generally not difficult either to
estimate how long the work represented by a drawing
should take or to judge whether that work was done.
In the fab area, Sanjiv relied on inputs from the fabrica-
tion department. Based on their experience and accumu-
lated records, the fabrication department broke down the
work orders into individual operations and established
standard hours for each operation to come up with a total
standard for each work order. Then they looked at how
much they had accomplished and calculated the total per-
cent complete on each work order. Sanjiv believed their
estimates were generally quite good, better than he could
make, but he noted that errors could occur on occasion:
For instance, they may say their fabrication is so
many percent complete on a given work order, but I
know we have already shipped all of it. Or the records
may show only 50% of the material on a job has been
withdrawn, but they are indicating 100% fabrication.
Field installation was a bigger problem, since TSC
was only beginning the establishment of standards for
installation. Sanjiv had to rely on the estimates of instal-
lation foremen who were generally optimistic. For
example, a foreman might say that he was 99% com-
plete with a work order when the reality was perhaps
more like 85%. Since Sanjiv often worked with new
foremen, it was impossible for him to judge which were
most optimistic and which were relatively pessimistic.
But the foremen were able to tell Sanjiv which items on
a work order were complete, so Sanjiv had some infor-
mation on which to apply judgments on the estimates.
The Job Status estimates were input to the computer,
and the portion of the budget determined by the percent
complete was compared with actual costs to date. Three
monthly reports were produced. The Detailed Job Cost
Report showed a comparison of actual costs (and labor
hours) with fraction of budget (total budget multiplied by
percent complete) for variable cost categories only. The
Summary Job Cost Report summarized variable costs by
component and showed variance-to-date and forecast-
to-completion. The Job Cost Fully Accounted Summary
summarized variances by component and showed vari-
ances to date for variable cost, full cost, and net profit.
The projects were monitored by accounting staff.
Shortly after the reports were produced, Mary Fiore,
job cost accountant, asked the project leaders for expla-
nations of cost category variances greater than $2,500
The Stimson Company
appearing during the month and of any obvious errors
(e.g. expenses incurred but showing zero percent com-
pletion). She was trying to determine whether an
actual problem existed or whether, for example, the
variance was merely a timing problem or was the result
of a recording error. Any large input errors were cor-
rected before the financial statements were produced.
Around the 10th working day of each month, a com-
pany-level financial review meeting was held with the
key managers in attendance: Henry and Bob Stimson,
Charles Cowsill, Bruce McIntosh, Kristina Boyd and
Steve Davis. About 30 minutes of this meeting was
devoted to a review of the top 6 to 10 projects, which
typically covered about 80% of the costs incurred dur-
ing the month. Mary Fiore would present a summary of
the project variances with the explanations provided by
the project leaders. The discussion would focus mostly
on overall performance, not the specifics of the jobs.
Budget adjustments
A number of budget adjustments were made for Project
14321. Appendix A explains the rationale and general pro-
cedure for budget adjustments. The following are two illus-
trative examples of budget adjustments for Project 14321:
A. Blow-back dampers
In December and January, work proceeded on Project
14321, mostly on project design. On January 23, 2015,
Sanjiv Kumar submitted a budget adjustment for $7,613
for the inclusion of three blow-back dampers. Normally,
the blow-back dampers had to be specifically called out in
the budget, since they were unique and required a certain
amount of time to be fabricated. However, sales engineer-
ing allocated the dollars for the blow-back dampers to M
(Main Line), instead of separating them under V (Valves)
or some other designation. But because the blow-back
dampers were shown in the drawing as part of A (mani-
fold), Sanjiv released them on an A work order. (He later
admitted that he should have gone back to sales engineer-
ing and requested that the blow-back dampers be shown
as part of the manifold.) On the job cost report, these
choices made A look bad and M look unnaturally good.
Sanjiv observed, however, that “Even with these dol-
lars allocated to the manifold, the sales engineering
estimate was extremely low.” It did not include enough
pounds for the three blow-back valves. Based on actual
drawings, Sanjiv submitted the budget adjustment.
Even after the budget revision, however, when fab
actually built the dampers, the actuals were way off
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Chapter 8 • Planning and Budgeting
budget. Sanjiv guessed that the material requirement
calculation done in design from actual drawings failed
to include scrap, or it may have been based on metal
cuttings of sizes of sheets that did not exist. These dif-
ferences between estimate, design, and fab showed up
as budget variances because a budget adjustment could
not be made after work was started. Jonathan Hem-
mer, the sales engineer, commented:
I agree that in comparison with what was actually
built, the material estimate was low. However, it’s
my contention that the manifold was over-designed
and thus over-built for this application. Before this
happened, design should have met with sales engi-
neering to discuss the anticipated variances to
attempt to develop corrective action.
B. Platforms
On June 16, a second formal meeting was held. Design
had progressed to the point where it was possible to tell
operations that they could look for specific work orders
on a specific schedule. In attendance at this meeting
were Sanjiv Kumar, Bob Stimson, and Bruce McIntosh.
The next day, because of what he learned at the meet-
ing, Sanjiv submitted an adjustment which increased
the budget by $38,170, the details of which are shown
in Exhibit 3. Sanjiv elaborated on the largest item,
which individually caused a $39,910 increase:
In order to estimate accurately, we can’t extrapolate
directly from past data. We need to look more
closely at what’s required from the current job. Last
year we built a very similar collector and used that
as a gauge for estimating. But this collector required
a minimum of four platforms that weren’t in the esti-
mate … I think sales engineering basically took their
estimate from their old estimate. But not only did
they overlook the platforms, we overran their origi-
nal estimate. They should have looked at the actu-
als on that job and not reproduced a bad estimate.
Jonathan Hemmer explained from his perspective:
We have to use last year’s job as a guide. Both col-
lectors have 18 hoppers. The configuration is slightly
different, and the size of the OPC collector is a little
smaller. I checked against the actuals on last year’s
job when that job was about 98% complete, and the
separators were 100% complete at that time Based
on that check I estimated we should come in at
about 135,000 pounds of material. Allowing for some
additional bracing and reinforcing, I forecast the
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actuals would come in closer to 140,000 pounds.
But we are predicting this job will come in at about
165,000 pounds. Not only is the material way off, but
installation on last year’s job took 2,300 hours, and
we’re now forecasting 2,800 on this job. The plat-
form will make a difference, but not 500 hours.
We did include some hours for the platforms in
the original estimate, although I admit we didn’t
have anything specific in mind, and that’s an obvi-
ous shortcoming. We certainly didn’t think in the
grand scale that was eventually drawn up. I don’t
know how to explain the extra 25,000 pounds of
material. There must be some over-designing. But
our original estimate for fab hours was 3,864, and
on the latest cost sheets we’re running at about
3,000 hours. That’s obviously to the good, and it’s
not consistent with the material overrun.
Scope changes/budget revisions
When a scope change required the customer price to be
renegotiated, a budget revision was also required.
Appendix B describes this price renegotiation and
budget revision process in general and the rationale for
involving the sales engineer in it. The following are two
examples of budget revisions for Project 14321.
A. Move collectors
In February, after the manifold was released for fabri-
cation, Sanjiv, the project leader, provided OPC some
additional information about where the collectors
would be located on the roof and the static and wind
loads that would be imposed on the roof. OPC decided
that these loads were unacceptable and asked that the
collector be shifted 150 feet north and to the grade
level of the building. Even though TSC was well into
production at that point, an acceptable alternative for
the collectors could not be found. Substantial modifica-
tions were required to incorporate the existing mani-
fold with some additional piping that had to be
installed. This necessitated a re-estimate of the job,
agreement on a new price, and revision of the budget.
Jonathan Hemmer, the sales engineer, was responsi-
ble for negotiating the price change. OPC accepted the
proposed price increase of $203,500, and Jonathan
revised the budget to reflect the needed changes.
A short time later, Sanjiv also submitted two adjust-
ments which increased the budget by just under
$47,500 because the final drawings showed the job had
expanded beyond where sales engineering had figured.

Since this occurred after TSC had received the addi-
tional money from the customer, Sanjiv had to adjust
the budget. He explained:
One of the problems we had with this change, and it
happens on occasion, is a definitional problem of
where the manifold left off and where the main pipe
began. I may report the costs against the manifold,
while the sales engineer had figured the budget in the
main. The sum total for the manifold and main may be
the same, but we would show a variance for each.
We also had a problem with the total dollars
budgeted. This is only speculation, but what may
have happened here is that sales engineering fig-
ured we couldn’t ask the customer for all of the dol-
lars for the change and they decided that TSC
would absorb part of the cost.
Jonathan Hemmer was not aware of this budget
adjustment at the time but he commented on it several
months later:
I wish Sanjiv had let me know what was happening.
There is nothing worse than knowing after the fact
that, for example, your manifold is 10,000 pounds
over budget. It may have ended up that way any-
way, but we can’t provide suggestions or learn from
problems if we don’t know about them.
B. Pipework supports
On June 24, another budget revision was necessary.
OPC insisted that the pipework did not meet their stand-
ard, even though TSC maintained that it met the indus-
try standard. OPC managers felt that the change should
be made at no cost to them, since they gave TSC the
total job without soliciting competing bids. TSC manag-
ers protested. The disagreement was finally settled with
a price increase of just $15,000. The total cost estimate,
however, which went through as a budget revision, was
around $42,500. Sanjiv Kumar commented:
This revision is a good example of a major problem we
have with sales – their budget changes are often pain-
fully slow. In this case, we had known for months that
the budget needed revising, and I had to keep prod-
ding them to make the change. These expected
changes can often span several reporting periods, and
it creates confusion as to whether we should be report-
ing against the budget or what we expect the budget
will be. Sometimes the revision takes so long that the
work is done before the revision comes through.
The Stimson Company
Status at August 2015
From the beginning, Project 14321 had had its share of
problems as reflected by the numerous budget adjustments
and budget revisions. The Summary Job Cost Report for
14321 at July 31 showed a small unfavorable total variance
versus the budget at the estimated 43% complete, caused
mainly because of the problems in the collector part of the
separator component. Sanjiv Kumar described the current
problems and his remaining concerns:
A gross estimation error has just recently surfaced.
The budget for “Material-Sundry” in the S (separa-
tor) component is $41,865. We have already spent
over $45,000, and our forecast to complete is in
excess of $67,500. It could be argued that we should
have recognized this problem earlier, but this is also
a notable example of poor estimating. I’m going to
have to adjust the budget upwards in this area.
We could also have more trouble with the budget
for management hours. Each addition to project
scope or extension of the project schedule extends
the number of reporting periods and increases
management time. Since the company has grown,
we have progressed from just “doing” a project to
“managing” a project, but the budgets haven’t
reflected this. On a large project, management time
can be 20%–22% of the total design budget, but
the original budget for 14321 allowed only 4%–5%.
In addition, I’m a little worried about the esti-
mates for getting painting and pneumatic piping
done on this particular project. We’re not as good
as we could or should be at estimating other trades,
such as printing, plumbing and electrical, and I’m
not sure there are enough dollars in there to get the
job done … And finally, we could always run into
some problems in installation.
Since the budget changes had increased the planned
costs much faster than the price had been negotiated
upward, the project’s planned profit margin had slipped
from an original 11% to less than 6% (see Exhibit 4), a
level considered below the company’s desired range of
between 10% and 15%. The margin would slip even
lower if the budget had to be adjusted upward any fur-
ther, and Sanjiv seemed to think it would have to be. Steve
Davis looked back at the job and summarized his feelings:
I don’t think this was a particularly difficult job. I still
feel that in an overall sense our original estimate
was accurate, although I will agree that there were
numerous discrepancies in the components. At this
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Chapter 8 • Planning and Budgeting
point, however, it’s even hard to tell that. We may be
seeing variances because conservative estimates
of percent complete are making the jobs look worse
than they really are. Design and fabrication seem to
like to hold back a few percent as a hedge against
something going wrong or just the unknown.
But more importantly, what seems to be missing
is a commitment to bring a job in at the minimum
cost possible. If we involved the various groups in
setting the budgets, the numbers would be so
super-conservative that they would be meaning-
less. We’d either be planning projects at a loss or
we’d be pricing ourselves out of the market. Not all
of the budgets set by sales engineering are tight.
They should be a target to shoot for; an incentive for
superior performance, so we are motivated to
search for creative solutions to our problems. We’ve
got to get this commitment internalized because
standards of performance aren’t available for eve-
rything we do. We’re not trying to punish anybody,
but the company does have to exist, after all.
Appendix A Budget adjustments
Over time, many changes were likely to be made to the
system as it was originally planned and estimated.
More information would be gathered as to the precise
customer requirements, such as for the layout of the
exhaust piping, and as company personnel reviewed
the technical design, suggestions would be made to
improve performance or cut costs.
In addition, while the sales engineers were consid-
ered excellent at estimating the total cost of a job, very
often their estimates for specific phases of a job (e.g.
main, exhausters) were very inaccurate, overestimated
for some parts and underestimated for others, and the
dollars in the budget would have to be moved between
components. The custom elements of the systems, such
as branch piping, presented the greatest estimating
uncertainty. Some definitional problems also existed, as
the boundary between components was not clear. A pro-
ject leader might build on a branch line work order what
a sales engineer estimated as part of the main piping.
The job budgets were intended to reflect the compa-
ny’s best estimate of what it should cost to do the work
described. This was because while the projects were in
process, the budgets were important tools for planning
and control, and after a job was completed, budgets
which proved to be accurate were useful as an aid for
estimating future similar jobs. As the project unfolded,
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the detailed breakdown in original budget was likely to
become less and less realistic. Thus, the company insti-
tuted a budget adjustment procedure to allow the pro-
ject leader to change the budget to reflect a realistic
standard, but with the following constraints:
1. No budget adjustments were allowed once work within
a labor category (e.g. design, fabrication, installation)
was started within a job section (e.g. separators, main,
exhausters), with the exception of general job costs.
2. No budget adjustments were allowed unless the
adjustment totaled at least eight hours and 10% of
the total hours in the work order.
3. All budget adjustments had to be approved by the
operations manager.
Appendix B Budget revisions
If for any reason the customer price had to be renegoti-
ated, such as for a scope change or customer-caused cost
overruns (e.g. schedule delay), the sales engineer was
notified to prepare a budget revision. This involved a re-
estimate of costs, using the same Estimating Sheets used
when the project was proposed, and a renegotiation of
price. When the price change was agreed upon, the new
cost estimate was entered as the revised project budget.
Even though at the time of most of these budget revi-
sions, the project leader’s detailed knowledge far exceeded
that of the sales engineer on the job, because they had
been following progress daily, it was seen as desirable to
involve the sales engineer in the budget revision because:
1. More realistic estimates were likely. The sales engi-
neers had been exposed to a broader range of jobs, and
they had begun to accumulate a database of standards
for recurring operations that could facilitate the esti-
mating process. They were also more skilled at prepar-
ing estimates at the concept stage; i.e. before detailed
drawings and specification sheets were available.
2. It was a good opportunity to develop the sales engi-
neer/customer relationship because it was a chance to
meet without a new sale being the explicit intent. In
addition, it would provide a relationship continuity for
the customer as the sales engineer may have made
agreements regarding the specifications of the system
that were not put explicitly in the written agreement.
3. It was a good learning opportunity for the sales
engineers. By getting out in the field and seeing how
the project was progressing, they could learn, both
technically and in their estimating.
 The Stimson Company

Exhibit 1 Anatomy of the Stimson Type C Separator

Input plenum

Dirty air in
Patented cleaning
mechanism keeps tubes
and plenum clean

Downward
air flow Specially shaped and
treated tubes minimize
hang-up

Door for clean-side

inspection access
Clean air
out

Steep hopper
discourages bridging

Collected dust
Optional bagging
system for dustless,
online emptying
without rotary value
or other powered
equipment

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 Chapter 8 • Planning and Budgeting
330

Exhibit 2 Organization structure

Henry Stimson
President/CEO

Charles Cowsill Bob Stimson Bruce Mcintosh Kristina Boyd

Director of Sales Design Manager and Director of Controller and Manager
Engineering Technical Director Operations of Corporate Planning

Steve Davis Mike Giordano

Associated Director, Sales Project Leaders, Purchasing Manager of
Engineering and Sanjiv Kumar Manager Manufacturing & Material Planner Material Planning Accounting
Proposals Manager and 4 others Installation

Sales Engineering
Jonathan Hemmer Manufacturing Installation
Material
and 4 others Foreman Foreman
Leadman
(2) (6)
 The Stimson Company

Exhibit 3 June 17, 1980 budget adjustment – Project 14321

Increase
Component (Decrease) in Budget Reason

S $39,910 Sales had not included enough for access platforms. Fab time estimates
were based on performance on 14019 collector which was very similar.

E (3,543) Design decided that fan adjustments would be made by fan supplier.

E (6,340) Design felt sales had overestimated fabrication time.

B 19,543 Design felt sales had underestimated fabrication time.

A 6,625 Input from the field.

Z (18,025) Design reevaluation based on improvement in method of fabricating

and installing.
$38,170

Exhibit 4 Plan and forecast for Project 14321

Original Plan Forecast at 7/31/15

Selling price $3,197,640 $3,426,248

Variable costs 1,910,288 2,125,680

Contribution margin $1,287,352 $1,300,568

Allocated fixed overhead 933,603 1,102,898

Net profit $ 353,750 $ 197,670

Contribution margin % 40.26% 37.96%

Net profit percent 11.06% 5.77%

This case was prepared by Professor Kenneth A. Merchant.

Copyright © by Kenneth A. Merchant.

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