These days projects are hard to get and project profit margins are declining. With more competition nationally and from overseas firms, it is critical to manage projects with precision, and utilizing best practices for financial management. With some focus on those areas of your business where your firm is weak, and improving the systems and processes around these areas, you can start to increase your profit margins, and reduce losses from waste and inefficiency.
In working with hundreds of A&E firms over the last 24 years, I have identified five areas that can cause projects to not perform as they should. As I discussed in my book, Find the Lost Dollars: 6 Steps to Increase Profits in Architecture, Engineering, and Environmental Firms, the job of a project manager (PM) is tough. They are given many responsibilities that they have never been trained for and are often relied upon to carry the success of the firm on their backs.
By looking at the underlying problems that plague many firms, and improving the operational bottlenecks that slow work down, and cause budget overruns, you can gain a substantial increase to the bottom line and help your PMs to be more successful.
The 5 Top Risks to Project Profitability
Poor Project Planning
A good project plan starts with the estimate, yet many firms do not have a consistent process or system for developing sound estimates, or carrying these estimates through the project budget. Bad habits over time including using standardized estimating practices, such as top down estimating without verifying the necessary breakdown of costs can cause project fees to be incorrectly calculated and bid.
Employee turnover is a very expensive and sometime unnecessary human resources expense. The cost of turnover goes way beyond just the expense of recruiting and training a new staff person in a position. Losing good people can also cause a lack of client satisfaction, and potentially losing clients that are not satisfied working with new staff members. Ensuring that your firm has a good performance management system, and a clear career path for your top performers will ensure the firm’s success, and continuation of client loyalty.
Lack of a Project Management Culture
Many of the ways that a firm operates every day comes from the culture that the firm is guided by. The culture is usually formed over many years, and goes back to the mindset of the owner, and their willingness to improve their systems and processes in order to increase employee productivity. A project management culture is one in which the PM is given all of the tools they need to succeed: training, systems, and information. If your firms is operating with manual processes and spreadsheets, or fails to share data with managers, you can expect your project profitability to be lower than average.
PMs That Don’t Have Financial Management Skills
Included in a good project management culture is having stellar PMS. Very often PMs are promoted to their roles and never given training on financial management, and how projects make money. Most PMs are technical people, and prefer to focus on delivering high quality projects, keeping clients happy, and meeting deadlines. While they might be responsible for many financial management aspects of a project, such as billing, collections, and budgeting, they have not been trained in these skills. In order to make money on projects, your PMs need to understand financial management concepts such as how billing rates are calculated, overhead, utilization, and project cost control. Training can go a long way towards building a team of skilled and profitable PMs.
Failure to Manage Resources
If you ask people on your team if they are busy, they will always say yes! But the numbers don’t lie – maximizing utilization is one of the keys to your firm’s success, and it all starts by managing resources on a daily basis, and ensuring that the right people are doing the right jobs. While most financial management reports focus on performance in the past, the key to effective resource management is to be able to forecast the future. There are many components that come into play when evaluating the right balance of resources including current project assignments, projects that are starting, projects that are ending, and opportunities in the pipeline that have not yet been won but are probable. Taking all of this data into account, and determining who is over-scheduled, under-scheduled, and whether you have the right mix of people based on all of these factors takes careful analysis. Resource Planning systems that allow you to look at all of these factors, and apply some assumption to your forecasts will prove to provide much-needed visibility into your three to six months future staffing requirements, and save your firm money by ensuring that hiring decisions are made at the right time.
By evaluating how your firm is performing in these five areas, you can start to improve your culture and management practices, and increase your project profit margins to a new level.
How does your firm stack up in these five risk areas?