The client called the project manager to ask if the final performance test and approvals meeting could be moved to Friday, one day delay, ‘it would fit in really well because Sarah (Technical Manager) will be in the office’. No problem, agreed the Project Manager, looking forward to the final sign-off, invoice issue and associated $200,000 balance payment.
The PMBOK contains the word ‘cash’ three times, only once referring to project cash-flow. The word ‘profit’ appears only 12 times, ‘margin’ once, and ‘contract’ although it appears 383 times, refers almost, if not completely, exclusively to contracts to procure goods and services into the project. So the PMBOK is apparently not concerned the least with commercial aspects of the project.
To be fair, we can say that the PMBOK project manager’s role is simply delivery of the project, and commercial roles belong to a different knowledge sphere outside the scope of the PMBOK; that is, a Commercial Manager’s role. The challenge is that in reality, and for many companies, these roles are fulfilled by the same person. For suppliers whose projects involve delivery of commercial projects to external projects, commercial aspects of projects become critically important, and the commercial, financial and contractual knowledge and skills required for this will not be found in the PMBOK.
(As an aside, the words ‘earned value’ appear 98 times in the PMBOK, on this measure 8 times more important than ‘profit’ and 98 times more important than ‘cash-flow’(!).)
It was never determined whether this was deliberate on the part of the client, however, the contract stated that payment would be made 30 days after the end of the month in which an invoice was submitted. The fact that the Friday was the 1st of the month meant that payment now became due in 60 days instead of the 30 days planned.
Does this matter? There is no impact to receipts, but there is a delay. At a typical cost of capital of 12% this has cost us 1% of $200,000, that is $2,000. This may not sound like much, however it must be borne in mind that first, in practice, margins are eroded not in single large increments, but rather in the slow drip, drip of marginal erosions. Second, our margins may not be great, and a small margin is quickly eroded then lost. The good news, on the other hand, is that with proper commercial management marginal gains may also accumulate into something more significant.
So where are these gains to be made and erosions to be avoided? Let’s look at some common areas.
- Price Paid:
Although the contractual price schedule contains the main price provisions, every term in the contract may have an impact on the final price paid (whether we are buyer or seller), either directly (example: ‘travel expenses will be paid according to buyer expenses policy and only if approved in writing in advance’) or indirectly (example: subjective acceptance provisions). Although individual impacts may be low, cumulatively they may become significant. A recent analysis of a loss-making contract identified incremental losses under the heads of subjective acceptance criteria, disputed change requests, failures in project management (standing time and some rework), failures of sub-contractors without back-to-back provisions, issues arising without contractual provision and uncompensated customer caused delays. With only a 8% margin in the original budget, this soon became a loss-making project.
In addition, many contractual terms (including those above) may not have a direct effect on price, but may have an impact on cash-flow (example: payment will be made in 30 days for properly presented invoices).
A consultant working for an IT security company completed the last tranche of project work and received sign-off from the client. As it was December 20th the consultant delayed completing their internal close-out report until December 28th and raised an invoice for the customer first thing in the New Year. Because of this, the company was unable to include the sale within the previous year’s turnover, as the year-end was December 31st. Because of missing growth targets agreed with the bank, the company’s overdraft facility was reduced for the following year.
In the scheme of things it is tempting to provide giveaways (we won’t charge you for the additional testing unit). But the costs are greater than they may appear. If that testing unit costs us $5,000 and we have an overall company net margin of 5%, then we need to sell an additional $100,000 of goods in order to afford that giveaway (to anyone that claims we only need to sell an additional $5,000, remember that only 5% of a $5,000 turnover ($250) is available to fund a giveaway. On the plus side, however, every change that is fully and properly charged to the client has a leveraged positive effect.
Contractor working within UK Government IT support: ‘one of the first things we are taught is to get a signed Variation Order if the client asks us for any work outside of our standard instructions, however small.’
- Customer Caused Delays:
The customer has caused a delay of 2 weeks to the critical path by late submission of design approvals. They grant us 2 weeks relief on the schedule. But commercially the impact in cost and schedule to us may be high – mobilisation, resource allocation, travel and work permits, sub-contractor commitments, additional finance costs, all of which we are unlikely to be able to recover. And financially speaking, we have also incurred various indirect costs which we will almost certainly be unable to recover. And financial costs are real costs!
- Ownership of Schedule:
The customer has caused a delay to a non-critical portion of the schedule. Microsoft® Project® (and the customer) tell us that there is no delay to completion date or costs and therefore no compensation due. But there is an impact: depending on contract type the used up float typically belonged to the supplier. The supplier has used that float to allocate resources to the project, optimise resource loading within the project, and optimised risk using the float. It may also represent some schedule buffer. The loss of the float is at a cost to the supplier.
- Contract Administration:
The failure to adhere to administrative provisions in the contract may have significant consequences. Notice periods particularly should be noted and adhered to (example, and this is a real one(!): ‘buyer will submit specification variation requests to supplier as they deem fit. These are deemed to be accepted by supplier if supplier does not respond to buyer within 10 working days’).
Our sub-contractor, responsible for utility installation on client site, fell far short of the required standards both for the installation and for their working methods. We terminated their contract and sourced an additional supplier. The original supplier made a successful claim against us because we had not followed the required process or notice periods for contract termination. We had to pay them in full, and in addition to the replacement supplier.
- Late Delivery Penalties:
Once the contract is in place there’s little we can do about penalties other than make sure we don’t hit them. But we should also make sure that we proactively enforce our rights throughout delivery (for example in the case of customer-caused delays) and robustly negotiate such deviations along the way.. Of course we should also remember that one week at the start of the project is the same as one at the end!
So What Do Good Companies Do?
- Ensure that the role of commercial manager is properly represented in client-facing projects. In smaller projects this will be the same individual as the project manager, but in larger projects an experienced project commercial responsible must support the project manager (not only because the sums are larger, but because financials such as bonds, warranties, currency, financing etc become more complex).
- Remember that the client is typically out to pay a fair price for a fair product, and that the key objective of contract development and management should be achieving clarity of responsibilities and rights and balance of risk and opportunity. Negotiations and management of the contract should therefore involve the (pre-)project manager and be carried out in a spirit of partnership. At the same time we should not confuse kindness with weakness, and always defend our rights.
- Successful project delivery includes clarity of scope and clarity of acceptance criteria. But it should be remembered that financial success requires additional considerations. This includes fast delivery (that’s not doing it faster, but chunking the project down into milestone deliverables, linked to payments), fast sign-off, fast invoicing and fast payment. The shorter each element of the cycle then the more efficient the use of resources (assets) and the better the overall Return on Investment.
One telecommunications company has as its main project performance indicator [margin/ current assets]. Current assets include work done but not invoiced for (materials and resource hours) (ie Work-In-Progress), and invoices not yet paid, less client advances. How to improve performance? Increase income, reduce costs, but also get the work done, out of the door, signed off, invoiced and paid.
- Remember that we are One Team. When it comes to costs, margins, risks and contingencies, politics enters the picture. And politics typically motivate the wrong type of behaviours. Good companies encourage one-team thinking and an open-book philosophy (internally of course).
It remains puzzling to me that the PMBOK apparently fails to address the commercial aspects of the project manager’s role in client-facing projects, but makes some sense if the roles of ‘project manager’ and ‘commercial manager’ are separated. It should be remembered however that there are few, if any, companies whose main activities are the delivery of projects to clients, that do not ultimately measure success in terms of profitability. Knowing how to measure and therefore how to control this is a key skill for all project managers in this environment.
 All case studies quoted are real anonymised cases.
 Project Management Institute, Inc. A Guide to the Project Management Body of Knowledge® 2017 (6th edition, Project Management Institute, Inc.)
 Remembering that you have to do the work and invoice in order to convert work-in-progress into turnover in the Profit & Loss account.
 Actually a quote by Al Capone!