Many Technology Solution providers in the IT/MSP, Physical Security and Audio visual industries struggle with the same project profitability issues. They can’t confirm if their project made money or lost money until weeks after the project has closed, or they get blindsided by a project they didn’t know was in trouble until it was too late.
Worse yet, they struggle to cycle project implementation lessons learned back into the quoting process and so they keep making the same quoting mistakes that affect project margins.
This leads to roller coaster quarterly profitability. As the projects and corresponding risks get bigger this also contributes to sleepless nights for Project Managers and Management.
So what are some project profitability best practices that can get you off of the project profitability roller coaster and how can you get better real-time visibility into project profitability to find out earlier if a project is in trouble?
Common Project Profitability Mistakes You Can Overcome
Mistake #1: Tracking summary labor costs instead of detailed labor hours:
Many technology solution providers manage their projects against the same summary labor totals the pre-sales engineer gave to the sales team for quoting purposes. Quoting a project against a $50,000, or 300 hour total labor budget is fine, but MANAGING a project against a $50,000, or 300 hour total labor budget isn’t very useful because because you won’t find out the project is in trouble until you get close to the $50,000 or 300 hour ceiling budget (Project @ $47,000 and $10,000 worth of work left, or Project @ 280 hrs and 50 hrs of work left) – and it’s too late to do anything about it.
Best Practice #1: Track detailed labor hours:
If you want to keep project profitability on-track and give your project managers a real shot at maximizing project profitability, what you really want to know is the detailed specialized labor breakdown that the $50,000 or 300 hours total labor budget was based on. (35 design hours @ $250 an hr, 75 project management hours @ $175 an hr, 50 configuration hour @ $150 an hr, 100 implementation hours @ $150 an hr and and 40 training hours @ $125 an hr).
For example if you estimated 35 design hours in the project early stages, and it ends up taking 60 design hours, you’d better be submitting a change order to the customer, or have a plan for how to compensate for those additional 25 hours over the remainder of the project (or tell the Sales team to stop quoting 35 Design hours for these kinds of projects and start quoting 60). So instead of finding out about the extra 25 hours when you’re at $47,000 of your $50,000 project budget and it’s too late, you’d know about those extra hours while you still had 70% of your project budget remaining and lot’s of planning runway to fix it.
The silly thing often is, in order to create the total project dollars and hours labor budget, the pre-sales engineer almost certainly created a document or Excel spreadsheet with exactly what the detailed specialized labor type hours were (design, project management, configuration, etc), in order to come up with the $50,000, 300 hour total labor budget, so let them pass the summary numbers to sales, but make sure the project delivery gets the detailed breakdown to measure project performance against.
Mistake #2: Not giving the VP of Services visibility into the Sales pipeline for Labor Forecasting:
If your VP of Services only finds out what labor resources are required for a project the day the order get’s booked, then it’s going to be a constant fire drill for them to juggle the right labor resources and they will struggle to maximize project profitability and maximize billable labor utilization. This is one of the primary contributors to roller coaster quarterly project profitability results. Great one quarter, disappointing the next. Because it’s unlikely that your pre-sales engineers are preparing project labor estimates for quotes that include 25% of project hours at overtime, or that account for two people on a single task to make up for the late project start because resources weren’t available on the project start date promised to the customer.
Best Practice #2: Give the VP of Services more labor planning runway:
If you adopt the best practice suggested above regarding breaking down your project labor estimates by detailed labor type (design, project management, config, training hours) you now have the foundation for a labor hours resource forecast by specialized resource type. With the right quoting/forecasting tools, this will allow you to forecast how many design, project management and training hours will be required 30, 60, 90 days from now, based on the high probability deals in the sales funnel. This will provide much better planning runway the VP of Services to make decisions regarding appropriate new hires, or adjusting the margins up front where you’re over capacity and will need to leverage subcontractors, or for setting customer expectations accurately for the project start and live dates.
P.S. A forecasted bucket of $50,000 or 300 labor hours is almost completely useless for real world labor forecasting & planning purposes. To be truly useful, the forecast has to be in hours, by specialized resource type (design, project management, training), in order to give your VP of Services a fighting chance to maximize project profitability and maximize billable labor utilization.
Mistake #3: Not consistently cycling implementation lessons learned back into the quoting process:
The old saying about “the definition of insanity is doing the same thing again and again and expecting a different result..,” definitely applies to quoting mistakes that impact project profitability. Many organizations struggle to consistently cycle implementation lessons learned back into the quoting process. The problem typically occurs because they are stuck comparing the total project labor actuals against the original $50,000 total labor budget quoted. If the project comes in 12.5% over budget ($56,250), how do you figure out what went wrong? If you’re managing the project against the total labor budget then it becomes an manual Easter egg hunt to find out where the extra $6,250 came from. And quite frankly, most companies won’t take the time to do the detailed project autopsy unless the project was significantly over budget (20%+), so that $6,250 in extra project labor never gets reconciled and so history just keeps repeating itself.
Best Practice #3: Consistently cycle implementation lessons learned back into the quoting process:
As per above, if you are track your project labor hours by detailed labor type, then it becomes very easy for you to see that your design hours came in 25 hours over. And now you have enough detailed information to confirm if you missed a change order (customer changed the scope), this was a project specific issue, or if you’re under quoting some aspect of your project labor hours and you need to cycle that implementation lesson learned back into the quoting process.
Yes, tracking detailed project labor hours by specialized labor type will take a little more work (or require better automation tools). But if you don’t take this approach then getting visibility into project profitability, providing your VP of Services with useful resource forecasting and more labor planning runway and cycling implementation lessons learned back into the quoting process will continue to be a struggle.
Those struggles are typically the difference between inconsistent and under performing project profitability and industry leading project profitability.