With competition tougher and margins smaller for professional services firms, we need to have every advantage to ensure our projects are profitable. Many things erode the margins on our projects including bad estimates, scope creep, poor resource management and issues with clients. By putting a few processes in place to eliminate the areas that give project managers and their teams the most frustration, we can control project costs more effectively, and start to realize greater financial success on our projects.
Five Steps to Increase Profit Margins
In working with hundreds of professional services firms over the last 23 years, I have found that firms that follow these five practices have seen the most success in their project management results:
1. Create a solid process for developing project estimates
Good estimates are the critical first step in assuring that your projects will be successful and make money. However, many firms do not have a standardized process for creating project estimates. If you are using excel for your estimates, there is a good chance that your managers are using old rates, inconsistent language, and poor assumptions in their forecasts. Because your estimates become the proposal and then the contract, a bad estimate will eventually lead to a bad budget. By establishing a rigid practice and standard templates for your estimating process, you will start your projects off on the right foot.
2. Develop and enforce stringent timesheet entry and approval processes
In a professional services firm, time is your inventory, and needs to be secured just like a physical asset. By creating a rigid timesheet entry process, and consistently enforcing it, you will see an increase in timesheet and billing accuracy. Strict timesheet approval processes by managers will help reduce budget overruns, and lead to better resource management. I recommend daily timesheet entry, and weekly review of timesheets by managers to ensure the best results.
3. Review project status at Monday morning meetings
There is a popular expression that people do what is measured, and project management is no exception. By reviewing project profitability, opportunity pipeline, AR aging, and utilization reports at your Monday morning meetings each week, you will put focus on the most critical factors in your company’s financial success, and create more of a focus by your staff on the most critical metrics of the business. This also has the desired effect of forcing people to keep the system updated. When they know you will be scrutinizing the numbers, and their performance each week, they are more likely to keep the data up to date.
4. Make sure PM’s have the info they need
Your project managers have a lot on their plate and the key to improving their financial management of your projects is to make their job as easy as possible. They need easy processes for creating and managing their project budgets and schedules, and timely access to project status data. Part of the key to success in giving them reports is to ensure they understand the information on the reports, and have the training and authority to do something about it. Empower your managers with information and they not only will be more successful, but they will also be happier, and less likely to leave the firm.
5. Create a process for approving and billing of extra services
One of the primary reasons for projects going over budget is scope creep – employees working on tasks that are outside the scope of the contract. This goes back to cultural traps in many firms including wanting to keep a client happy at all costs, and a desire for most professionals to put quality over profit.
There are processes and controls that a professional services firm can put in place to minimize scope creep, and ensuring that all extra services are recovered. I recommend the following best practices to control project costs and keep projects on budget:
- Review the project scope with the entire team during the project kickoff
- Establish a policy that outlines the process for extra services requests and approvals.
- Make sure there is language in your contracts about how extra services requests, approvals, and invoicing will occur.
- Create an extra services phase so that employees can segregate services they believe are not in the scope.
With a focus on project profit margins, project managers will be more successful at delivering profitable projects.
For more information about improving your project financial management practices, contact June Jewell.
Cash is King Webinar
Managing Cash Flow in a Down Economy
Date: Wednesday, August 19th, 12:00pm ET
The average days to collect cash in the AEC industry is between 60 to 120 days. In this web training we will examine the complete project lifecycle to understand how cash flow can be increased when the economy is uncertain. Participants will gain valuable tips to improve cash flow by improving timesheet practices, reducing the billing cycle, and improving client relationships and collection practices.
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