Project Financial Management and financial control is an area that many companies under-emphasize. Especially those that are not familiar with project cost control management methods. To do this well requires a fusion between the Company’s Accounting organization and the Project Manager or Practice Leader for the project(s) that need to be controlled. I have seen many situations where companies have failed to effectively plan for solid control, and ended up spending far more or making far less on their project(s) than anticipated. Often this is because the company did not consider (or failed to recognize) that the project(s) would require a different control method than what they were familiar with.
An established US Law Firm with diversified practice areas will serve as our example for this post.
The firm does most of its work on a T&M (time and materials) basis. That is, the firm’s attorneys accrue hours and expenses doing work for its clients, and typically bills clients on a monthly basis for all hours and “costs” of the work expended during the prior period. This continues on a month to month basis. The firm’s Accounting Department is used to this type of billing arrangement. They know to accumulate billable hours, confirm the hours with the responsible attorneys, calculate the “fee” billings, and to aggregate client cost items to bill for reimbursable costs.
In the 2012-2013 timeframe the firm was offered a significant contract to deliver services for several hundred discrete locations on a “Milestone” payment basis. That is, each location involved from one to six different service scope items with fixed payments for completion of each discrete scope item. The milestone amounts were established at a level where it was expected to be profitable on an overall basis, though not all individual locations would be profitable by themselves. That is, the overall program was expected to be profitable, but profitability would exist at a program level, not at a discrete location level. The firm took on this contract but did not significantly change how it would process and handle billings for this program.
In this situation the firm could (and should) have established a new process or series of processes to track and manage its internal time (and internal expense) against the fixed price milestone payment amounts. The firm could (and should) have established a new way of working between the service delivery team and its Accounting department to assure on a month to month basis that all client expenses were truly being captured, validated and billed correctly and timely. Last, the firm could (and should) have evaluated the internal hours spent against each location’s milestone amounts to see how the financials were trending on a monthly basis.
Instead, the firm continued to operate largely as it did for T&M work. There was an expectation that all cost items were getting correctly captured and billed by Accounting, but with no real validation by the delivery team that this was occurring. Further, when individual locations incurred internal “fees” that exceeded the milestone payment amounts, the Accounting department initially “wrote off” the excess internal costs instead of reporting the financials in a way to determine where or if adjustments were warranted in how the services were being delivered versus the milestone amounts. Getting an accurate picture of the overall financial condition of the program at any point in time, both in terms of internal time expense and in terms of cost items was almost impossible. Accordingly, there was little to no way for this firm to head off potentially avoidable costs and time.
The result was that over an 18 month period the firm expended more monies than originally anticipated in support of the project. Many $1000’s of reimbursable cost items and potentially reimbursable items were identified only after a separate analysis was conducted outside of the Accounting department. In addition, the Accounting department had to undo a lot of its prior accounting work to treat the “program” as a program instead of as separately profitable (or non-profitable) matters.
The lesson is that firms need to recognize that different types of projects and different types of payment arrangements really need to be managed with different processes and structures. This includes potentially customizing the way that the Accounting Department supports a given team or project so that the delivery team can help to financially manage the outcome(s) most effectively. The assumption that a single way of managing, tracking, and billing for work on a period over period basis is the most profitable way of conducting business is very short sighted, and often very wrong. At the very least, new types of business and service delivery arrangements need to be analyzed before delivery commences in earnest to determine how best to manage the project financials for the best result. Reports may need to be customized, ledger accounts and tracking mechanisms may need to be established, etc., – all in the name of providing the best, real time view of financial condition of the program. In short, true “Project Cost Accounting” practices need to be implemented to manage the financials at the most relevant and practical level. If a firm does not take this approach, it risks losses (or fewer gains) than it might otherwise achieve with a more tailored financial process.
To reasonably assure that the firm is fully prepared to manage its work using one or more new constructs, the firm should look outside of itself to find the necessary expertise to establish (or help with establishment of) these customized financial processes. Too often, internal team(s) and department(s) are so used to doing things one way, or there are political or organizational issues at work, that internal staff cannot see or drive the adoption of new process(es) to suit real project (financial) needs. Further, specific knowledge or understanding of the best project control methods for a given project type may not exist anywhere in the firm. An external “hired gun” may be the best solution for this.
We are very highly experienced in project financial controls and methods. This includes many GAAP practices, but especially financial management of discrete projects and programs, and how to do it well. We also understand that setting up custom methods and processes inevitably involves multiple departments and may require organizational changes, alignments, and reporting paths. This includes setting up processes and controls for your (new) projects and/or performing financial (forensic) project cost analysis and change management for existing projects in risk.
Please call us if we can provide any assistance in this space.