Find the margin thieves in your projects

canadian-money-stock-market-7471429 (2)Projects can easily start off with a good profit margin, and end up at a loss – even if the billable rate is twice the cost rate for a consultant, and even if there was plenty of room for error when the contract was quoted and signed.

As the project moves along, margins thieves get into the project and eat away at that comfortable padding we added to the contract. These margin thieves can go undetected until the end of the project, when it’s too late. Margin thieves often take the form of non-billable items that are not logged correctly to the project. For example, it can be time logged in an internal project or not logged at all, or an expense mistakenly absorbed in the overhead costs of the business. When the project closes, the administration team corrects those mistakes, and our profit margin melts away.

How can we fix this and prevent the margin thieves from going undetected? Here are 5 suggestions:

  1. Make sure all expenses are logged to the project. This includes non-billable expenses, like parking fees or employee’s expense reports.
  2. Make sure all time worked on the project is logged to the project. This includes non-billable time, such as technical support time or administrative time.
  3. Make sure to log all supplier and contractor costs to the project, even if it’s non-billable.
  4. Run your budget control report religiously. If all expenses and work hours are logged, the report will tell you, in real time, how much the project has cost so far.
  5. Set up a workflow alert to email the project manager when budgets are in danger.

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Project management and project cost management: two worlds

Quite often when we speak about project management, we usually refer to the set of monitoring tools that are utilized to ensure that we shall deliver the project according to the three universal criteria:

  • Product/service delivered on time;
  • It is proper according to the specifications;
  • It is proper according to budget.

It is rather simple to list the required specifications and to comply, and it is relatively easy (everything being kept in perspective, of course) to plan the final delivery date for a project. However, it is more difficult to incorporate changes and contingencies that may arise during its execution. In general, project management tools used to manage these changes along the way allow limiting risks, at least on the organization point of view. It remains no less true that these changes have an impact on the financial component of the project.

Therefore, the concept of delivering ‘according to the defined budget’ becomes quite often uncertain.

The importance of billing method is obvious:

If we invoice the real number of hours and related expenses, then the situation is perfectly clear and there are no problems in sight. Whatever the changes involved in the life of the project might be, the billing will be done based on the real number of hours incurred in the performance of services and expenses. However, unforeseen costs may occur after project delivery.

If we bill on a fixed fee basis, the following question will soon or later arise: what do we do if our flat rate billing does not reflect the reality on the ground? In other words, if we charge a lump sum which in equivalence is less than the selling value of the worked hours? Shall we post the difference in losses, or initiate a negotiation with the client? It will depend on the customer’s goodwill and on our negotiating skills.

Anyway, at this point we find ourselves still in the phase of delivery of services, but what about services rendered to customers beyond the delivery date of the project? Although these occur in retrospect, they were not initially budgeted, and as such they will affect the level of profitability of the project.

Let’s take an example: we develop a software solution for the industry.

My project consists of three phases: needs analysis, development, and commissioning. For the entire project I planned respectively 25, 100, and 50 hours for a total of 175 hours. My average hourly cost is $35 and my average hourly rate is $70. The agreement with the client is based on a lump sum of $14,000 (175 hours and a 25 hour buffer at the rate of $ 70).

I underestimated, in my analysis, development needs. In addition, the Beta version contained bugs that I had to fix. In total, I spent 40 hours more than anticipated in my original budget (excluding the buffer). In compliance with the agreement I have with the client, I charged a flat fee of 200 hours and therefore have recorded a loss of 15 hours, representing $ 525 (cost). The software has been delivered. Two months later, the client informs me that there are recurring malfunctions and I have to work twenty hours to correct the situation. In total, although the project has been delivered, I recorded a second loss equivalent to $ 700 (cost). To summarize:

industrial software

Beyond project delivery, financial loss may occur. It is therefore appropriate to include in the budget a risk factor which would ideally represent the price of one year of service contract. In the example, besides the 25 hour buffer, it would have important to add an amount to cover the risk of post-delivery, for example 10 to 15% of the total contract value. Abak software specializes in time recording, billing and cost management of the project while including a component for budget calculation.

Abak or ERP?

The ERP: An Essential Management Solution

ERP solutions (Enterprise Resource Planning) are now an indispensable tool in the management of a company. Ensuring the pragmatic management of internal processes, the ERP system contributes greatly to increase the profitability and productivity of the enterprise. The ERP offers many features and positions itself as a centralizing element: a communication link between different software (CRM, payroll, accounting, etc.) and thus eliminates data redundancy, multiple data entry and errors or inconsistencies between different management systems in place within the company.

The Other Side of the Coin

The process of choosing a solution, its gradual implementation of the solution, testing, and customization have an impact within the company, both in terms of personnel and processes. The time required for the solution to be fully operational alone represents a significant challenge for the company, especially for small business.

Alongside these considerations, there is the financial component – not a negligible element. ERP systems are generally expensive. The introduction of an ERP system, in addition to its price, generates significant associated costs:

  • Time required to choose the solution
  • Time and effort required for implementation
  • Customization costs
  • Test phase costs
  • Training costs
  • IT infrastructure costs

While many companies are fully satisfied with their ERP system, others, however, find themselves ‘stuck’ in a lengthy and costly implementation process. In some cases, company leaders must face the facts: the implementation of the solution is a failure, as well as a waste of time and money.

The implementation of an ERP system is not only the installation of an IT solution. Whatever the chosen solution, a constant challenge is time. Business leaders must indeed be patient and plan the implementation of its ERP over several months before it is fully operational, sometimes after multiple adjustments.

ERP vs Abak