Is Your Project Profitable?
Your company just signed a $200K deal and they've elected you, its best Project Manager, to manage the development. You're confident you'll get the job done on time and according to specs. But by the time you deliver this project, how much profit will you realize?
If this $200K is strictly an estimate, then it doesn't really matter. As long as you charge your customer on a per diem basis, then you're guaranteed to realize a profit. If you charge your customer $1,000 per diem, and the job ends up taking 250 days instead of 200, then your profit is $250,000 minus your expenses.
However, if the $200K is a fixed price to cover the activities described in a Statement of Work (SOW), then you better hope that your estimate is accurate. Otherwise, the extra 50 days that you didn't account for will come out of your own pocket.
How can you ensure that each contract remains lucrative?
First, make sure that the items described in the SOW are well defined. Don't leave anything up for interpretation. Your SOW should be as clear as your software specs. As a matter of fact, it's preferable if your SOW is your software specs. Any scope change demanded by the customer should be an addendum to the original SOW, and you should charge extra for it.
Second, take the time to properly size each feature in the SOW. Sales people anxious to close a sale often omit certain derivative activities from their forecasts. When their commission is at stake, many are more interested in closing the deal then determining how long an activity will actually take to properly design, develop, and test. Try to get involved in the negotiation of the SOW, or at least in the sizing of the individual features and the overall project.
Third, add an extra 10% to the overall effort of the project for project management activities. You of all people should know that projects don't manage themselves, and yes, you cost money. If you're going to manage this project, you need to make sure that your time is included in the overall project schedule. Generally speaking, you need one day of project management for every 10 days of design/development and testing. In other words, if you estimate that designing, developing and testing the solution will take 100 person months, then you should include 8 to 10 person months for project management.
Fourth, make sure you specify in your SOW or your contract something along the following clause:
[Client name] shall reimburse [contractor name] for travel and other expenses as identified in this Statement of Work, or as authorized in writing, in advance by [client name] . No payment of travel expenses will be made to [contractor name] for routine travel to and from [client name] 's location. [Contractor name] shall provide a detailed itemization of expenses as requested by [client name] . The amount reimbursed to [contractor name] is included in calculating the “not to exceed” amount specified above.
This clause is just legal jargon to specify that the customer has to reimburse you for any travel expenses that are encountered because of the SOW. Traveling usually represents 2% to 5% of total expenditures of a project. However, there are times when they represent as much as 15%-20%, depending on the size of the project. Regardless, make sure that you get reimbursed for all travel expenses. This will ensure that traveling won't negatively impact your bottom line.
In addition to charging the client for travel expenses, make sure you get reimbursed for hardware and/or software licenses that need to be purchased for the realization of the project.
Finally, track project expenditures. Putting together a detailed WBS is a best practice followed by most Project Managers. Moreover, most managers size, prioritize, and assign tasks. But not many track project expenditures to later determine exactly how much profit was realized from a specific project.
Make sure each person assigned to the project fills out (dreaded) timesheets. I know, they're a pain. But remember: you can't manage what you can't measure. If you're not sure how much time people spent on a specific project, then you don't know whether or not you've truly realized a profit. In addition to tracking time, make sure everyone, or at least every group (e.g. designers, developers, testers) is assigned a per diem rate so you can not only measure time spent, but cost.
Conclusion
Some projects are strategic in nature. For example, a start-up might consciously opt to deliver a product at a loss if the customer is willing to act as a lead referral. However, sooner or later, even start-ups must show a profit. As a Project Manager, not only should you deliver on time and according to specs. You must also deliver within budget, and at profit.
When estimating the project's cost:
- Treat your SOW as you would your specs.
- Charge your customer for anything that's beyond the scope of the original SOW.
- Take the time to properly size each feature in the SOW.
- Add 10% to the overall effort of the project for project management activities.
- Add a clause to cover expenses, such as travel, hardware and software licenses.
Once the project is underway:
- Insist that everyone on the project, including you, fills out timesheets.
- Assign a per diem rate to everyone on the project.
- Track your travel, hardware and software licenses
Common sense, isn't it? Absolutely. So why aren't more project managers tracking project costs? Why can't a project manager tell you how much profit was realized from their last project? You tell me!
This article was originally published on www.gantthead.com.