A Tale of Two Conversations: Managing Fixed Price Projects

Author: Categories: Professional Services, Project Management

How to manage fixed price projectsLast week, our head of business development, Barry Franklin, had an interesting conversation with a prospect who was interested in learning more about Projector. That conversation went something like this:

Prospect: Can you forecast revenue accurately in Projector? Because if you can’t, this will probably be a short conversation.
Barry: Yes, no problem.
Prospect: What about for fixed price projects?
Barry: Absolutely.
Prospect: What if the project is already underway?
Barry: That’s not a problem.
Prospect: (Pause) Really?
Barry: Definitely. Let me explain…

A few years ago, I had a slightly different, but related conversation with the CFO at an organization that had just started using Projector. That conversation went something like this:

CFO: We have to be able to perform trial rev recs in bulk at the end of each week. How easy is this to do in Projector?
Me: Can you tell me a little bit about why you need to do this?
CFO: Well, it’s the only way to see where we are on fixed price projects. (Pause) Isn’t it?
Me: Not really. Let me explain…

We talk with all kinds of prospects and work with all kinds of clients. Some are just starting up their professional services firms and may not know the term “Professional Services Automation” (PSA). Others have decades of experience running services firms, understand the complexities of managing long-running fixed price projects, and have been burned by other PSAs or clumsy business processes in the past.

The two people with whom we had these conversations were obviously among the latter category…savvy business people who found themselves trapped with less than capable systems. Like all savvy business people, they didn’t let simple product shortcomings stop them, but rather built business processes to work around those shortcomings. Like all savvy business people, they were also in search of better ways to do things—ways that provided a truer picture of reality and that didn’t require clumsy workarounds.

So, how can Projector help? Let me explain…

The Thing About Fixed Price Projects

Managing fixed price projects is a challenge in many systems. No matter how much or how little effort needs to be invested to deliver the project, the client gets billed the same amount. Because of this, fixed price projects can represent an opportunity or a risk to the organization, depending on how well the work is scoped and executed.

Most organizations that run longer fixed price projects need to run through a process called revenue recognition, usually on a monthly basis. This allows the firm to recognize revenue in proportion to how complete the project is in a manner that is justifiable to its board, its shareholders, its auditors, and the IRS. Recognize revenue too slowly, and you get accused of sandbagging. Recognize revenue too aggressively, and you go to jail.

The thing about fixed price projects is that there’s a bit of a complex interplay between this process of revenue recognition and having sufficient visibility to make sure they’re not going off the rails. That visibility needs to be accurate. It needs to be easily executable. It needs to be real-time.

Most systems can achieve some of these goals, but many cannot achieve all of them. In many systems, once the organization decides what revenue should be recognized through, say, the end of the year, the system fixes the hourly rates for the remaining work through the end of the project such that the contract’s value is respected.

That process actually works well, and provides an accurate view of the project, but only for that instant in time. Fast forward a week, and what the system now tells you may deviate from reality, sometimes by a little, sometimes by a lot. Hours reported in the last week may differ from hours that were planned. Resources may have gotten swapped in and out. Schedules may have changed or tasks reassigned. Contracts may even have been renegotiated with the client or delivery dates replanned. All of these make that picture that was spot-on accurate the second after the last rev rec either slightly or significantly inaccurate just a week later.

In talking with a host of experienced, savvy professional services managers, we’ve seen a host of workarounds. Spreadsheets or whiteboards maintained outside the PSA that tell the “true” mid-month revenue or profitability story. The weekly Gallup poll of project managers who manually compute and submit revenue and labor forecasts outside the PSA. The periodic “trial” rev rec to true up the system with reality. Lots of approaches, none of them particularly accurate, easy, or real-time.

Hence, all the questions.

Managing Fixed Price Projects in Projector

Projector’s approach to ensuring accurate, real-time visibility into fixed-price projects is about as easy as it gets for you: do nothing. Or, more accurately, let Projector do the hard work and the annoying, meticulous calculations for you. After all, that’s what computers are good at.

What Projector is actually doing behind the scenes is something we rather inelegantly call “Dynamic Revenue Allocation” or DRA for short. Conceptually, Projector understands what the contractual terms are that you negotiated with your client. It understands what labor you’ve expended to date and what you’re projecting to have to invest going forward. It knows when you last ran rev rec, how much you’ve recognized to date, and how much revenue you’re projecting. Projector has an idea of the rules you’ve agreed with your auditors around how to proportionally allocate that revenue or if you’ve pre-established revenue schedules. In short, it has a pretty good idea how you’ve modeled this contract and what you’re doing to deliver it.

The cool part about DRA is that it’s dynamic. Rather than taking a frozen-in-time snapshot of the state of the state as of the last rev rec run, DRA contunually re-evaluates the world whenever you ask it a question…whether it’s in a dashboard, on a project, or in a report. Think of it as a “trial” rev rec that you don’t have to do yourself, and which Projector does for you every time you ask it a question. There’s a lot of stuff going on behind the scenes that allows this calculation to happen fast, but it allows Projector to achieve the goals of accurate, easy, and real-time. And it just works.

There’s More There, There

It’s taken over a thousand words for me to narrate the story to you about how Projector manages fixed price projects. Sorry, but there are just some things that can’t be condensed into a nice, tight soundbyte. Some of these design decisions that we’ve made, however, can mean the difference between a system that actually works for you, rather than one that you have to work around. They can mean the difference between thinking about fixed price projects as an opportunity instead of as a risk. These design decisions can mean the difference between thriving rather than just hanging on.

There is a myriad of other similar, often subtle decisions that we’ve made when designing Projector that allow it to work for your business—naturally, accurately, and in real-time. Ask our team about lumpy scheduling. Ask them about resource history. Ask them about false positive overallocation warnings. Ask them about hierarchical rate inheritance. Ask them about decoupling the messy worlds of project management and resource scheduling. Ask them about project accounting subledgers.

We love talking with experienced, savvy business people and with users who have been burned by other PSAs before. We’re happy fielding the tough questions because more often than not, we have great answers. Not always, but most of the time. And when we don’t, we start thinking hard about how we can improve Projector.

Let me explain…

2 Comments on “A Tale of Two Conversations: Managing Fixed Price Projects”

  1. Hi!

    You explained a lot about how Projector can manage revenue recognition on accrual basis as un-billed revenue which is easy to manage through other time tracking tools and even through spreadsheets.

    I was looking for some words about how Projector takes into consideration and calculates the “Staff Cost” incurred on a fixed price or even a time and materials contract. As I can only see the charge-out of expenses incurred like meals or travel expenses in your Project Accounting Module (this feature is also available in QB) but there is no demonstration of:

    1) does it charge the staff cost based on no. of hours worked by each of the professional team member?
    2) if yes, how it calculates the per hour cost rate of each professional member to the Company?
    3) how does it calculate the absorption of Company overheads including the cost of admin staff and other G&A overheads to either the Direct Staff’s Cost rate or on project basis?

    1. Hi Sarfraz,

      These are excellent questions. Projector does indeed manage the cost of labor against both fixed price and time and materials projects so that organizations can get a full understanding of project (and resource) profitability. The system has a detailed labor rate inheritance structure that allows organizations to model labor rates at different levels of granularity, from blended rates by generalized job title/experience level to specific rates per individual and per project.

      Further, team members can be modeled in Projector as being paid on a salaried or hourly basis, and Projector can make the appropriate calculations to allocate those labor costs across the work that they do. Finally, Projector allows for profitability analysis inclusive of billable projects and/or billable staff only or inclusive of billable plus non-billable/admin activities, effectively helping organizations understand margins inclusive of overhead as necessary.

      If you’re interested in seeing how these capabilities translate into bottom-line performance, take a look at our interactive performance scorecard that compares organizations that use Projector as their professional services automation tool against ones that use other PSA software.

      Happy to talk in more depth about these and any other questions you may have. Just let us know how we can help out at: https://www.projectorpsa.com/about/contact-us

      Steve Chong
      COO and Product Manager
      Projector PSA

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