One problem I am called upon to fix is when a company regularly suffers from project delivery costs that are three times the estimated price quoted. First, I have to figure out what happened. Common scenarios are:
- Project costs are underestimated and resources are over-utilized.
- Project changes are not tracked and cost overruns are identified during the billing cycle.
- The project is over-managed.
- The project is quoted based on an informal conversation rather than a codified description of the scope of work.
- Project requirements are not finalized before the work starts, requiring multiple re-starts.
- The project owner is not established, resulting in unnecessary round of review and approval.
In this post, I’ll address the first scenario.
The client has a small project budget of $3,000 for the type of work the company does regularly. Such routine work often leads to companies agreeing to projects without properly assessing the use of resources. Therefore, the company unintentionally over-promises its resources, which can easily range from 10% to 40% in unbudgeted utilization. In short, the company accepted a project based upon other work without first confirming whether all components necessary to deliver the project–within budget–are in place.
In this scenario, the actual cost of delivering this small project ends up being $7,000. When it comes time to invoice the client, the company must make a choice: 1) write off the resource utilization and declare a loss on the project, or 2) ask the client for additional funds to cover the overage not anticipated by the original estimate.
Since this is the company’s error, the company decides to take a loss on the project so as not to alienate the client. However, the client now perceives the company as a low-cost provider: lots of work for a small price. (We’re not even going to address the problems that perception yields for the company.) Over time, the company improves at managing project resources, bringing delivery costs in line with project budgets, but at what cost to the company’s bottom line?
Based on the scenario as described, here’s how the numbers could play out. Following are key assumptions:
- The client requests three more similar projects are priced at $3,000.
- The blended hourly resource rate is $200.
- The standard resource hours for the small project is 15.
Now, let’s run the numbers.
Multiply these simple numbers by the number of projects the company manages in that same way. Then think how this scenario would scale when applied to larger, more complex projects.
Questions arise: How often are projects underestimated and resources over-utilized? What organic revenue-generating opportunities are missed when scenarios like this happen? What new business opportunities suffer from inadequate resources because those resources have been over-committed to other projects?
The simple scenario above indicates that the company needs an assessment of process breakdowns to determine how to realign processes and systems to eliminate it from happening again. A realigned process put in place with system tracking and monitoring justify the specific tools a business needs to use to avoid unintentional project errors and provide the reporting necessary for informed senior management decision making.
Oftentimes, an outside consultant is needed to assess the problem and analyze the information, if only because the consultant comes to the problem with an open mind and without preconceived ideas. The consultant’s evaluation will be fair and the recommendations unbiased, without assigning blame. The new processes will consider the true command of resources for a routine project and then establish a feasible and efficient workflow to deliver the service or product. The company can then adjust its prices in accordance with the new process and use that new process as a guideline for estimating future project costs and fees.
I’m Jayne Heggen and this is what I do.