How Project Management Can Improve Your Profitability


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How Project Management Can Improve Your Profitability

  1. 1. How Project Management Can Improve Your Profitability Ed Kozak organization aren’t necessarily safe fromIt seems counter-intuitive to claim to the ill effects of cost overrun. Certain contract types will not allow unforeseenincrease profitability by adding moreoversight to a project and project and unplanned costs to be passed on tomanagement would definitely qualify as the client, and while other types will, ifoversight. After all, the money for that the client thinks you’ve mismanaged theoversight has to come from somewhere. project they might refuse to cover anyIf you’re working on a project for your additional costs or there could beclient you’re able to pass through that grounds for a lawsuit. You also run thecost to the client. However, some risk of alienating the client for whatexecutives might feel that the added cost might be perceived as poor clientof project management oversight will service.price proposals out of competition andso they fail to include it or include aninsufficient budget for it. This can be Project Management Yields Betterviewed even more negatively if the Profits By Creating Better Costproject is being funded internally from Estimateswithin the company. The money forproject management comes directly from Let’s start at the beginning. How arethe capital expenditures budget and so budget estimates made at yoursome executives would rather forego this organization? Is there a formal process“extra” cost in order to invest that in place that all estimators must followmoney elsewhere. What isn’t being that includes documenting the manner inconsidered is the fact that lack of project which the estimates were obtained or aremanagement oversight will steal money they allowed to estimate in whicheverfrom an organization—money for costs way suits them? How confident are thethat hadn’t been factored in—in the form estimators in their estimates? Howof a cost overrun. Executives must also confident are you in their estimates? Doconsider the reduction in ROI, some estimators arbitrarily add in moreinsufficient delivery of benefits, money “just in case”? That’s a deadunattained competitive strengths, and giveaway that they’re not very confidentmissed windows of opportunity that will in their estimates. This doesn’t meancertainly occur as well. that some money shouldn’t be set aside in a contingency fund but there is aThose that are working on projects formal way to determine how much isfunded by a client external to your really needed and who controls the
  2. 2. release of those funds. This is discussed to perform all of the work for a set price,further in the text under risk planning. no matter what. Let’s assume that the contract allows for economic priceThe profitability of the organization adjustments so that the buyer still wouldbegins with the project budget estimates be required to pay the difference if thethemselves. If an organization has to price of material has gone up since itsmake a choice to fund only one or two price was listed in the contract and theprojects out of a number of potential vendor is protected. The vendor is notprojects one of the selection criteria will protected if the estimate for the workbe a financial metric—NPV, IRR, turns out to be less than what the actualMIRR, or something else. What does work will. That difference between thethis mean then if the budget estimate for estimate cost of labor and the actual costa project is incorrect? Whatever of labor will come directly from thefinancial metric is being used is vendor’s profit. When there isn’tmeaningless. If the estimate is much enough profit in the contract to cover thelower than what is should be—either difference the vendor will have to paybecause the estimator pulled some for any remaining costs out of thenumbers out of the air, took a short cut organization’s profits made elsewhere.and didn’t consider a number of tasks Luckily, not every contract type is sothat needed to be done on the project, or risky for vendors. Under a cost-didn’t correctly factor in how long some reimbursable contract type the vendor istasks would take—the project not obligated to finish the work once theinvestment will be artificially lower. money has run out and so there is someThe result is that the project will have a protection if the estimate falls short ofhigher value for NPV, IRR, or MIRR the actual costs. Under this contract typethan it really should and it might be the client will have to decide whether toselected over projects that actually give a provide additional funding for thebetter ROI. If the budget estimate is project or to stop work but the vendormuch higher than what it should be— will not have to tap into profits madetypical of projects whose estimates were thus far. The issue then really becomes“padded”, that is when the estimator one of the perception of client service.arbitrarily adds money to the estimate In this day and age where relationships“just in case”, then required investment are built on trust many clients may feelfor the project will be higher, the that the adjustment in contract pricefinancial metrics for that project will be constitutes a violation of that trust andlower than they should, and a different that certainly would sour the chances ofand less profitable project might be getting future work from them. There’sselected instead. also a chance that your organization might receive some negative word-of-What if the project isn’t being funded mouth from the client’s staff,internally but rather, by a client? Can jeopardizing other future relationships.poor estimating, stemming from poor orno project management, hurt yourprofitability? The answer, of course, is Project Management Yields Betteryes. If you’re working under a firm Profits By Creating Better Schedulefixed-price contract then you’ve agreed EstimatesHow Project Management Can Improve Your Profitability 2© Successful Projects For Leaders. No portion of this document may be copied or distributed withoutthe expressed written consent of the author.
  3. 3. Inaccurate time estimates are just ascostly as inaccurate cost estimates.What is the result of an inaccurate time Project Management Yields Betterestimate for an internally-funded Profits By Mandating Cost And Timeproject? If a time estimate is too short Management And Controlthen Management doesn’t have a clearpicture of what the true project costs will Assuming the time and cost estimatesbe. That is, if a project runs 25% longer from your organization’s projectbecause the time to complete certain estimators are correct, only the constanttasks was estimated incorrectly that’s vigilance that is required by proper25% more actual time for staff to be project management will help keep theworking on the project, and hence an project on budget and on schedule. Inincrease in project costs. Every increase order to facilitate exceptional monitoringin project cost from the original estimate and control, cost and time estimatesis a reduction in ROI and a reduction in must be broken on a month-by-monththe profitability of the organization. basis and not only on a task-by-taskWhat happens if the outcome of the basis for efficient comparisons ofproject is a rollout of some sort that will estimated planned expenditures againstenhance competitiveness or overall actual expenditures. Regular cost andmarket attractiveness? A delay in either schedule monitoring is espoused bywill delay sales revenue and impact project management governingprofitability. If the project is leading to organizations in order to catch thethe development of a product any delay project when it has varied slightly fromgetting that product to market will be cost and/or schedule targets. This allowsthat much longer for the organization to some type of corrective action to begenerate revenues from that product. taken. From my experience theWorse still is the erosion of any first- optimum frequency for monitoringmover advantage that the organization should be monthly (assuming a project ismight be able to capitalize on and we’re a minimum of three months in duration,all aware of the respective impact to else bi-weekly if cost reports can beprofitability from each of these. generated that often). Monitoring cost and schedule less frequently thanWhat if the project is being funded by an monthly can allow the project to veer soexternal client? The same contract much off cost and/or schedule targetsissues apply here as mentioned that corrective action might not be ablepreviously for cost estimating. On a to be taken or, if it can, it might cost sofixed-price type of contract, your much to perform it erodes the benefit oforganization, as the vendor, will have to any corrective action. Monitoring costpay for that extra time out of profits. On and schedule more frequently thana cost-reimbursable type of contract, the monthly (for projects greater than 3client will need to make the decision to months in duration) doesn’t offer anypay for your bad estimate or stop work marginal advantage and will do nothingand accept whatever partially-completed but to use up more of the project budgetwork was done. Either way, the client for oversight than necessary. Thewill not be happy. important thing to note is that cost andHow Project Management Can Improve Your Profitability 3© Successful Projects For Leaders. No portion of this document may be copied or distributed withoutthe expressed written consent of the author.
  4. 4. schedule monitoring is necessary in testing the product after it’s been madeorder to help keep the project on its cost and making changes to it until itand schedule targets. This, in turn, helps performs as required. Fiscalthe organization hit its profitability responsibility is lacking in thattargets which help the organization assumption. How far back in the chainachieve its strategic goals. of tasks must the team go in order to make the necessary corrections? How many tasks that already have beenProject Management Yields Better performed must be then repeated as aProfits With Good Quality result? Not one of those repeated andManagement completely wasteful tasks were ever factored into the original budget of theThe two factors of a project that will project or in the profit, both of whichquickly erode profits are the reworking suffer as a result. If no quality assuranceof errors and an endless stream of things is conducted throughout this reworkgoing wrong. The latter is discussed a process it is very likely that more reworklittle further on under Risk Management might be needed once the modifiedbut the former is addressed here. product or service has been re-tested.Rework is a quality issue and arises from This wasteful cycle can continue throughthree main things—a lack of managing several iterations, each time drainingquality into the product (or service); a profits more and more.lack on the project team’s part tocompletely identify what the end-users’ Project management also addressesrequirements and needs really are (this products or services missing theirmight be flowed down to the team by intended marks as a result ofManagement or some technical people misunderstandings between the projectmight feel they know better than the user team and the end-users. Proper projectwhat the end results should be); or a management follows a set of guidelinesmismatch between the finished product that ensure that this doesn’t occur. Itand the end-user requirements (this can also protects the project team against anyresult from a misunderstanding between moving targets or changes in acceptancethe end-users and your team of what the criteria on the part of the client.requirements are from the userschanging their requirements). Projectmanagement addresses and controls all Project Management Yields Betterof these. From a quality standpoint, Profits By Making Your Teams Beproject management requires that a Proactive In Identifying Threats andquality plan be created before the project Opportunitieseven begins, discussing the process bywhich quality will be managed While it is true that no one is inthroughout the project. During possession of a crystal ball and canexecution that document serves as a predict all of the negative events thatroadmap to follow and is used to might occur on a project, the riskmonitor quality throughout the process. management aspect of projectThis is the antithesis of assuming that management brings the team as close toquality can be controlled merely by that as one can get. By performing theseHow Project Management Can Improve Your Profitability 4© Successful Projects For Leaders. No portion of this document may be copied or distributed withoutthe expressed written consent of the author.
  5. 5. activities, the project team isn’t caught the organization, thereby affording theoff-guard by threats that occur and time organization even more free cash as theand labor aren’t taken away from critical project moves along.path activities. If the team had to stop Will every possible negative occurrenceplanned activities in order to put out be thought of in advance? Certainly not.fires all the time the project schedule For those “unknown-unknowns”, awould slip, the budget would be overrun, second contingency fund, called aquality could suffer, benefits might not Management fund, can be put in realized, and windows of opportunity However, the money in that fund ismight be missed—all things that have a restricted and can only be allocated fordirect impact on profitability, as use by Management. It is discretionarypreviously discussed. and affords Management the decision to continue with the project or to cancel it.There’s an added benefit to this process;the project team can also identifyopportunities that might enhance the Project Management Yields Bettersuccess of the project, shorten its Profits By Creating Better Contractduration, improve benefits recognized, Awarenessand/or reduce costs—all things that willhave a positive impact on profitability. This is a point that should not be understated for those companies doingWhen one uses risk management the business for clients on contract or onesprice for the project doesn’t have to be that have contractors do work for themartificially inflated, or padded, to cover —the contracting process itself presentssome unknown occurrence since an five inherent risks that may affect anyorganization can create a task-by-task contract. These are Lack of buyercontingency account that the project understanding of contractualmanager would have access to. This requirements; Shortcomings of humanprocess solves two things. First, an language and differing interpretations;arbitrarily large amount of money isn’t Behavior of the parties; Haste; andstored for a “what-if” scenario since Deception. An organization’s projectthere is a time-tested method to leaders must be aware of these in orderdetermine how much money is needed, to manage the risks they pose. Inallowing cash to be freed up that can be addition, the contract type that is choseninvested by the organization on further (or dictated by the client) can impose itsprofitable things. Second, it prohibits own risk as well. Certain contract typesthe tendency for the work to expand to are riskier for the vendor while othersequal the amount of money that’s are riskier for the client; knowledge ofavailable or for the project manager to this is a requirement of certified projectunilaterally use that excess money on managers. That knowledge is valuablesome other task that is going over when making a bid/no-bid decision tobudget, rather than performing determine whether or not to write acorrective action on it. The latter is proposal in response to an RFP,achieved by ensuring that any left over estimating the price of the work to becontingency money set aside for a done, and overseeing the workspecific is immediately returned back to encompassed by the contract itself—allHow Project Management Can Improve Your Profitability 5© Successful Projects For Leaders. No portion of this document may be copied or distributed withoutthe expressed written consent of the author.
  6. 6. variables that affect the overall project or the quality must also beprofitability of an organization. decreased. This is intuitively obvious.Contractual terms and conditions (Ts & The price of the proposal reflects theCs) can also affect price, risk, schedule, cost of the work to be done (marked uppayments, the overall perception of by overhead and fee). If the price isvalue the vendor’s organization has to negotiated downwards and the amountoffer to the client, and thus overall of work hasn’t changed it will still costprofitability to the organization. The the same to perform that work,person with the overall responsibility for regardless of the price tag. The only twothe proposal needs to be aware of them things that can change are the overheadto understand what Ts & Cs from the multiple and the fee (pure profit). If youother organization are being agreed to recover less of a pro rata share toward(or must be negotiated). That same indirect costs, where will the remainderperson also needs to try to ensure that of that money come from other than theyour own Ts & Cs are placed in the organization’s bottom line? A projectcontract language to minimize your manager’s job at the negotiating table isorganization’s exposure to risk. to assist the organization’s negotiator toDepending on an organization’s size, determine how much the project scopethat responsibility may fall solely on the must be decreased and to identify whatproject manager or it may fall on both can be decreased in order to bring thethe contract administrator and the project proposal price down to its new level.manager. In either case, an organization Will a salesperson or contract managerthat follows a prescribed project have the intimate project knowledge ormanagement methodology faces less risk the wherewithal to do that if the projectthan one that doesn’t. manager isn’t present?The wrong people present at yourcontract negotiations can mean the Project Management Yields Betterdifference between a project being on- Profits By Enforcing Processbudget or over-budget. An experienced Improvementproject manager should always bepresent when contract price is being There are certain activities that fall undernegotiated. While a project manager project management that organizationswill never be the lead negotiator or have will perform regardless of whether theythe authority to approve a contract, his or have embraced an enterprise-wideher presence can determine whether the project management methodology.project will be profitable or not. A Negotiating, estimating, and taskdoctrine learned by professionally- execution are examples of such. Oneeducated project managers is that the tenet of formalized project managementprice, scope (time), and quality of a is that of Lessons Learned. Every aspectproperly estimated proposal are at of a project—from the initial contractequilibrium. One of those variables negotiations to estimation to projectcannot be adjusted without affecting at close-out offers the project manager, theleast one of the remaining two. That is, project team, and the organization anwhen the price of a proposed project is opportunity for improvement. Companynegotiated downwards, the scope of the CEOs and CFOs are under increasedHow Project Management Can Improve Your Profitability 6© Successful Projects For Leaders. No portion of this document may be copied or distributed withoutthe expressed written consent of the author.
  7. 7. pressure to increase performance anddeliver enterprise-wide profitimprovement and cost-reduction is aconstant focus. Project management About the Authorbudgets should never be arbitrarily cutbut project management activities can Ed Kozak, M.S., M.B.A., PMP is theand should be streamlined, thereby President and CEO of Successfulcosting less. The estimating process can Projects For Leaders, internationalimprove, the planning and execution of experts in project management processprojects can improve, and the formation improvement. The staff of Successfuland interactions of teams can be Projects For Leaders work withimproved. By following a systematic companies along three main points ofprocess the organization and its people focus. First, they help companiescan follow a path of continuous improve their profitability by cuttingimprovement, generating cost reductions wasteful project costs (upwards to 50%and increases to profitability. or more) and improve their overall management of projects in order toIn summary, there has been a tendency reduce risk, schedule slippage, andamong organizations to forego any unnecessary spending on productproject management expenditures or to rework. As a result their clients are ableseverely constrain the amount of money to exert more control over their projects;allocated towards project management. improve target schedule performance;This has been done with the feeling that monitor and control cost performanceproject management is nothing more better; increase their success at hittingthan an unnecessary burden on the budget estimates; improve quality andproject budget and the project team and satisfaction; and recognize thean unnecessary expense that lessens substantial financial benefits that comeprofits. Hopefully, this paper has along with that.demonstrated that this is quite thecontrary. Experience shows that, time Second, Successful Projects For Leadersand time again when Management is hired as project turnaround expertschooses not to enforce any formal, and is brought in on critical projects thatprescribed project management are in the midst of schedule, budget,methodology, organizations end up and/or quality issues or projects that arebeing less profitable than if they had. having continual setbacks. They analyzeThe lack of project control, the lack of the problems, set a new budget andadequate planning, and the lack of schedule, and work with the incumbentskilled estimating alone can end up project management team to bring themcosting companies 1 1/2 to 2 times more to completion.than their original budgets. Thesecondary costs—missed windows of A third benefit that Successful Projectsopportunity, drains on resources, For Leaders offers is their availability tounattained competitive strengths, losses be out-sourced by Organizations to serveof clients, and sub-optimal benefits can as the Chief Projects Officer. In thisbe even more costly and detrimental to role, Successful Projects For Leadersthe organization. only develops standards and practicesHow Project Management Can Improve Your Profitability 7© Successful Projects For Leaders. No portion of this document may be copied or distributed withoutthe expressed written consent of the author.
  8. 8. directed at the effective execution ofprojects and the attainment of schedule,cost, scope, and quality objectives, butalso communicates enterprise-levelobjectives to the respective projectgroups in the most-appropriate way forthem to follow and communicatesproject information to Management.This overcomes the problem common tomany organizations that no connectionbetween Operations and project groupsexists and no structured, consistent, andmeaningful flow of information betweenthese two groups occurs, allowingManagement to determine if efforts areefficient and effective, if projects arestill the best ones to support strategicobjectives, whether there areperformance issues associated withmeeting objectives.Ed is an accomplished professional withhas over twenty-three years experienceas a consultant, manager, executive,facilitator, and instructor that includesproject/program manager experience inthe private and Government sectorsmanaging multi-year, multi-milliondollar programs for his clients in fieldssuch as IT, healthcare, research,development, and manufacturing. Hebrings his expertise to managementteams in strategic planning, process re-engineering, program managementoffices, and project management and is afrequent conference speaker.How Project Management Can Improve Your Profitability 8© Successful Projects For Leaders. No portion of this document may be copied or distributed withoutthe expressed written consent of the author.