Background

The project-based business reported monthly revenue based on the estimated percentage completion of each engineering project. 

The business had been very successful in winning several large projects in a new market with high technical risks.  

The value of the new projects was a magnitude higher than previous projects.  Any discrepancy in the estimated percentage completion of the new projects could therefore have a significant impact on the revenue reported by the whole business. 

The engineers nominated to run the new projects did not have a project management background and were focussed almost exclusively on the technical delivery of their project. 

Each month, they provided a percentage completion number for their project without further details. 

Problem

The new projects spanned typically over 12 to 18 months.  They were front loaded with design and analysis work in the first few months, followed by technical support to the customer during their manufacture, assembly and testing of the product. 

Once drawings had been supplied to the customer, project managers tended to over-estimate the percentage completion of their project as they felt most of the work had been done.  

This led to a general over-estimation of revenue and an overstated profit across the whole business in the first year. 

However, it had a major impact on the financial results of the business in the following year, where the costs to complete projects were much higher than estimated and the remaining revenue to be taken was minimal. 

The consequences of the project managers’ inaccurate estimates were dire and led to painful cost cutting measures. 

Reasons

The reasons for the over-estimation of percentage completion by project managers were multiple: -

❌ Project managers were almost entirely focussed on the technical delivery of their projects and did not appreciate the impact of their estimations on the financial results of the whole company. 

❌ They lacked the knowledge and experience to provide robust percentage completion information. 

❌ They did not have easy access to the costs incurred on their project to-date.

❌ The percentage completion figures they provided could not be queried in the absence of any substantiating information.

Actions taken

✅ To address this project managers were asked to forecast the costs to complete their project month by month instead of providing a single percentage completion number. 

✅ Their forecast was then used to calculate the percentage completion of their project, taking into account the actual costs to date. 

✅ By providing a forecast of the costs to complete, project managers had to focus on the work left to be done and its timing.  This information also made it possible for others in the business to query the robustness of their forecast. 

✅ In addition, project managers were provided with the costs incurred on their project each month, so they could compare actual against forecast and improve the quality of their estimates. 

✅ Finally monthly reviews of all projects were introduced to monitor technical and financial progress, and initiate actions as required to manage cashflow and profitability. 

Outcome

The measures taken to improve the robustness of the revenue forecast and provide project managers with feedback and data to manage their project finances allowed the business to take on many more large projects successfully and grow sustainably. 

Help

I work with overstretched leaders of SMEs in the engineering sector to help them prepare their business for sustainable growth. 

If you would like to explore how I could help you please use the link below to book a time in my diary for a free conversation without obligation. 

http://tinyurl.com/HerveJardonCalendar