Erosion of profit margins is something that can sneak up on you gradually. Without proper planning and monitoring, everything appears to be in order until, suddenly, nothing adds up. And once it begins, erosion can accelerate quickly.
Many things can erode margins on projects. Some are harder to control than others, but by putting a few processes in place to minimize or eliminate the major areas that give project managers and their teams the most frustration, project costs can be controlled more effectively, and organizations can realize greater financial success on their projects.
There are a few common areas that encompass many of the problems that lead to margin erosion. Here are three approaches to tackling them head on:
Establish repeatable processes for accurate cost estimating
Good estimates are the critical first step in assuring that your projects will be successful. However, even under the best of these circumstances, cost estimating is difficult. It requires both quality data and judgment.
In the highly competitive services industry, precise financial information is required for accurate proposals. Knowing and anticipating the project’s expenses correctly provides a definitive advantage in the business development process and ultimately, the financial success of the project, particularly on lengthy or large jobs where small discrepancies can have a domino effect throughout the project.
Proactively manage the change order process
Out-of-scope requests can kill project profits. Every firm gets out-of scope requests from clients, yet few have formal processes for dealing with them. How a firm deals with out-of-scope requests can go a long way in determining a firm’s profitability. Change orders are not always a bad thing, but minimizing them should always be a goal and communicating the extra costs and time to your client in a timely manner is critical.
Arm yourself with information necessary to proactively respond to cases of margin erosion
Project managers and principals need the right tools to budget effectively and monitor actual time spent versus budget. Project managers must have the appropriate project accounting tools and metrics in their hands and so that they can adjust their planning based on scope changes and be armed with the information necessary to proactively respond to issues that could potentially result in margin erosion.
The solutions for avoiding project margin erosion all involve a combination of people, processes and tools. When it comes to technology, it is critical for professional firms to have solutions that support the effective collection and analysis of data to provide for better decision making including actionable, strategic reporting and visibility to key performance indicators at both the project and firm level.
Check out our whitepaper for some practical tips on how to avoid margin erosion on your projects.