Companies applying the management by project business model should monitor their margins by project or product, based on multiple extremely finely-tuned criteria. The gain in productivity for the company is understood based on internal and external budgets, which must coincide with the contractual commitments accepted. This precise management of margins, customer by customer, enables the monitoring of the company's productivity and margins at every stage of a project.
The different parts that make up the margin
To calculate a margin for each project, a company managed by project must pass on the following costs in the selling price of a service: the cost of purchases for the project in question, such as the outsourcing of certain tasks, time spent on each step, in hours/days and in euros, not forgetting a proportion of overheads calculated (unless these running costs are already factored into the price charged for your employees' time). These factors determine the potential productivity gain for the project.
Monitoring the margin over time
The most accurate budget forecasts come up against the possible development of projects, which sometimes turn out to be less linear than expected. Monitoring of the margin in real time is therefore required to ensure an increase in productivity for the company. This monitoring is organised around four main pillars:
- Definition of the initial budget: for a company managed by project, each contract involves an initial budget based on assumptions or management data, such as estimates and orders. This budget will be used for reference during the provision of the service. Developments may occur, involving adjustments and budget revisions, because of additional sales, for example.
- Work completed: it is strongly recommended to check adjustments in real time between the initial budget assigned to the project and its progress. Powerful ERP (Enterprise Resource Planning) software, adapted to management by project, enables you to see (in real time) the time already spent, deliveries made and the status of invoiced items for sales and for purchases.
- To be done: as its name suggests, it will show all costs in terms of the schedule but also the committed but not yet completed, such as supplier orders that have yet to be received and client orders that have yet to be delivered. In a nutshell, what remains to be done in the future! In order to arrive at the "to be done" level, the project manager will update the ERP system, either in real time by checking the schedules almost daily, or by periodically reporting a level of progress (fairly common in engineering and architecture practices).
- Reforecasting: this provides a projection of the project (and therefore of its components) at the end of the contract. Generally, it is customary to add the completed to the "to be done" which will give a picture which includes reforecasting, unless you're happy to subtract the completed from the initial budget. According to the results, this will make it possible to predict and therefore to carry out the necessary corrective actions to ensure a satisfactory level of margin.
Fine tuning the understanding of the figures
Management by project involves the real-time monitoring of numerous figures. Some integrated management tools enable the fine tuning of understanding via a detailed approach to aggregated information, also known as "Drill Down". This will provide you with immediate evidence of the components of a cost of time spent, of turnover, etc.
Also, if your accountant enters losses on completion as an MO and the information goes into this budgetary control dashboard, the project manager will want to know why and should take this into account.
Finally, what could be more reassuring for a CFO than to know that their sales people are compiling their offers based on similar completed projects?
Did we make a profit? How much time did we really spend on that project? In short, if you ask the right questions from the start, your margins will thank you!