Project profitability: Overview and key factors

Profitability is best described as the firm’s ability to earn financial profit/gain from a specific project. 

It depends on the cost-income ratio and is a measure of project operational efficiency. The net profit, technically, is the revenue business ends with after paying all the direct expenses such as production costs, and other expenses related to the operational and business activities.

Estimation is a major method to determine project profitability. The key project parameters like cost, performance and time etc. are measured over time to determine the benefits project may incur in future. Calculating the cost-income ratio provides an understanding that operating expenses shouldn’t exceed operating incomes of the project to ensure smooth running. The project expenses are required to be kept in check in order to maintain healthy project profitability.

Also, operational efficiency is closely linked to profitability. More efficient projects generate more profits and hence operate with higher profitability. An efficient project runs with lower operational expenses and consumption of resources but produces desired results.

The success of a project is the ultimate goal of any company but more for the ones where the outturn account depends on projects, For example- Programming, design, construction, and consultancy companies etc. Any company that undertakes projects for its clients should consider the profitability of each project as the most significant goal.

The following are the major steps involved in the process of Project Profitability:

  • Defining the scope

When it comes to scope, there arises this big question about what should be included or excluded. Clients tend to consider a broader scope than project leaders which often leads to a difference in perception and conflicts affecting project profitability eventually.

Defining the scope of a project should be considered utmost important as it’s the first ladder and a key factor in project profitability.

  • Estimation of required resources

This is also a crucial step to ensure a proper planning. It involves breaking down the tasks involved and producing a bottom-up estimation to confirm that the overall estimation is in line with the plan and action that is to be put in place. Sometimes, there isn’t sufficient time to decide the commercial offer for the client which can lead to hurried and incorrect estimations based on past data. To avoid going wrong, the estimate should include as much detail as possible on the profiles needed for each activity. Also, it should be based on historical data as well as the current scenario.

  • Detailed Planning

The break-down of tasks and their estimation should be considered with utmost importance for the careful planning of the future tasks. It is needed to avoid any additional major project costs which may arise during a single or multiple stages of project implementation.

Focus on keeping a realistic expectation about the delivery date so that client doesn’t expect anything at an unreasonable level. It will help you save any situation which may add up to the delivery cost.

  • Right workforce

The project team is the vital factor in turning project estimates and planning to reality. Maintaining quality and meeting client expectations should be the goal. Cutting down on labor force can turn out to be more expensive in the long run. Employing under-talented people with no relevant experience or little motivation may save you few bucks at the moment but will eventually become a cost for the company since they will either take too long to complete a task or screw up the quality altogether. It will also impact client credibility immensely.

High-performing teams are capable of significantly increasing project profitability.

  • Risk Identification

The risk is inevitable. Every project is in risk radar by default which requires analyzing and assessing. Risks with small or negligible potential impact must be taken with a pinch of salt and not spend a lot of money in avoiding or mitigating such risks. Those risks with the greatest exposure, i.e. those whose impact and likelihood are average or high, should be managed and may require specific actions to guarantee project profitability.

It would be wise to establish a safety margin in the cost to be paid by the client depending on the degree risk posed by the project.

  • Analyze profitability at the beginning

Project profitability should be analyzed much before the project even begins to ensure proper onboarding of client and also with the resources and hope and client contracts other services in the future. At any event, this fact and the level of profitability to be expected from the project should be ascertained.

  • Foster clear and open communication

Communication plays an important role in project profitability. Open, clear and timely communication within a team helps in identifying issues and challenges at the right time. Conflicts, misunderstandings and poorly communicated information could ruin a project altogether and effective communication can avoid that situation.

Effective communication with client enables the right sync of expectations and also helps in identifying stumbling block that may arise.

  • Efficient recording and managing Data

We all know how important “Data” is for the project management. Feelings and anecdotes in management may provide a comfortable progress and advancement, but only objective and recorded data will be able to provide the accurate information needed for efficient management.

It is essential for the team to understand the importance of tracking information and undertaking data entry on a regular basis.

  • Track profitability at all times

A proper tracking of project profitability is the most important aspect and should not be left until the end, once the project is executed. Tracking should be undertaken constantly, regularly monitoring project status to date and taking any necessary steps when unforeseen deviations or circumstances are identified.

If deviations are identified timely and corrective actions are at a place, maximum profitability can be ensured.

  • Project deviations

Deviations, small or big, are to be considered as a caution of something not going right. Even though small deviations don’t require a lot of your productive time, they shouldn’t be completely ignored. These deviations are often the symptom of a larger problem, meaning it is important to project them into the future and gain a clear picture of the situation.

The Earned Value technique is one of the useful tools for making project status projections.

  • Taking a lesson from past mistakes

If the relevant information and data regarding the project are recorded properly, it becomes easier to analyze what went wrong or what factors made certain projects achieve greater profitability than others. One should learn from both the mistakes and successes since mistakes make you cautious and improve and successes let you stay motivated and stick to the goal.

  • Using the right tools and equipment

Any project is futile if the right tools and technologies are not used in the execution. It is important to use the right tools (without generating a high cost for the project) that ensures swift and efficient project management, help estimate and plan, record and analyze data and allow the team flexibility to work on complex situations and from remote locations.

 

Summary

Creating a culture of project profitability is a top priority for engineering and consulting firms. Project-based ERP systems provide the framework to keep all employees — project managers, resource planners, and financial managers — focused on the same goals and the right metrics to drive profitability and cultural change. Optimized for the way professional services firms work, project-based ERP gives project managers one place to control all aspects of their projects from planning and capture to invoicing and reporting. Using a system specifically designed for the way they work gives project managers the ability to focus on the bigger picture of profitability, cash flow, and resource management while continuing to do innovative work.

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