A true story

The project-based engineering consultancy reported monthly revenue based on the estimated revenue earned by each project.

The business successfully won several large projects in a new market with high technical risks.  The value of these projects was an order of magnitude greater than for previous projects.

Winning the large projects was a major achievement but delivering them profitably turned out to be a much greater challenge than anticipated. 

Challenges

The business was not set up to manage the complexity of large projects delivered by teams of engineers working together across several offices. 

Customers in this new market were very demanding and relatively inexperienced. 

They struggled to understand the need for them to clearly specify their requirements and provide the input data required by the business to deliver projects successfully. 

The culture of the relatively inexperienced engineers facing customers was to accept whatever the customer wanted without attempting to push back. 

What happened

In the absence of project managers in the business, engineers were nominated to deliver the new large projects.  Aware of the technical risks, they naturally focussed on the technical delivery. 

To avoid taking too much of their time, the finance department asked them to just provide an estimate of the percentage completion of their project each month. 

By lack of attention and experience, the engineers routinely over-estimated progress and provided inflated percentages of completion.  Since this was not substantiated by any data, it was not possible to gauge the credibility of their estimates. 

This led to a general over-estimation of revenue earned across the new large projects and an overstatement of profit across the business in year one.

However, this had a major impact on the financial results of the business in the following year, when the costs to complete large projects turned out to be much higher than estimated and the revenue left to be taken was minimal.

The consequences of the inaccurate and unsubstantiated estimates were dire and led to painful cost cutting measures across the business. 

Actions taken

To address this situation, several measures were introduced.

Project managers were appointed to manage large projects with a focus on satisfying the customer while at the same time protecting the budgeted margin. 

They 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.

Instead of just providing an estimated percentage completion, project managers were asked to re-estimate the costs to complete their project each month.  This enabled questions to be asked to probe the validity of their estimate. 

Monthly reviews of the large projects were set up.  This allowed corrective actions to be instigated well in advance of the projects being completed. 

When project delays or overspend resulted from customer changes, actions were taken to inform the customer of the consequences and commercial negotiations were instigated to mitigate the impact on project margin. 

Outcome

The measures taken to improve the robustness of the revenue forecast and initiate corrective actions when required allowed the business to take on many more large projects profitably.

Of equal importance, other measures were taken to substantially improve the quality and effectiveness of the technical work. 

Once these measures were implemented, the business became an unrivalled world leader in this new market and achieved sustainable growth. 

Help

30 years of senior management experience dealing with similar situations equipped me to help overstretched leaders of engineering SMEs to prepare their business so they can achieve profitable growth. 

If you would like to explore how I could help you, please use the link below to book a free 30-minute conversation.

http://tinyurl.com/HerveJardonCalendar