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SERIES ARTICLE

Project Business Management 3

By Oliver F. Lehmann

Munich, Germany

 


 

“Do what you do so well that they will want to see it again and bring their friends.”   
– Walt Disney

 

Summary

A traditional approach to resolve monetary problems in customer projects is “Cost engineering”. This article describes an alternative solution named “Benefit engineering”, which can be more effective and leaves a customer with increased happiness, while the contractor’s problems are resolved.

The Boon and Bane of Cost Engineering

As a trainer and writer, the author of this article has a focus on project business management (PBM), the knowledge area in project management that is dealing with networks of customers, contractors and lots of other players. These organizations and individuals are forming project supply networks (PSNs) that can become very large, complex, intransparent, and very dynamic in the organizations that constitute them and the interfaces between them.

In these discussions, the author is often confronted with questions from project managers working for contractor organizations on profitability of customer projects. It seems to people that profitability and a happy customer are mutually exclusive. A project manager in a customer project has to invest into the contract project to deliver to the customer what is desired and needed, thus impacting the satisfaction and possibly the delight of the customer. This would reduce the profit from the project. Increasing the profit in turn would improve profitability but comes with the price of a frustrated customer and possible conflicts that may finally need to be sorted out at court.

A second question, which follows the first question is commonly the issue of liquidity. As a contractor for a customer, a company often has to outlay money, work and deliverables for the customer. This will be later paid back by the customer, but depending on the billing cycles of the contractor and the payment terms and discipline of the customer, may take some weeks. During that time, the contractor’s business with the customer runs into a temporary loss situation, which can strain the company’s credit line, particularly if the company has several customer projects that require that the contractor is financing the customers’ projects in advance. Project outlays in addition come with the risk that the customer may go bankrupt and the contractor will not get them reimbursed, because the deliverables paid with them may become part of the insolvency estate or lose value when the customer project has been terminated.

Profitability and liquidity seem to oppose customer happiness. A focus on the monetary side of the project negatively influences the customer’s perception of the performance of the contractor. It gives the customer the impression that the contractor is greedy, and that this greed is diminishing the success that the customer will have from the project.

Investing in the project to accelerate work, meet deadlines independent of customer payments, and to increase the value of the deliverables for the customer reduces the margin from the project, at least when the additional costs are born by the contractor.

Figure 1 shows how a company that gets its income from customer projects calculates is profitability from

  • the revenues from the individual projects
  • the costs that are incurred by these projects
  • and by the general and administration (G&A) costs that cannot be assigned to individual projects but are incurred as overheads by the entire organization to be able to perform this project portfolio

Figure 1: Marginal costing model for a project contractor with a portfolio of 6 projects

For project contractors, the risk is high that the profit from the projects may be impacted by reduced revenues, increasing costs for the projects or increasing costs for G&A. Project business management deals with high risk business, and the causes of such disappointments in the company’s main ledger are numerous. Problems with project costs may come from poor cost estimating, unexpected rework, poor subcontracting or other incidents that drive the costs of a customer project. Revenue reductions may stem from incomplete deliverables, at least in the customer’s perception, from delayed payments that move the income into the next business year, from withheld payments by dissatisfied customers, or from projects that are terminated before the full scope has been delivered and invoiced.

More…

To read entire article (with footnotes and references), click here

 

Editor’s note: This is the third in a series of articles by Oliver Lehmann, author of the book “Situational Project Management: The Dynamics of Success and Failure” (ISBN 9781498722612), published by Auerbach / Taylor & Francis in 2016. See author profile below.



About the Author


Oliver F. Lehmann

Munich, Germany

 

 

 Oliver F. Lehmann, MSc., PMP, is a project management author, consultant, speaker and teacher. He studied Linguistics, Literature and History at the University of Stuttgart and Project Management at the University of Liverpool, UK, where he holds a Master of Science Degree. Oliver has trained thousands of project managers in Europe, USA and Asia in methodological project management with a focus on certification preparation. In addition, he is a visiting lecturer at the Technical University of Munich

He has been a member and volunteer at PMI, the Project Management Institute, since 1998, and serves currently as the President of the PMI Southern Germany Chapter. Between 2004 and 2006, he contributed to PMI’s PM Network magazine, for which he provided a monthly editorial on page 1 called “Launch”, analyzing troubled projects around the world.

Oliver believes in three driving forces for personal improvement in project management: formal learning, experience and observations. He resides in Munich, Bavaria, Germany and can be contacted at [email protected]

Oliver Lehmann is the author of the book “Situational Project Management: The Dynamics of Success and Failure” (ISBN 9781498722612), published by Auerbach / Taylor & Francis in 2016.

To view other works by Oliver Lehmann, visit his author showcase in the PM World Library at https://pmworldlibrary.net/authors/oliver-f-lehmann/