Control Project Costs Sure-footedly To Improve Your Bottomline

The way project costing is done in IT companies significantly impacts their ability to protect and improve their bottomlines. Managers need an ability to try different resource-mixes and arrive at data-backed decisions. Traditional enterprise software falls short of their operational needs.

This article outlines various issues and presents a solution - modern PSA technology - to make you sure-footed and quick-footed in dealing with all aspects of project costing and control. 

In this edition:

• Challenges in project costing

• Protecting and improving bottomline

• The solution and its benefits

• Conclusion

• A call to CXOs and project teams

Your topline is determined by market conditions, verticals, deal pipeline, hit rate, and your pricing power. You can improve some of the above variables. But in the visible future, to improve the bottomline, your costs are the only variables under your control. Therefore, how you estimate project costs, know the actual costs, and control them is crucial for your profitability. 

If you rely only on legacy or traditional enterprise software like ERP, CRM, HRMS, etc., uncertainties and errors can mar managing costs at every stage. They can derail your best efforts to improve your bottomline. 

Challenges in project costing

Let’s dive into the challenges in estimation of proposals, finding actual costs, and controlling them.

1. Your cost database: your business policy may stipulate a certain method of costing resource-hours -based individual salary costs, paygrade-wise-average salary costs, or costs loaded with indirect costs like overheads, travel etc. Whatever the case may be, your sales engineers likely use their own spreadsheets to estimate project costs. There is no way to standardise and update resource-hour costs. 

2. Estimating project costs for bidding purpose: Project cost estimation depends on who is working on a project proposal. Your project cost estimates may be too high or too low with obvious consequences.

3. Calculating planned project costs at the time of resource allocation: At the start of project execution, project managers allocate resources depending on the work breakdown structure(WBS) and skill sets and hours needed for individual tasks. The actual resource-mix allocated can be quite different than the one considered to estimate project costs. This can potentially lead to planned costs higher than estimated. For example, you quoted for a project on the basis of estimated cost Rs 35 Lakh, but the way the project manager allocated resources the planned cost may be Rs 40 Lakh. This can happen due to shortage of resources forcing allocation of higher paygrade resources. But there is no way that this gets flagged automatically. Unknowingly, you might be planning a hit on your bottomline.

4. Calculating actual project costs Year-To-Month, Month-On-Month, or Cumulative-To-Date: As projects get underway their allocated resource-mixes keep changing. How resource-hours are actually used needs to be found from employees’ timesheets. By the time your finance department calculates, cost overruns can be fait accompli. 

Protecting and Improving bottomline

You need several capabilities.

1. Standardised cost database: Your sales engineers and project managers need access to standardised and updated resource cost databases and tools to quickly calculate total costs based on the WBS and timelines. 

2. Automatic cost estimation: Your project managers need planned project costs as soon as resource allocation is done or changed from time to time. You also need standardized methods of handing employees logging less than or more than their allocated hours -for example, when employees log less hours 120 hours instead of 150 hours, the balance hours are allocated to the bench. 

3. Flagging of planned or actual cost variances: Any increase in costs, must get flagged immediately to enable preemptive actions. Timesheets filled by employees need to be used to find actual month-on-month costs and cumulative costs.

4. Ability to construct what-if-scenarios: Since resource-mixes impact costs significantly, project managers need tools to change resource mix and construct what-if-scenarios to make optimal decisions. For example, a project manager should be able to try changing a resource mix of two grade B persons to three grade A (lower salary grade)  persons to lower the project cost. 

Traditional enterprise software packages fall short of meeting the above operational needs because they are islands of automation -for example, salary costs in HRMS database don’t get reflected in the spreadsheets that sales people use. They also don’t support quickly locating matching resources from bench or other places and allocating them. Timesheet systems are often standalone. Actual employee hours need to be manually copied into a spreadsheet to calculate actual month-on-month costs.

The solution and its benefits

Modern Professional Service Automation(PSA) Software provides various tools to estimate, calculate, and control costs proactively. It provides a cost master as a central repository controlled by the finance department. It flags cost variances. It provides quick ways of finding matching resources and tells you revised costs. It pulls resource-hours data from timesheets to calculate actual costs. You can calculate costs quickly and accurately in every situation and make better decisions.

In addition to the above, a modern PSA is expected to provide capabilities like actionable project charters, project contracts, and RAID framework(risk, assumptions, issues, and dependencies), updated skills inventory, etc. These capabilities can make a big difference to your ability to improve your bottomline even under uncertain situations.

Conclusion

Managers in IT service organizations can protect and improve bottomlines through PSA-powered cost estimation and calculation and smart resource allocations. 

A call to CXOs and project teams, do you have unique insights?

What is your experience of estimating project costs? Do you get cost alerts when you allocate resources? Do you get surprises after monthly closing? How do you handle timesheet data and various edge-cases?

I would love to hear from you about your unique insights, struggles, and successes. With your permission, we shall publish select insights in the upcoming editions of “PSA Insights” newsletter. Please write to me at psainsights@kytes.com  I shall personally respond to you.

Let’s build a community of insights-driven professionals in project companies.