Project Profitability Analysis
Professional services are normally organized around "projects", or "engagements". Projects are the primary unit of work, similar to a product except for being somewhat different each time it is delivered. As product profitability is vital to product businesses, project profitability is vital to service businesses like engineering and architecture. Or at least it should be.
Engineers and architects today routinely prepare project cost, revenue and profit reports as part of their project management information. They try to keep progress in line with actual+projected costs as a way to ensure that the project will come in on budget and will therefore deliver the required profit. Hardly any project managers escape this important but dreary chore.
What very few firms do, however, is carry out any systematic analysis of their projects and profitability. What types of projects are most profitable and which tend to lose money? Are certain services provided by the firm losing money? Are certain types of clients routinely associated with losses on projects? Answers to these kinds of questions can lead to developing ways to improve the firm's overall profitability by making adjustments to projects that typically lose money.
Most large firms lose money on small projects. Some have responded by accepting small projects only as a way to get access to a new client or to gain experience in a new area of technology. Sometimes small projects are not avoidable, such as when they come from a good client, but many can be bypassed if there are clear rules.
Some clients are consistently unprofitable because they request many changes, or because they do not know well enough what they need, or because they create a very heavy administrative burden. Firms should be willing to "fire" a bad client if the firm cannot find a way to make that client profitable.
Nearly every firm has one or two weak specialties that got started because a client asked and not because the firm made any real commitment. Some firms have dozens of narrow service areas in which their expertise and experience is limited. Such specialties are chronic money pits and should generally be avoided. The alternative is to make the commitment of resources needed to establish a strong capability in the specialty, which is often a major strategic decision.
Our Services
We can generate a project profitability analysis, in most cases using data already available within your project reporting system. We normally classify projects by client type, by client (for large clients), by project type, by services delivered in the project, by geographical location, by project duration, by project manager, and by project start date (seasonal impacts). We also like to ask the project manager about unusual aspects of the project that might have contributed to the profit results. The basic analysis task can almost always be carried out internally but taking the next step is where we add most of our value — figuring out what the analysis means and what the firm might be able to do about issues it raises.
If you have questions or would like to discuss a project profitability analysis for your organization, please contact us.