The culture of your firm directly impacts your profitability. How you look at money, deal with your financial management, and manage your staff directly translates into policies, processes and behaviors that cause projects to go over budget. Without a healthy focus on profit, an owner may find it difficult to grow the business.
The following are the main “culture traps” I see affecting how a firm manages money and influences their ability to be profitable. These mistruths cause many firms to ignore their contracts, budgets, and other project management best practices:
Trap #1: Quality is everything
Most professionals want to offer the highest quality possible. However, the reality is most budgets are lower than the level of quality we desire. Trying to balance the level of quality with an inadequate budget is a critical yet often poorly mastered component of project management. Setting realistic expectations from the beginning is critical to a profitable project and happy client.
Trap #2: Keep the client happy at all costs
We have all heard the old adage, “the customer is always right,” however, this trap can have the unwanted result of derailing our project management practices to our financial detriment. In our desire to have a happy client, our employees may engage in practices that threaten the profitability of the project. It is critical to the success of our company that our employees learn how to set client expectations, communicate often and well, and deal with conflict as it arises during the project.
Trap 3: In slow times it is OK to take projects we know we will lose money on
With the downturn in the economy over the last five years, many firms have struggled to stay in business, and retain staff. As competitors continue to bid lower and lower, we feel the pressure to lower our fees to a level that the firm cannot permanently sustain. As a result, many firms feel compelled to bid on projects at a lower cost than they can do the work, knowing they will lose money. In most cases, you will never be able to get a profitable project with this client, and get trapped in a long term vicious cycle of continuing to provide services at a loss. It can also have the negative effect of causing tension between your project managers and the client, as they struggle to keep costs in control and limit the amount of loss that is realized.
Trap 4: All clients are good clients
We all know intuitively that all clients are not good clients, yet we continue to work with clients that are cheap, treat our staff badly, and don’t appreciate the work we do for them. In some cases you may love the project, and desire the profits and exposure that the project affords, yet dread working with the client for a host of reasons. The truth is – life is too short to work in these conditions! If you are not happy then I can bet that your employees are not either. And studies show that if employees are not happy, they will not perform at their best, which continues to erode profits and client satisfaction.
Trap 5: You can’t lose money on a Time and Materials (T&M) contract
This may seem counter-intuitive but if you do a lot of T&M contracts, it is really important to understand. This is assumed because you are able to bill for every hour that you work, and unless there are write-offs of hours that are not billed, you are making money. The issue with T&M contracts is that in order to make the target profit, the actual fringe, G&A and overhead costs must be in line with the estimated rates. If the actual costs are higher than the estimated rates by the amount of the target profit percentage, the company loses money.
Trap 6: We do not share financial data with managers and employees
Sharing financial data with your project managers is a key management decision that can determine how successful they can be in controlling project profitability. In most cases, the more they know, the easier it is for them to react in a timely manner to project issues and overruns. There must be a balance between keeping certain information, such as executive compensation plans, confidential, and giving them the data they need to manage their projects. Managers will feel more empowered and motivated to help the company succeed if they feel they are trusted, and have a direct impact on the success of the firm.
Trap 7: Our client does not want us to make a profit
As everyone is under pressure these days to cut costs and streamline budgets, our clients are pushing us harder to lower our fees. This pressure has caused a common myth in the industry that our clients do not want us to make money, and we should bid as low as possible. It is critical to our short and long term success that we strive to find the clients that truly value our work, and understand how important it is to the success of their projects that we make a profit. Operating at a loss causes us to have to cut back on quality, using cheaper people than we recommend, and possibly making critical decisions based only on cost. While this may be the reality in today’s world, it is ultimately a threat to the success of our projects and our firms.
Trap 8: We can’t make our employees follow our policies
As firms “grow up” they usually find it necessary to start to implement more internal controls, policies and approval processes in order to effectively manage people and execute on their project delivery and financial management. However, despite the fact that they put these policies in place, many firms do not enforce compliance with these policies, and many key aspects of firm financial management are compromised. Companies need good management policies to maximize project success, and failing to control critical business functions through necessary policies and processes will erode a firm’s ability to achieve its goals.
Trap 9: Times are tough so we can’t spend any money
For anyone that has been in business for over 10 years, you have probably lived through a recession or two. Most firms took the necessary steps between 2007 and 2009 to trim back the fat from their overhead, do the painful layoffs that were necessary, and hunker down to weather the storm.
But the truth is that taking this defensive position will not work forever. As the economy begins to recover, this is the time to take a hard look at your business and see where you can drive real efficiency, and generate bigger margins on your projects. Everything is driven by people, processes and technology, and it is up to you to invest in the right areas to help your company achieve its goals, and remain competitive.
Trap 10: This is how we have always done it
If this is the answer given for the way that you do anything in your company, then it is very likely that your processes are outdated and inefficient. Your employees are given guidance as to how to best manage their time, deal with clients, process transactions, and communicate. If they are doing these things the same way that they were doing them a few years ago, then your company is not maximizing the technology available today to save time and improve efficiency. If your firm is not constantly looking at improving, and taking advantage of new technology that is available for business and project management, then you are going to lose your competitive edge.
The above is an excerpt From June’s book, Find the Lost Dollars in Your Business: Best Practices for Architecture, Engineering and Environmental Firm Business Management.
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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