Risks involved in Project Profitability
Tuesday November 06, 2018,
4 min Read
If we talk about the present, projects are getting challenging and profit margins are dwindling.
With increasing competition nationally and from overseas firms, it is becoming imperative to manage projects with precision and following best practices for financial management. Every business comes across risk threats that could impact their success negatively. With added focus on your firm’s weak areas, you can aid in increasing your profit margins and save losses resulting from wastage and inefficient management.
Every entrepreneur needs to be proactive in identifying underlying problems that are plaguing the firm and prioritize improving the operational bottlenecks that slow work down, and lead to budget overruns. One can contribute to a substantial increase to the bottom line and help the firm’s project managers to perform more efficiently.
Top Risks to Project Profitability
- Inefficient Planning
Planning is the vital part of any project and any good project starts with an estimate, yet many firms fail to have a sound well-researched estimate in place. One such example could be- Using standardized estimating practices, such as Top-down estimating without verifying the necessary breakdown of costs. This can lead to project fees to be incorrectly calculated and hence business may suffer a huge loss.
- Unsupportive Culture
A firm’s culture is hugely responsible for the smooth functioning and success of the firm. The daily operations are impacted by the culture which is driven in a firm. The culture, in any firm, takes years to form and implement. It also depends a lot on the owners and their willingness to improve their systems and processes in order to increase employee engagement and productivity.
A project management culture is one in which the PM is provided all of the tools they need to succeed: for example- training, systems, and information. If your firm is still operating with manual processes and systems, your project profitability will probably be lower than average.
- Lack of Financial Management Skills
Any firm or any entity without its people is like a train without an engine. For a good project management, highly skilled project managers are needed. More than often PMs are appointed for their roles without giving them the required training in financial management and the way project profitability works.
Most PMs belong to technical backgrounds and prefer to focus on delivering high-quality projects, client satisfaction, and meeting deadlines. While they might be responsible for many financial management aspects of a project, such as billing, collections, and budgeting, the least focus is paid to get them trained in these skills. Apart from much needed technical and behavioral skills, Project managers need to understand financial management concepts such as calculations of billing rates, overhead, utilization, and project cost control in order to make the project profitable. Skill training and development can go a long way towards building a team of skilled and profitable project managers.
- Employee Turnover
Employee turnover is a very costly human resources expense. The cost of turnover goes way beyond just the expense of recruiting and training a new staff person in a position. Failing to retain good employees can also cause client dissatisfaction and potentially losing them to competitors as most of the clients don’t prefer a frequent change of staff members. A rewarding and motivating performance management system and a growing career path for your top performers will ensure the firm’s success and continuation of client loyalty.
- Mismanagement of Resources
Optimum utilization of people’s skills, talent and time are one of the keys to your firm’s success. It all starts by regular tracking and management of resources and ensuring that the right people are doing the right jobs. While most financial management reports focus on performance in the past, the key to effective resource management is to be able to forecast the future.
While evaluating the right mix of resources, many components come into picture including current project assignments, projects yet to begin, projects about to end and opportunities in the pipeline which are yet to be won but probable. One should take into account all of this and determine who is over-booked, under-booked and whether you have the right mix of people based on all of these factors.
Taking all of this data into account and determining efficient Resource Planning systems can help you provide much-needed idea and visibility about your three to six months (at least) future resourcing requirements, and save your firm money by ensuring that hiring decisions are made at the right time.