Why You Need to Show Your PMs the Numbers

Posted on: 07/31/17

Written by: Stephen C. Evans

Topics: Project Management

PMs typically understand the financial aspects of their own projects, but do not understand firm operations and financial management.

This is a fairly common scenario:

(1) A firm has just completed the first quarter of the fiscal year. (2) A project manager financial performance report shows highly profitable projects on a job-to-date basis and also on an annual basis for the last fiscal year. (3) The firm exceeded business planning goals for earned revenue and profitability for the last fiscal year with bonus distributions for members of the firm.

Sounds pretty good so far. Let’s keep going.

(4) Financial performance for the firm’s first quarter is not good, and year-to-date project profitability is much lower than the last fiscal year. (5) The backlog is troubling, as projected revenue falls off dramatically by the end of the second quarter of this fiscal year. (6) Many ongoing projects have a ways to go, are in Design Development or Construction Documents, and need to be staffed appropriately to complete the jobs under contract. (7) The operations leadership of the firm analyzes the current financial metrics and determines significant staff reductions are necessary.

The firm’s project managers position themselves as follows:

What’s the problem? Our job-to-date profitability is outstanding!
We need the staff to meet our contract obligations and quality expectations of our documents.
Our projects will be highly profitable upon completion.

Whoops! Things don’t seem to be lining up. What should the firm do now? The firm leaders should ask several questions:

Is there a Director of Operations and if so, is this person awake?
What is the firm’s standard process for project work plans, recognizing revenue, and staffing projects?
Does accountability for project profitability rest with the Principal-in-Charge, Project Manager, or project team?
When revenue is recognized, who evaluates the reported percent complete?

Any of these questions, when explored honestly, will generate changes, improvement in process, and address the scenario above. Fundamental to this, and a root cause for ending up in these shoes, is an important aspect of a firm’s project management culture. Project managers are always “project-centric.” This is not necessarily a bad thing, as long as a team approach, and there is a dedication to client service and design.

But the key question is: What is the firm’s culture and knowledge-base for everyone, including project managers with respect to business management and firm operations?

Project management does not come in a “one-size-fits-all” formula. Even practices like project work planning can be successful with various levels of detail from project to project and project manager.A successful firm is comprised of people who understand the basics of firm and project accounting and project managers who understand how their actions affect the overall health of the firm. If everyone in the firm is required to pass Accounting 101 the following is achievable:

Leadership can communicate regularly to the staff in clear and simple terms how the firm is performing financially and what the future looks like.
Project financial performance metrics can also be communicated to the staff and, most importantly, within the project teams whose goals for profitability can be a common goal with shared responsibility to the firm.
The firm can achieve excellent design and client service while running a good business practice.
Project budgets can be established that represent how the project will be executed with the necessary staff and how revenue will be recognized by phase of service.
Earned revenue can be reported accurately minimizing the possibility of “over-earning” in the early phases of the project.
Adequate fee will be available to earn during the later phases of service including Construction Documents and Contract Administration.

Managing project managers must respect the different personalities, communication skills, and professional development goals for each project manager. The Manager or Director of Operations needs to be flexible, and at the same time communicate clear expectations across the firm’s group of project managers.With this comes a fundamental aspect of project management that is missing in many firms: Project managers typically understand the financial aspects of their own projects, but typically do not understand firm operations and financial management at a higher level.

As accurate reporting for earned revenue and forecasting are the lifeblood of managing a design or engineering practice, project managers must see their roles connected to the overall practice and understand the financial measures that maintain the health of the organization.

About the Author: Stephen C. Evans, AIA is the owner of Stephen C. Evans Consulting, LLC and has over thirty years of experience as a Senior Project Manager with Populous (formerly known as the HOK Sports Facilities Group), Director of Risk Management for HOK Corporate Legal and Director of Operations for HOK’s North Central Region and Treanor Architects. Steve can be reached at steve@scevansconsulting.com or visit his website at www.scevansconsulting.com

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