How Project Management Can Improve Your Profitability

Ed Kozak

It seems counter-intuitive to claim to

increase profitability by adding more oversight to a project and project management would definitely qualify as oversight. After all, the money for that oversight has to come from somewhere. If youre working on a project for your client youre able to pass through that cost to the client. However, some executives might feel that the added cost of project management oversight will price proposals out of competition and so they fail to include it or include an insufficient budget for it. This can be viewed even more negatively if the project is being funded internally from within the company. The money for project management comes directly from the capital expenditures budget and so some executives would rather forego this extra cost in order to invest that money elsewhere. What isnt being considered is the fact that lack of project management oversight will steal money from an organizationmoney for costs that hadnt been factored inin the form of a cost overrun. Executives must also consider the reduction in ROI, insufficient delivery of benefits, unattained competitive strengths, and missed windows of opportunity that will certainly occur as well. Those that are working on projects funded by a client external to your

organization arent necessarily safe from the ill effects of cost overrun. Certain contract types will not allow unforeseen and unplanned costs to be passed on to the client, and while other types will, if the client thinks youve mismanaged the project they might refuse to cover any additional costs or there could be grounds for a lawsuit. You also run the risk of alienating the client for what might be perceived as poor client service. Project Management Yields Better Profits By Creating Better Cost Estimates Lets start at the beginning. How are budget estimates made at your organization? Is there a formal process in place that all estimators must follow that includes documenting the manner in which the estimates were obtained or are they allowed to estimate in whichever way suits them? How confident are the estimators in their estimates? How confident are you in their estimates? Do some estimators arbitrarily add in more money just in case? Thats a dead giveaway that theyre not very confident in their estimates. This doesnt mean that some money shouldnt be set aside in a contingency fund but there is a formal way to determine how much is really needed and who controls the

release of those funds. This is discussed further in the text under risk planning. The profitability of the organization begins with the project budget estimates themselves. If an organization has to make a choice to fund only one or two projects out of a number of potential projects one of the selection criteria will be a financial metricNPV, IRR, MIRR, or something else. What does this mean then if the budget estimate for a project is incorrect? Whatever financial metric is being used is meaningless. If the estimate is much lower than what is should beeither because the estimator pulled some numbers out of the air, took a short cut and didnt consider a number of tasks that needed to be done on the project, or didnt correctly factor in how long some tasks would takethe project investment will be artificially lower. The result is that the project will have a higher value for NPV, IRR, or MIRR than it really should and it might be selected over projects that actually give a better ROI. If the budget estimate is much higher than what it should be typical of projects whose estimates were padded, that is when the estimator arbitrarily adds money to the estimate just in case, then required investment for the project will be higher, the financial metrics for that project will be lower than they should, and a different and less profitable project might be selected instead. What if the project isnt being funded internally but rather, by a client? Can poor estimating, stemming from poor or no project management, hurt your profitability? The answer, of course, is yes. If youre working under a firm fixed-price contract then youve agreed

to perform all of the work for a set price, no matter what. Lets assume that the contract allows for economic price adjustments so that the buyer still would be required to pay the difference if the price of material has gone up since its price was listed in the contract and the vendor is protected. The vendor is not protected if the estimate for the work turns out to be less than what the actual work will. That difference between the estimate cost of labor and the actual cost of labor will come directly from the vendors profit. When there isnt enough profit in the contract to cover the difference the vendor will have to pay for any remaining costs out of the organizations profits made elsewhere. Luckily, not every contract type is so risky for vendors. Under a costreimbursable contract type the vendor is not obligated to finish the work once the money has run out and so there is some protection if the estimate falls short of the actual costs. Under this contract type the client will have to decide whether to provide additional funding for the project or to stop work but the vendor will not have to tap into profits made thus far. The issue then really becomes one of the perception of client service. In this day and age where relationships are built on trust many clients may feel that the adjustment in contract price constitutes a violation of that trust and that certainly would sour the chances of getting future work from them. Theres also a chance that your organization might receive some negative word-ofmouth from the clients staff, jeopardizing other future relationships.

Project Management Yields Better Profits By Creating Better Schedule Estimates How Project Management Can Improve Your Profitability 2
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Inaccurate time estimates are just as costly as inaccurate cost estimates. What is the result of an inaccurate time estimate for an internally-funded project? If a time estimate is too short then Management doesnt have a clear picture of what the true project costs will be. That is, if a project runs 25% longer because the time to complete certain tasks was estimated incorrectly thats 25% more actual time for staff to be working on the project, and hence an increase in project costs. Every increase in project cost from the original estimate is a reduction in ROI and a reduction in the profitability of the organization. What happens if the outcome of the project is a rollout of some sort that will enhance competitiveness or overall market attractiveness? A delay in either will delay sales revenue and impact profitability. If the project is leading to the development of a product any delay getting that product to market will be that much longer for the organization to generate revenues from that product. Worse still is the erosion of any firstmover advantage that the organization might be able to capitalize on and were all aware of the respective impact to profitability from each of these.

Project Management Yields Better Profits By Mandating Cost And Time Management And Control

Assuming the time and cost estimates from your organizations project estimators are correct, only the constant vigilance that is required by proper project management will help keep the project on budget and on schedule. In order to facilitate exceptional monitoring and control, cost and time estimates must be broken on a month-by-month basis and not only on a task-by-task basis for efficient comparisons of estimated planned expenditures against actual expenditures. Regular cost and schedule monitoring is espoused by project management governing organizations in order to catch the project when it has varied slightly from cost and/or schedule targets. This allows some type of corrective action to be taken. From my experience the optimum frequency for monitoring should be monthly (assuming a project is a minimum of three months in duration, else bi-weekly if cost reports can be generated that often). Monitoring cost and schedule less frequently than What if the project is being funded by an monthly can allow the project to veer so external client? The same contract much off cost and/or schedule targets issues apply here as mentioned that corrective action might not be able previously for cost estimating. On a to be taken or, if it can, it might cost so fixed-price type of contract, your much to perform it erodes the benefit of organization, as the vendor, will have to any corrective action. Monitoring cost pay for that extra time out of profits. On and schedule more frequently than a cost-reimbursable type of contract, the monthly (for projects greater than 3 client will need to make the decision to months in duration) doesnt offer any pay for your bad estimate or stop work marginal advantage and will do nothing and accept whatever partially-completed but to use up more of the project budget work was done. Either way, the client for oversight than necessary. The will not be happy. important thing to note is that cost and How Project Management Can Improve Your Profitability 3
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schedule monitoring is necessary in order to help keep the project on its cost and schedule targets. This, in turn, helps the organization hit its profitability targets which help the organization achieve its strategic goals. Project Management Yields Better Profits With Good Quality Management The two factors of a project that will quickly erode profits are the reworking of errors and an endless stream of things going wrong. The latter is discussed a little further on under Risk Management but the former is addressed here. Rework is a quality issue and arises from three main thingsa lack of managing quality into the product (or service); a lack on the project teams part to completely identify what the end-users requirements and needs really are (this might be flowed down to the team by Management or some technical people might feel they know better than the user what the end results should be); or a mismatch between the finished product and the end-user requirements (this can result from a misunderstanding between the end-users and your team of what the requirements are from the users changing their requirements). Project management addresses and controls all of these. From a quality standpoint, project management requires that a quality plan be created before the project even begins, discussing the process by which quality will be managed throughout the project. During execution that document serves as a roadmap to follow and is used to monitor quality throughout the process. This is the antithesis of assuming that quality can be controlled merely by

testing the product after its been made and making changes to it until it performs as required. Fiscal responsibility is lacking in that assumption. How far back in the chain of tasks must the team go in order to make the necessary corrections? How many tasks that already have been performed must be then repeated as a result? Not one of those repeated and completely wasteful tasks were ever factored into the original budget of the project or in the profit, both of which suffer as a result. If no quality assurance is conducted throughout this rework process it is very likely that more rework might be needed once the modified product or service has been re-tested. This wasteful cycle can continue through several iterations, each time draining profits more and more. Project management also addresses products or services missing their intended marks as a result of misunderstandings between the project team and the end-users. Proper project management follows a set of guidelines that ensure that this doesnt occur. It also protects the project team against any moving targets or changes in acceptance criteria on the part of the client. Project Management Yields Better Profits By Making Your Teams Be Proactive In Identifying Threats and Opportunities

While it is true that no one is in possession of a crystal ball and can predict all of the negative events that might occur on a project, the risk management aspect of project management brings the team as close to that as one can get. By performing these How Project Management Can Improve Your Profitability 4
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activities, the project team isnt caught off-guard by threats that occur and time and labor arent taken away from critical path activities. If the team had to stop planned activities in order to put out fires all the time the project schedule would slip, the budget would be overrun, quality could suffer, benefits might not be realized, and windows of opportunity might be missedall things that have a direct impact on profitability, as previously discussed. Theres an added benefit to this process; the project team can also identify opportunities that might enhance the success of the project, shorten its duration, improve benefits recognized, and/or reduce costsall things that will have a positive impact on profitability.

the organization, thereby affording the organization even more free cash as the project moves along. Will every possible negative occurrence be thought of in advance? Certainly not. For those unknown-unknowns, a second contingency fund, called a Management fund, can be put in place. However, the money in that fund is restricted and can only be allocated for use by Management. It is discretionary and affords Management the decision to continue with the project or to cancel it. Project Management Yields Better Profits By Creating Better Contract Awareness

This is a point that should not be understated for those companies doing When one uses risk management the business for clients on contract or ones price for the project doesnt have to be that have contractors do work for them artificially inflated, or padded, to cover the contracting process itself presents some unknown occurrence since an five inherent risks that may affect any organization can create a task-by-task contract. These are Lack of buyer contingency account that the project understanding of contractual manager would have access to. This requirements; Shortcomings of human process solves two things. First, an language and differing interpretations; arbitrarily large amount of money isnt Behavior of the parties; Haste; and stored for a what-if scenario since Deception. An organizations project there is a time-tested method to leaders must be aware of these in order determine how much money is needed, to manage the risks they pose. In allowing cash to be freed up that can be addition, the contract type that is chosen invested by the organization on further (or dictated by the client) can impose its profitable things. Second, it prohibits own risk as well. Certain contract types the tendency for the work to expand to are riskier for the vendor while others equal the amount of money thats are riskier for the client; knowledge of available or for the project manager to this is a requirement of certified project unilaterally use that excess money on managers. That knowledge is valuable some other task that is going over when making a bid/no-bid decision to budget, rather than performing determine whether or not to write a corrective 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 be contingency money set aside for a done, and overseeing the work specific is immediately returned back to encompassed by the contract itselfall How Project Management Can Improve Your Profitability 5
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variables that affect the overall profitability of an organization. Contractual terms and conditions (Ts & Cs) can also affect price, risk, schedule, payments, the overall perception of value the vendors organization has to offer to the client, and thus overall profitability to the organization. The person with the overall responsibility for the proposal needs to be aware of them to understand what Ts & Cs from the other organization are being agreed to (or must be negotiated). That same person also needs to try to ensure that your own Ts & Cs are placed in the contract language to minimize your organizations exposure to risk. Depending on an organizations size, that responsibility may fall solely on the project manager or it may fall on both the contract administrator and the project manager. In either case, an organization that follows a prescribed project management methodology faces less risk than one that doesnt. The wrong people present at your contract negotiations can mean the difference between a project being onbudget or over-budget. An experienced project manager should always be present when contract price is being negotiated. While a project manager will never be the lead negotiator or have the authority to approve a contract, his or her presence can determine whether the project will be profitable or not. A doctrine learned by professionallyeducated project managers is that the price, scope (time), and quality of a properly estimated proposal are at equilibrium. One of those variables cannot be adjusted without affecting at least one of the remaining two. That is, when the price of a proposed project is negotiated downwards, the scope of the

project or the quality must also be decreased. This is intuitively obvious. The price of the proposal reflects the cost of the work to be done (marked up by overhead and fee). If the price is negotiated downwards and the amount of work hasnt changed it will still cost the same to perform that work, regardless of the price tag. The only two things that can change are the overhead multiple and the fee (pure profit). If you recover less of a pro rata share toward indirect costs, where will the remainder of that money come from other than the organizations bottom line? A project managers job at the negotiating table is to assist the organizations negotiator to determine how much the project scope must be decreased and to identify what can be decreased in order to bring the proposal price down to its new level. Will a salesperson or contract manager have the intimate project knowledge or the wherewithal to do that if the project manager isnt present? Project Management Yields Better Profits By Enforcing Process Improvement

There are certain activities that fall under project management that organizations will perform regardless of whether they have embraced an enterprise-wide project management methodology. Negotiating, estimating, and task execution are examples of such. One tenet of formalized project management is that of Lessons Learned. Every aspect of a projectfrom the initial contract negotiations to estimation to project close-out offers the project manager, the project team, and the organization an opportunity for improvement. Company CEOs and CFOs are under increased How Project Management Can Improve Your Profitability 6
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pressure to increase performance and deliver enterprise-wide profit improvement and cost-reduction is a constant focus. Project management budgets should never be arbitrarily cut but project management activities can and should be streamlined, thereby costing less. The estimating process can improve, the planning and execution of projects can improve, and the formation and interactions of teams can be improved. By following a systematic process the organization and its people can follow a path of continuous improvement, generating cost reductions and increases to profitability. In summary, there has been a tendency among organizations to forego any project management expenditures or to severely constrain the amount of money allocated towards project management. This has been done with the feeling that project management is nothing more than an unnecessary burden on the project budget and the project team and an unnecessary expense that lessens profits. Hopefully, this paper has demonstrated that this is quite the contrary. Experience shows that, time and time again when Management chooses not to enforce any formal, prescribed project management methodology, organizations end up being less profitable than if they had. The lack of project control, the lack of adequate planning, and the lack of skilled estimating alone can end up costing companies 1 1/2 to 2 times more than their original budgets. The secondary costsmissed windows of opportunity, drains on resources, unattained competitive strengths, losses of clients, and sub-optimal benefits can be even more costly and detrimental to the organization.

About the Author Ed Kozak, M.S., M.B.A., PMP is the President and CEO of Successful Projects For Leaders, international experts in project management process improvement. The staff of Successful Projects For Leaders work with companies along three main points of focus. First, they help companies improve their profitability by cutting wasteful project costs (upwards to 50% or more) and improve their overall management of projects in order to reduce risk, schedule slippage, and unnecessary spending on product rework. As a result their clients are able to exert more control over their projects; improve target schedule performance; monitor and control cost performance better; increase their success at hitting budget estimates; improve quality and satisfaction; and recognize the substantial financial benefits that come along with that. Second, Successful Projects For Leaders is hired as project turnaround experts and is brought in on critical projects that are in the midst of schedule, budget, and/or quality issues or projects that are having continual setbacks. They analyze the problems, set a new budget and schedule, and work with the incumbent project management team to bring them to completion.

A third benefit that Successful Projects For Leaders offers is their availability to be out-sourced by Organizations to serve as the Chief Projects Officer. In this role, Successful Projects For Leaders only develops standards and practices How Project Management Can Improve Your Profitability 7
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directed at the effective execution of projects and the attainment of schedule, cost, scope, and quality objectives, but also communicates enterprise-level objectives to the respective project groups in the most-appropriate way for them to follow and communicates project information to Management. This overcomes the problem common to many organizations that no connection between Operations and project groups exists and no structured, consistent, and meaningful flow of information between these two groups occurs, allowing Management to determine if efforts are efficient and effective, if projects are still the best ones to support strategic objectives, whether there are performance issues associated with meeting objectives. Ed is an accomplished professional with has over twenty-three years experience as a consultant, manager, executive, facilitator, and instructor that includes project/program manager experience in the private and Government sectors managing multi-year, multi-million dollar programs for his clients in fields such as IT, healthcare, research, development, and manufacturing. He brings his expertise to management teams in strategic planning, process reengineering, program management offices, and project management and is a frequent conference speaker.

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