Arguably one of the most important metrics of any commercial project is it’s financial performance. But in order to deliver successfully on this, a Project Manager needs both clear visibility and an understanding of the numbers to positively influence a project’s roll-out. In this article, we run through how to set-up and manage a project for financial success. And spoiler alert, it starts long before the project does.
Project Financials: The Basics
There are two key metrics when reviewing the top-level financials of any project – the overall revenue being generated by the project and the cost of delivering it. The difference between these two, put simply, is the profit margin, which is ultimately where businesses will focus analysis once a project is delivered. These metrics are not just the concern of the accounting and finance team, however, it’s vital information that a Project Manager needs at their fingertips. So whatever project management software is being used, it needs to support real-time (and forecast) snapshots of these metrics at every stage of a project roll-out.
1. Setting up a project
There are a number of different ways to structure the financials of a project: ‘Fixed Rate’ (upfront quote that the project is then delivered to), ‘Fixed Rate plus Expenses’ (same + additional expenses as they are incurred), and ‘Time and Materials’ (pay for what you use – be that hours and / or materials). Depending on the industry and the client, all are viable ways to set-up a project’s financials and a good project management system will allow you to easily track budget across all of them. It may sound obvious but ensure all stakeholders are clear on how a project is being scoped, whether that’s paying for an output or paying as-you-go type scenario. It will avoid any surprises down the line.
For Fixed Rate projects, scoping is of particular importance. Accurate scoping allows for a far smoother roll-out and greater control if it’s done thoroughly from the offset. This takes time – so allow for it. Clients are ultimately signing up to an output – be that a new building, a website, software or a blueprint, but once it’s signed off, how long it takes you to get there is down to you. If a project does end up taking longer than anticipated (but the scope hasn’t changed), then that’s going to directly impact the profit margin. When scoping, always allow for a contingency. If the last 18 months have taught us anything, it’s expect the unexpected. So build in a buffer to give a little breathing space when a project is underway.
Collaborate with stakeholders to ensure the project objective(s) are clear to all. Be sure to distinguish between what is needed and what is wanted, what is essential and what’s a nice to have. Then before the project commences, make sure these are communicated back and agreed upon by all stakeholders. This is the time to identify and address any discrepancies. A project’s objectives become a critical reference point if the project scope (and hence financials) starts to creep. They can help keep stakeholders (and therefore budget) aligned and focused.
2. Running a project:
We’ve said it before, and we’ll say it again – integrated systems are essential for successful project management. Asking a Project Manager to run a project without clear visibility on a project’s real-time financials is like being asked to drive a car blind folded. Dangerous and destined for disaster. If expenses are coming in (e.g. invoices from sub-contractors), then that needs to be captured in the project management software, not just the accounting program. This allows a real-time snapshot of a project’s financials and also the opportunity for prompt push back if any discrepancies arise.
Plan and communicate:
How much time does each project resource have for each action? What external expenses are expected? Is collaboration required? First class communications with a project team are critical to ensure a project roll-out (and its financials) stays on track. The more focused a project team is on what is expected of them (both in actions and time), the more efficient the output will be. Break down the budget into phases, key actions and tasks. When it comes down to monitoring the financials, you’ll be glad you did! A comprehensive project plan that assigns scheduled hours to project resources – right down to the hour – leaves no room for misunderstanding. It’s also advisable to ensure business processes are embedded in the software, from submitting expenses to tracking time so there’s no option for a project team to go rogue! KPIs should be set around what is expected in terms of recording key data e.g. tracking hours daily / % of hours to track / capturing expenses weekly. How accurate a project’s financials are is dependent on how good the information is that is being inputted by everyone on the project team. So a project team should be fully engaged from the offset.
When a project kicks off, it falls to the Project Manager to start the all-important tracking of the project budget. An unmonitored project budget is one likely to fail! Checking in on the financials shouldn’t be an ad hoc activity but rather part of a structured business cadence, be that daily or weekly. At Mission Control, we’ve created a tab in the Project Overview for an instant snapshot on how a project is tracking against budget – from what is expected (scheduled) to what’s really happening (actual) and any discrepancies between them. It supports the ability to drill down into further detail (be that into a phase, action or task) to identify what might be happening and inform what action might need to be taken.
Sometimes it’s important to take a step back from the day-to-day budget tracking to look at the bigger picture, especially for large scale, longer term projects. At Mission Control we created the PMO dashboard for exactly this reason. It gives a top-level, helicopter view of how a project is tracking. Perfect for informing conversations with stakeholders and perfect for knowing, at a glance, which projects might require extra attention, particularly if managing multiple.
In the dashboard, we monitor a project’s financial performance by reviewing both time and budget. The two key metrics being:
- Cost Performance Index (CPI) – how the project is running to budget
- Schedule Performance Index (SPI) – how the project is running to a timeline
The PMO dashboard allows you to select the point in time you wish to evaluate these metrics, as well as being able to select a secondary date for comparative purposes. In case you’re wondering how we arrive at these, we calculate them in the background using:
- PV: Planned Value (the % of revenue you are planning to earn during a set period),
- EV: Earned Value (how much revenue has actually been earned based on work completed in set period),
- AC: Actual Cost (how much of the revenue has actually been used during set period)
- RR: Revenue Recognized (how much of the total revenue due to be earned has actually been recognized during set period).
At a glance, CPI and SPI should be 1 or above which means the project is financially tracking exactly as scoped or even a little better. Cue a healthy profit margin. Anything under 1 should be looked into further and addressed where needed.
For Time and Materials type projects, automated invoicing can be a serious time saver! It simply consolidates hours used over a set period (taken from Timesheet tracking) and generates an invoice – monthly, fortnightly or even weekly if required. This can support a steady cashflow without adding additional admin. It’s also a great tool for retainer-based clients where the same invoice needs to be generated and issued each month.
3. Post project review:
Not every project will deliver the forecasted profit margin…and that’s ok, to a point. The key is to learn from why it might have under delivered and put safeguards in place to prevent it happening in the future. The PMO dashboard again is great to review overall performance and access extra information if needed. Mission Control also has a Retrospective Board feature – great for reviewing overall learnings from a project. It can be worth a check-in if a project budget has really blown out to see detailed insights from the wider team.
Establishing and maintaining visibility on a project’s financials is so much more than checking in on the numbers. It requires clear communications, stakeholder engagement, discipline and an integrated platform to underpin it all. If you’d like to learn more about improving the financial management of your projects, please chat to our team.