How Project Management Can Improve Your Profitability

How Project Management Can
Improve Your Profitability
Ed Kozak

organization aren’t necessarily safe from
It seems counter-intuitive to claim to the ill effects of cost overrun. Certain
contract types will not allow unforeseen
increase profitability by adding more
oversight to a project and project and unplanned costs to be passed on to
management would definitely qualify as the client, and while other types will, if
oversight. After all, the money for that the client thinks you’ve mismanaged the
oversight has to come from somewhere. project they might refuse to cover any
If you’re working on a project for your additional costs or there could be
client you’re able to pass through that grounds for a lawsuit. You also run the
cost to the client. However, some risk of alienating the client for what
executives might feel that the added cost might be perceived as poor client
of project management oversight will service.
price proposals out of competition and
so they fail to include it or include an
insufficient budget for it. This can be Project Management Yields Better
viewed even more negatively if the Profits By Creating Better Cost
project is being funded internally from Estimates
within the company. The money for
project management comes directly from Let’s start at the beginning. How are
the capital expenditures budget and so budget estimates made at your
some executives would rather forego this organization? Is there a formal process
“extra” cost in order to invest that in place that all estimators must follow
money elsewhere. What isn’t being that includes documenting the manner in
considered is the fact that lack of project which the estimates were obtained or are
management oversight will steal money they allowed to estimate in whichever
from an organization—money for costs way suits them? How confident are the
that hadn’t been factored in—in the form estimators in their estimates? How
of a cost overrun. Executives must also confident are you in their estimates? Do
consider the reduction in ROI, some estimators arbitrarily add in more
insufficient delivery of benefits, money “just in case”? That’s a dead
unattained competitive strengths, and giveaway that they’re not very confident
missed windows of opportunity that will in their estimates. This doesn’t mean
certainly occur as well. that some money shouldn’t be set aside
in a contingency fund but there is a
Those that are working on projects formal way to determine how much is
funded by a client external to your really needed and who controls the

release of those funds. This is discussed to perform all of the work for a set price,
further in the text under risk planning. no matter what. Let’s assume that the
contract allows for economic price
The profitability of the organization adjustments so that the buyer still would
begins with the project budget estimates be required to pay the difference if the
themselves. If an organization has to price of material has gone up since its
make a choice to fund only one or two price was listed in the contract and the
projects out of a number of potential vendor is protected. The vendor is not
projects one of the selection criteria will protected if the estimate for the work
be a financial metric—NPV, IRR, turns out to be less than what the actual
MIRR, or something else. What does work will. That difference between the
this mean then if the budget estimate for estimate cost of labor and the actual cost
a project is incorrect? Whatever of labor will come directly from the
financial metric is being used is vendor’s profit. When there isn’t
meaningless. If the estimate is much enough profit in the contract to cover the
lower than what is should be—either difference the vendor will have to pay
because the estimator pulled some for any remaining costs out of the
numbers out of the air, took a short cut organization’s profits made elsewhere.
and didn’t consider a number of tasks Luckily, not every contract type is so
that needed to be done on the project, or risky for vendors. Under a cost-
didn’t correctly factor in how long some reimbursable contract type the vendor is
tasks would take—the project not obligated to finish the work once the
investment will be artificially lower. money has run out and so there is some
The result is that the project will have a protection if the estimate falls short of
higher value for NPV, IRR, or MIRR the actual costs. Under this contract type
than it really should and it might be the client will have to decide whether to
selected over projects that actually give a provide additional funding for the
better ROI. If the budget estimate is project or to stop work but the vendor
much higher than what it should be— will not have to tap into profits made
typical of projects whose estimates were thus far. The issue then really becomes
“padded”, that is when the estimator one of the perception of client service.
arbitrarily adds money to the estimate In this day and age where relationships
“just in case”, then required investment are built on trust many clients may feel
for the project will be higher, the that the adjustment in contract price
financial metrics for that project will be constitutes a violation of that trust and
lower than they should, and a different that certainly would sour the chances of
and less profitable project might be getting future work from them. There’s
selected instead. also a chance that your organization
might receive some negative word-of-
What if the project isn’t being funded mouth from the client’s staff,
internally but rather, by a client? Can jeopardizing other future relationships.
poor estimating, stemming from poor or
no project management, hurt your
profitability? The answer, of course, is Project Management Yields Better
yes. If you’re working under a firm Profits By Creating Better Schedule
fixed-price contract then you’ve agreed Estimates
How Project Management Can Improve Your Profitability 2
© Successful Projects For Leaders. No portion of this document may be copied or distributed without
the expressed written consent of the author.

Inaccurate time estimates are just as
costly as inaccurate cost estimates.
What is the result of an inaccurate time Project Management Yields Better
estimate for an internally-funded Profits By Mandating Cost And Time
project? If a time estimate is too short Management And Control
then Management doesn’t have a clear
picture of what the true project costs will Assuming the time and cost estimates
be. That is, if a project runs 25% longer from your organization’s project
because the time to complete certain estimators are correct, only the constant
tasks was estimated incorrectly that’s vigilance that is required by proper
25% more actual time for staff to be project management will help keep the
working on the project, and hence an project on budget and on schedule. In
increase in project costs. Every increase order to facilitate exceptional monitoring
in project cost from the original estimate and control, cost and time estimates
is a reduction in ROI and a reduction in must be broken on a month-by-month
the profitability of the organization. basis and not only on a task-by-task
What happens if the outcome of the basis for efficient comparisons of
project is a rollout of some sort that will estimated planned expenditures against
enhance competitiveness or overall actual expenditures. Regular cost and
market attractiveness? A delay in either schedule monitoring is espoused by
will delay sales revenue and impact project management governing
profitability. If the project is leading to organizations in order to catch the
the development of a product any delay project when it has varied slightly from
getting that product to market will be cost and/or schedule targets. This allows
that much longer for the organization to some type of corrective action to be
generate revenues from that product. taken. From my experience the
Worse still is the erosion of any first- optimum frequency for monitoring
mover advantage that the organization should be monthly (assuming a project is
might be able to capitalize on and we’re a minimum of three months in duration,
all aware of the respective impact to else bi-weekly if cost reports can be
profitability from each of these. generated that often). Monitoring cost
and schedule less frequently than
What if the project is being funded by an monthly can allow the project to veer so
external client? The same contract much off cost and/or schedule targets
issues apply here as mentioned that corrective action might not be able
previously for cost estimating. On a to be taken or, if it can, it might cost so
fixed-price type of contract, your much to perform it erodes the benefit of
organization, as the vendor, will have to any corrective action. Monitoring cost
pay for that extra time out of profits. On and schedule more frequently than
a cost-reimbursable type of contract, the monthly (for projects greater than 3
client will need to make the decision to months in duration) doesn’t offer any
pay for your bad estimate or stop work marginal advantage and will do nothing
and accept whatever partially-completed but to use up more of the project budget
work was done. Either way, the client for oversight than necessary. The
will not be happy. important thing to note is that cost and

schedule monitoring is necessary in testing the product after it’s been made
order to help keep the project on its cost and making changes to it until it
and schedule targets. This, in turn, helps performs as required. Fiscal
the organization hit its profitability responsibility is lacking in that
targets which help the organization assumption. How far back in the chain
achieve its strategic goals. of tasks must the team go in order to
make the necessary corrections? How
many tasks that already have been
Project Management Yields Better performed must be then repeated as a
Profits With Good Quality result? Not one of those repeated and
Management completely wasteful tasks were ever
factored into the original budget of the
The two factors of a project that will project or in the profit, both of which
quickly erode profits are the reworking suffer as a result. If no quality assurance
of errors and an endless stream of things is conducted throughout this rework
going wrong. The latter is discussed a process it is very likely that more rework
little further on under Risk Management might be needed once the modified
but the former is addressed here. product or service has been re-tested.
Rework is a quality issue and arises from This wasteful cycle can continue through
three main things—a lack of managing several iterations, each time draining
quality into the product (or service); a profits more and more.
lack on the project team’s part to
completely identify what the end-users’ Project management also addresses
requirements and needs really are (this products or services missing their
might be flowed down to the team by intended marks as a result of
Management or some technical people misunderstandings between the project
might feel they know better than the user team and the end-users. Proper project
what the end results should be); or a management follows a set of guidelines
mismatch between the finished product that ensure that this doesn’t occur. It
and the end-user requirements (this can also protects the project team against any
result from a misunderstanding between moving targets or changes in acceptance
the end-users and your team of what the criteria on the part of the client.
requirements are from the users
changing their requirements). Project
management addresses and controls all Project Management Yields Better
of these. From a quality standpoint, Profits By Making Your Teams Be
project management requires that a Proactive In Identifying Threats and
quality plan be created before the project Opportunities
even begins, discussing the process by
which quality will be managed While it is true that no one is in
throughout the project. During possession of a crystal ball and can
execution that document serves as a predict all of the negative events that
roadmap to follow and is used to might occur on a project, the risk
monitor quality throughout the process. management aspect of project
This is the antithesis of assuming that management brings the team as close to
quality can be controlled merely by that as one can get. By performing these

activities, the project team isn’t caught the organization, thereby affording the
off-guard by threats that occur and time organization even more free cash as the
and labor aren’t taken away from critical project moves along.
path activities. If the team had to stop Will every possible negative occurrence
planned activities in order to put out be thought of in advance? Certainly not.
fires all the time the project schedule For those “unknown-unknowns”, a
would slip, the budget would be overrun, second contingency fund, called a
quality could suffer, benefits might not Management fund, can be put in place.
be realized, and windows of opportunity However, the money in that fund is
might be missed—all things that have a restricted and can only be allocated for
direct impact on profitability, as use by Management. It is discretionary
previously discussed. and affords Management the decision to
continue with the project or to cancel it.
There’s an added benefit to this process;
the project team can also identify
opportunities that might enhance the Project Management Yields Better
success of the project, shorten its Profits By Creating Better Contract
duration, improve benefits recognized, Awareness
and/or reduce costs—all things that will
have a positive impact on profitability. This is a point that should not be
understated for those companies doing
When one uses risk management the business for clients on contract or ones
price for the project doesn’t have to be that have contractors do work for them
artificially inflated, or padded, to cover —the contracting process itself presents
some unknown occurrence since an five inherent risks that may affect any
organization can create a task-by-task contract. These are Lack of buyer
contingency account that the project understanding of contractual
manager would have access to. This requirements; Shortcomings of human
process solves two things. First, an language and differing interpretations;
arbitrarily large amount of money isn’t Behavior of the parties; Haste; and
stored for a “what-if” scenario since Deception. An organization’s project
there is a time-tested method to leaders must be aware of these in order
determine how much money is needed, to manage the risks they pose. In
allowing cash to be freed up that can be addition, the contract type that is chosen
invested by the organization on further (or dictated by the client) can impose its
profitable things. Second, it prohibits own risk as well. Certain contract types
the tendency for the work to expand to are riskier for the vendor while others
equal the amount of money that’s are riskier for the client; knowledge of
available or for the project manager to this is a requirement of certified project
unilaterally use that excess money on managers. That knowledge is valuable
some other task that is going over when making a bid/no-bid decision to
budget, rather than performing determine whether or not to write a
corrective action on it. The latter is proposal in response to an RFP,
achieved by ensuring that any left over estimating the price of the work to be
contingency money set aside for a done, and overseeing the work
specific is immediately returned back to encompassed by the contract itself—all

variables that affect the overall project or the quality must also be
profitability of an organization. decreased. This is intuitively obvious.
Contractual terms and conditions (Ts & The price of the proposal reflects the
Cs) can also affect price, risk, schedule, cost of the work to be done (marked up
payments, the overall perception of by overhead and fee). If the price is
value the vendor’s organization has to negotiated downwards and the amount
offer to the client, and thus overall of work hasn’t changed it will still cost
profitability to the organization. The the same to perform that work,
person with the overall responsibility for regardless of the price tag. The only two
the proposal needs to be aware of them things that can change are the overhead
to understand what Ts & Cs from the multiple and the fee (pure profit). If you
other organization are being agreed to recover less of a pro rata share toward
(or must be negotiated). That same indirect costs, where will the remainder
person also needs to try to ensure that of that money come from other than the
your own Ts & Cs are placed in the organization’s bottom line? A project
contract language to minimize your manager’s job at the negotiating table is
organization’s exposure to risk. to assist the organization’s negotiator to
Depending on an organization’s size, determine how much the project scope
that responsibility may fall solely on the must be decreased and to identify what
project manager or it may fall on both can be decreased in order to bring the
the contract administrator and the project proposal price down to its new level.
manager. In either case, an organization Will a salesperson or contract manager
that follows a prescribed project have the intimate project knowledge or
management methodology faces less risk the wherewithal to do that if the project
than one that doesn’t. manager isn’t present?

The wrong people present at your
contract negotiations can mean the Project Management Yields Better
difference between a project being on- Profits By Enforcing Process
budget or over-budget. An experienced Improvement
project manager should always be
present when contract price is being There are certain activities that fall under
negotiated. While a project manager project management that organizations
will never be the lead negotiator or have will perform regardless of whether they
the authority to approve a contract, his or have embraced an enterprise-wide
her presence can determine whether the project management methodology.
project will be profitable or not. A Negotiating, estimating, and task
doctrine learned by professionally- execution are examples of such. One
educated project managers is that the tenet of formalized project management
price, scope (time), and quality of a is that of Lessons Learned. Every aspect
properly estimated proposal are at of a project—from the initial contract
equilibrium. One of those variables negotiations to estimation to project
cannot be adjusted without affecting at close-out offers the project manager, the
least one of the remaining two. That is, project team, and the organization an
when the price of a proposed project is opportunity for improvement. Company
negotiated downwards, the scope of the CEOs and CFOs are under increased

pressure to increase performance and
deliver enterprise-wide profit
improvement and cost-reduction is a
constant focus. Project management About the Author
budgets should never be arbitrarily cut
but project management activities can Ed Kozak, M.S., M.B.A., PMP is the
and should be streamlined, thereby President and CEO of Successful
costing less. The estimating process can Projects For Leaders, international
improve, the planning and execution of experts in project management process
projects can improve, and the formation improvement. The staff of Successful
and interactions of teams can be Projects For Leaders work with
improved. By following a systematic companies along three main points of
process the organization and its people focus. First, they help companies
can follow a path of continuous improve their profitability by cutting
improvement, generating cost reductions wasteful project costs (upwards to 50%
and increases to profitability. or more) and improve their overall
management of projects in order to
In summary, there has been a tendency reduce risk, schedule slippage, and
among organizations to forego any unnecessary spending on product
project management expenditures or to rework. As a result their clients are able
severely constrain the amount of money to exert more control over their projects;
allocated towards project management. improve target schedule performance;
This has been done with the feeling that monitor and control cost performance
project management is nothing more better; increase their success at hitting
than an unnecessary burden on the budget estimates; improve quality and
project budget and the project team and satisfaction; and recognize the
an unnecessary expense that lessens substantial financial benefits that come
profits. Hopefully, this paper has along with that.
demonstrated that this is quite the
contrary. Experience shows that, time Second, Successful Projects For Leaders
and time again when Management is hired as project turnaround experts
chooses not to enforce any formal, and is brought in on critical projects that
prescribed project management are in the midst of schedule, budget,
methodology, organizations end up and/or quality issues or projects that are
being less profitable than if they had. having continual setbacks. They analyze
The lack of project control, the lack of the problems, set a new budget and
adequate planning, and the lack of schedule, and work with the incumbent
skilled estimating alone can end up project management team to bring them
costing companies 1 1/2 to 2 times more to completion.
than their original budgets. The
secondary costs—missed windows of A third benefit that Successful Projects
opportunity, drains on resources, For Leaders offers is their availability to
unattained competitive strengths, losses be out-sourced by Organizations to serve
of clients, and sub-optimal benefits can as the Chief Projects Officer. In this
be even more costly and detrimental to role, Successful Projects For Leaders
the organization. only develops standards and practices

directed at the effective execution of
projects and the attainment of schedule,
cost, scope, and quality objectives, but
also communicates enterprise-level
objectives to the respective project
groups in the most-appropriate way for
them to follow and communicates
project information to Management.
This overcomes the problem common to
many organizations that no connection
between Operations and project groups
exists and no structured, consistent, and
meaningful flow of information between
these two groups occurs, allowing
Management to determine if efforts are
efficient and effective, if projects are
still the best ones to support strategic
objectives, whether there are
performance issues associated with
meeting objectives.

Ed is an accomplished professional with
has over twenty-three years experience
as a consultant, manager, executive,
facilitator, and instructor that includes
project/program manager experience in
the private and Government sectors
managing multi-year, multi-million
dollar programs for his clients in fields
such as IT, healthcare, research,
development, and manufacturing. He
brings his expertise to management
teams in strategic planning, process re-
engineering, program management
offices, and project management and is a
frequent conference speaker.


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