That’s it, you have sold a big project to a customer! it’s exciting!
Now let’s get to work, and make sure you will be profitable with this project. But wait, what exactly should you measure? Sure, you have a revenue and you have costs, so it seems pretty straight forward, but is there a way to anticipate any overspending? What are the best financial metrics to follow the performance of your project?
Labor time: When you sell a project at a fixed-fee, usually, you know how much time your team and yourself will be spending on this project. And usually, you sell a number of days at specific daily rates. Even if you have applied a discount, you probably have included a margin when you did you bid to your client.
So, at this point, it’s all about making sure that each member of your team spends as much or less time than what was initially planned.
The trick here, is to update continuously time allocated in the past to this project, and time booked or “staffed” in the future on this project. Since you know the cost of each team member, you will able to track the evolution of your margin compared to what you had in mind. For that, you need to use a tool in which every team member (and maybe freelancers if you have external resources) can easily update the time actually spent on the project, and the project manager can accurately staff his team in the future. With the right tools in hand, this won’t take more than a couple of minutes to update, and will enable a full follow-up of past and future costs incurred on this project.
Expenses: It is also critical to track expenses. Sometimes, you will agree with the customer that 100% are billable. But most of time, not all expenses are billable. Just think about the commercial part of this project. If you want to have a perfectly accurate financial performance analysis of this project, you should include in the margin, all the costs (time and expenses) that have been spent to win this project.
Besides, in some cases, you only agree with your client to bill a fixed amount of expenses per period. In this situation, if your team manages to spend less when they travel, it is all good, otherwise it will impact negatively the margin. In both cases, it is important to follow this impact, positive or negative, of expenses.
In Stafiz, we like to show a very useful KPI: we call it the production rate
It takes everything into account (past and future time, expenses) and tells you if you can anticipate to over perform or under perform the project. Here’s how we calculate it:
Project fees / [Actual and future labor time spent on the project x Daily rates]
Of course the denominator takes into account the different daily rates of each member involved in the project.
So, if you have sold the project at the exact value of the time planned for each team member, multiplied by their daily rate, you plan to realize a Production rate of 100%.
Let’s take an example: You have sold a project $100 000, and plan to have a junior working 60 days at $1000/day, a senior working 20 days at $1500/day and a director working 5 days at $2000/day: (60 x 1000 + 20 x 1500 + 5 x 2000 = 100 000). So in your plan, the production rate is at 100%.
But, let’s say you are a month in the project, and now you anticipate that the junior will spend 70 days, the senior 25 days, and the director 6 days. Now, the value of your production is (70 x 1000 + 25 x 1500 + 6 x 2000 = 119 500). So the production rate is:
It doesn’t mean that your margin is negative, because your daily rates may include a significant margin compared to the real cost of your collaborator. But it means that you are under performing compared to your initial plan, by 16.3%.
You need to find ways to speed up the project or justify a price increase to your client.
It also happens that over the course of a project, your client may ask for additional work. In this case, you need to review the initial plan, adjust the fixed-fee sold, and take it into account in your performance analysis. In Stafiz, you can do it by adding as many new “production plans” as necessary.
There are many reasons why a project becomes unprofitable: commercial activity costs have been underestimated, expenses have not been included in the margin calculation or you are just stuck on the project and spend more time. In some cases it will be the opposite, and you will end up much more profitable than planned. The most critical aspect of all this, is to ANTICIPATE. You need to have the reporting tools to have real-time visibility over your project financials. It will help you set the appropriate bidding price, and it will help you have enough time to react and take decisions to speed-up the project or reduce costs when you still can.
What else are you guys looking at?