Better Profits through Better Projects - All Ohio 4-23-14 [Read-Only] · 2019-01-24 · Cost plus...
Transcript of Better Profits through Better Projects - All Ohio 4-23-14 [Read-Only] · 2019-01-24 · Cost plus...
4/28/2014
1
Better Profits through Better Projects
Oswald CompaniesAll Ohio ConvocationApril 23, 2014
Presented By: Brad Wilson, CMAPSMJ Resources, Inc.
This information is copyrighted by PSMJ Resources, Inc.® All rights reserved.
Risk Management Should Be a Two-Sided Coin
Risks Rewards
Enhanced Reputation
Long‐Term Workload
Profits
Lost Opportunities
Financial Loss
Liability
2
Three Chances for “Under Performance”
1. Before You Start the Project – In the Contract
2. Running Over Budget – Project Management
3. After You’re Done – Defending Claims
3
4/28/2014
2
What is “Net Revenue Deficit”?
Uncollectable A/R
Unbillable WIP
Over budget
Negotiations
Proposal cut
2
2.2
2.4
2.6
2.8
3
3.2
3.4
Dir
ec
t L
ab
or
Mu
ltip
lier Net Revenue
Deficit
Target
Achieved
4
What Causes “Net Revenue Deficits”?
1. Fee reductions
2. Jobs in budget trouble
3. Jobs with potential quality/liability problems
4. Charges to jobs w/o contracts
5. Delays in getting charges keyed into accounting
6. Delays in getting charges billed
7. Late payment
8. Jobs with unusually high risks
NRD = Σ (Project Write‐downs – Project Write‐ups)Annual Net Revenue
5
How Can You Generate a Net Revenue Surplus?
2
2.5
3
3.5
4
Target Multiplier Viewed as a Ceiling Target Multiplier Viewed as a Floor
D.L
. Mu
ltip
lier Target
Multiplier
AchievedMultiplier
AchievedMultiplier
ProposalCut
Negotiation Cut
OverBudget
A/RWrite-
off
L.S. JobsUnderBudget
IncentiveFees
6
4/28/2014
3
Ways to Define a Fee Limit
Fee is based on delivering a defined product
Invoice based on completion, not costsLump Sum
Agreed upon target
No contractual commitment to meet the target
You should advise client if you think you’ll exceed it
Project Budget
Fee is based on actual construction cost at completion
You may have to guarantee the construction costs
% of Construction Cost
Connotes a client funding limitation
You must inform client if you don’t think you can finish the job for this amount (usually at 75 – 80%)
Most non‐federal clients treat this as a "g‐max"
Not‐to‐Exceed Amount
You must complete the scope for "g‐max" amount
Invoice actual costs (plus profit)
Guaranteed Maximum Fee
ImplicationsContract Term
7
What’s the Risk of Losing Money?Contract Type High Medium Low
Lump Sum √
% of Construction √
Hourly (No Limit) √
Hourly not-to-exceed √
Hourly w/guar max √
Cost plus negotiated fee
√
Advantages and Disadvantages
Contract Type Advantage Disadvantage Lump Sum Can make a large profit if you
manage efficiently. Do not have to show client all costs.
You risk losing money if scope is not carefully defined, or you haven’t negotiated pay for out-of-scope services.
Percent of Construction
A high level of quality required, or rising construction costs, or a shortage of potential contractors can assure high construction costs. Profitable in booming economy.
You have no control over costs; risk losing money in a poor economic climate. Difficult to administer due to fluctuating construction costs.
Cost Plus Fixed Fee
Rewards you for value or risk incurred. Guarantees a profit when costs are estimated accurately and there’s no limit on the total amount of the contract.
Costs incurred beyond a contract limit must be absorbed in the fee; clients see a firms’s costs and may try to negotiate your costs down.
Standard Billing Rate
Simplicity in invoicing. Rates have to be continually recalculated as people receive salary increases.
Multiplier Times Salary
No need to constantly revise rates. Can be profitable if you begin work at a high hourly rate before scope is defined.
Salaries are revealed to clients. Dangerous to startwork without a contract in case of future litigation.
4/28/2014
4
How Clients Select and Contract Really Affects Profitability!
Source: PSMJ's A/E Financial Performance Surveys from 2007 thru 2011Copyright PSMJ Resources, Inc. Available at www.psmj.com
4.0% 6.0% 8.0% 10.0% 12.0% 14.0% 16.0%
QBS Lump Sum
QBS Time & Materials
Lowest Total Price
Lowest Rates
EBBT by Type of Contract
10
Lump Sum Has Become the Most Common Contract Type
11
Source: 2012 PSMJ A/E Fees & Pricing Survey
0% 10% 20% 30% 40% 50%
Percentage of Construction
Hourly (with maximum)
Hourly, Time and Materials (nomaximum)
Cost Plus Fixed Fee
Lump Sum
2011
2012
…But It Varies a Lot, Depending on Client Type
22
67
2145 56
41
2
8
93
1414
36
24 15
24 832 16 26
9 1 6 0
Transportation GovernmentBuildings
Industrial Housing Healthcare
% of Contracts Used by Various Client SectorsLump Sum Cost Plus Fixed Fee T&M w/o MaxT&M w/Max % of Const. Cost
12
Source: 2012 PSMJ Fees & Pricing Survey
4/28/2014
5
Converting to Lump Sum
1. Tested 50 proposals
Proposed T&E per RFP (with a not‐to‐exceed)
Proposed lump sum alternate for slightly less than T&E NTE
2. 75% of clients selected the lump sum option
3. Lump sum contracts were 35% more profitable
4. They now do this on virtually every proposal!
Actual Experiences of an Illinois Geotech Firm
13
Getting Better Contracts1. "Mini‐scoping" – negotiate a
lump sum for each phase
2. T&M for front‐end, then convert to lump sum
3. Lump sum for basic services plus T&M for special services (e.g. client meetings on residential designs)
4. Unit price contracts (units can’t be hours)
5. T&M with incentives for meeting predefined objectives (e.g. meeting an accelerated schedule)
14
Common Contractual ProblemsProblems Possible Remedies
1. Extensive backup for charges
Convert to lump sum or unit price contracts "Shop fee" instead of itemized expenses Get approval to submit your standard cost reports as backup
2. Billing upon completion of large milestones
Provision to invoice monthly in between milestones
3. "You get paid when we get paid"
Up‐front retainer to accommodate extra collection time Front‐end load your invoices Have prime submit your invoice separately to the owner Contract provision requiring prime to invoice promptly and pay you promptly after being paid
Specify terms for payment if payment delay isn’t your fault
4. Open‐ended retainage provisions
Offer letter of credit in lieu of retainage Limit retainage to an agreed upon $ amount Release retainage on contractual due date unless project is delayed because of your fault
15
4/28/2014
6
Common Contractual ProblemsProblems Possible Remedies
5. Vague invoicing requirements
Attach sample invoice to contract
Invoice a predetermined amount each month
6. T&M invoices requiring progress report
Lump sum contract
Separate submittal of progress reports and invoices
7. Unclear or one‐sided change management terms
Clearly specify process for approving changes
Make terms comparable for both parties
8. “Payment within 30 days of approved invoice”
Negotiate client’s approval process to be part of the 30 days
Document client’s approval process and limit its duration
9. No penalty for late payment
Guaranteed interest for late payment
Irrevocable letter of credit
Up‐front payment for "project mobilization"
Right to withhold delivery of documents (send COD)
16
Common Pitfalls in Subconsultant Negotiations
1. Sole‐sourcing major subs
2. Accepting a sub’s first proposal
3. Selecting on low bid vs. best value
4. Failing to flow down prime contract provisions
5. Not taking advantage of your purchasing power
16 Terms to Negotiate Into Your Contracts
1. Upfront mobilization fee
2. Job cancellation fees
3. Project restart fees
4. Automatic fee escalator
5. Limitation of liability
6. Late payment penalty
7. Sample invoice format
8. Limitation on design alternatives/time
9. Premium for client changes/reorientation
10. Lien provisions
11. No manual back‐up on reimbursables
12. Frequent client approvals
13. Ownership of documents
14. Only stamp after payments current
15. Hazardous waste and asbestos indemnification
16. Payment of CA services tied to schedule and volume of shop drawing resubmittals required
18
4/28/2014
7
Work Breakdown Structure(a.k.a., Detailed Task Outline)
1. Accounting Elements vs. Scope Elements
2. Use the Organization Breakdown Structure vs. Work Breakdown Structure
3. Deliverable‐based vs. Activity‐based
4. Same WBS for Scope, Schedule, Budget
5. Include PM as Separate Task
6. Don’t Revise WBS Without a Contract Change
(55-56)
Example WBS Levels
Level Used for
1. Phase • Managing overall deadlines and major milestones• Reporting status by the PM to the client
2. Discipline • Managing disciplines or other first-level activities• Reporting status by discipline managers to PM
3. Task • Managing work elements by discipline managers• Reporting status to discipline managers
4. Subtask or Deliverable
• Estimating level of effort• Monitoring progress of each work element
Activity-Based Task Lists Require Limits
Schematic Design1. The architect shall provide
schematic design services.
2. Alternative schemes shall be provided for the client’s review and approval.
Construction Administration1. The architect shall respond to
contractor RFIs.
2. The architect shall provide limited on‐site observation.
3. Upon substantial completion, the architect shall perform on‐site inspection and compile a final punch list.
4. Attend progress meetings as requested by the client.
Why is this language bad for a proposal or contract?
(Generally required for early phase or late phase services)
4/28/2014
8
What is the Status of This Project?
$0
$17,379
$34,758
$52,137
$69,516
$86,895
$104,274
$121,653
$139,032
$156,411
$173,790
31-Jan 31-Mar 31-May 31-Jul 30-Sep 30-Nov
Cu
mu
lati
ve E
xpen
dit
ure
s
Projected Cumulative $
Actual Costs
$13,000
What Happened on the Way to the Bank?
22
Sample Accounting Reports1. Division Time Analysis
2. Percent Chargeable
3. Detail Verification
4. Invalid Transaction Report
5. Division Aging Report
6. Active Projects w/Completion Dates w/in 30 Days
7. Unauthorized Expenditure Detail Report
8. Active Projects w/Unauthorized Items
9. Authorization Listing
10. Items Made Non‐Billable during Period X
11. Revenue Write‐offs during Period X
12. Unbilled Receivable/ Undistributed Revenue–Audit
13. Unbilled Receivable/ Undistributed Cost Aging
14. Manager’s Project Status
15. Operating Statement
16. Budget & Expense Report
17. Budget & Expense Exception
18. Near‐Term Financial Action
Academic Earned Value Analysis
The Process
1. Take out separate accounting
codes for each task/activity
2. To assess status, generate a
forecast to complete (FTC) for each
task/activity
3. Get actual expenditures from
accounting for each task/activity
4. Add Steps 2 and 3 to determine
the Estimate at Completion (EAC)
5. Compute earned value
The Problems1. You need lots of job cost
account numbers
2. Team members don’t charge their time to correct account numbers
3. PM ends up being a “timesheet cop”
4. PM has to estimate forecast to complete each month
4/28/2014
9
3-Line Graph Earned Value Analysis
1. Prepare an expenditure forecast Convert expenditure forecast
to a progress forecast
2. Estimate progress for each task3. Compute overall progress
Schedule (step 3 vs. step 1)Budget (step 3 vs. step 4)
4. Actual expenditures from accounting
Project Budget & Schedule Status
$0
$17
$35
$52
$70
$86
$104
$122
$139
$156
$174
31-Jan 31-Mar 30-May 31-Jul 30-Sep 30-Nov
Cu
mu
lati
ve E
xpen
dit
ure
s ($
000)
0
10
20
30
40
50
60
70
80
90
100
Per
cen
t C
om
ple
te
Projected Cumulative $Actual CostsEarned Value
"A" = Schedule Status= 2.3 Months Behind
A
"B" = Budget Status= $12,000 Over Budget
B
26
27
How Does Your Firm Achieve Quality/Efficiency?
0%
10%
20%
30%
40%
50%
60%
70%
80%
90%
100%
VerySmall
VeryLarge
Quality of WorkProcessesQuality of People
4/28/2014
10
28
What Are the Liability Risks?
0 0.5 1 1.5 2 2.5
StructuralEngineers
Architects
MechanicalEngineers
CivilEngineers
ElectricalEngineers
Claims Paid/Fees Earned
0 2 4 6 8 10 12
Condos
Wastewater
CustomHomes
Subdivisions
Schools
Claims Paid/Fees Earned
Low High
High Risk Project TypesHigh Risk Project TypesBy DisciplineBy Discipline
This claims data is provided by the Design Professional group of the XL Insurance companies, formally DPIC. 2006 X.L. America, Inc. All rights reserved. This information may not be reproduced without written consent.
29
No Procedures to Identify/address conflicts, errors, omissions 12%
Unqualified Staff 12%
Inexperienced PM 6%
Client/Project Selection 19%
Scope Mgmt 6%
Contract Terms 3%
Technical Errors/Omissions
30%
Other 12%
Causes of Claims
This claims data is provided by the Design Professional group of the XL Insurance companies, formally DPIC. 2006 X.L. America, Inc. All rights reserved. This information may not be reproduced without written consent.
30
Lessons Learned About Claims Management
70% of E&O claims aren’t just technical errors or omissions.
Most firms overemphasize the importance of contract terms (which cause just 3% of claims).
Picking the right clients/projects is key.
Sound project management is the best defense against claims.
You must have an institutionalized process to insure sound project management.
44
22
11
33
55
4/28/2014
11
What Your Clients Tell Us About A/E Firms
1. Quality is often defined differently by the customer and supplier
2. Quality and cost must be linked
3. Need a quantitative definition of quality
Satisfied but not Loyal
32%
Very Satisfied &
Loyal15%
Somewhat Dissatisfied
23%
Ready to Defect10%
Somewhat Loyal20%
Alignment with Your Client’s Quality Expectations
CO
ST
Potential for _________________
Potential for ____________________
LEV
EL
OF
QU
ALI
TY
PERFECTION
Professional Standard for Quality Meet all applicable laws, codes & standards Do what the contract says Do it as well as the average competent A/E/C
Client #2 Expectation for Quality
Firm’s Expectation for Quality
Client #1 Expectation
unhappy client
going over budget
Whose Definition of Quality?
A/E Definitions
1. Conformance with requirements
2. Conformance with industry standards
3. Suitable for intended purpose
Client Definitions
1. Understanding my problems
2. Helping me develop creative solutions
3. Effectively implementing these solutions
4. Eliminate hassles from my life
4/28/2014
12
Translating ISO-Speak1. Quality Management ‐ coordinated
activities to direct and control an
organization with regard to quality
2. Quality Control – part of quality
management, focused on fulfilling
quality requirements
3. Quality Assurance – part of quality
management, focused on providing
confidence that quality requirements
will be fulfilled
4. Quality Improvement – part of quality
management, focused on increasing the
ability to fulfill requirements
Source: ISO 9001:2000
1. Quality Control
Check a product
2. Quality Assurance
Act to assure
3. Quality Improvement
Examine continuously
The Quality Toolkit1. Defining Requirements Project Management Plan (PMP)
Programming Document orBasis of Design Report (BODR) orPreliminary Engineering Report (PER)
Checklist for Defining Client Requirements
Contingency/Risk Management Analysis
2. Sequence of the “Work‐Process”
1. Quality Control Activities
35
Early
Late
Risk Management - Claims
Top four non‐technical causes of claims
Negotiations & Contracts
Client Selection
Project Team Capabilities
Communication
One or More of these are part of 93% of claims.
Contract not in place before work is started
Unclear/inappropriate scope
CA services
No long-term relationship
Litgious
Low-price selection
No experience
Tight budget
Inexperience
Lack of procedures to identify conflicts and E & O issues
Disputes not handled well
Lack of documentation on CHANGE
Scope of services not explained
4/28/2014
13
Risk Driver ResearchA/E firms in 2001 & 2009
Percentage of Claims Affected*
1. Negotiations & Contracts
2. Client Selection
3. Project Team Capabilities
4. Communication
200113%
16%
24%
27%
20096%
23%
25%
39%
*Data from XL Insurance
The Root Causes of Most Client Relationship Issues Are…
Working for the Wrong Client
38
Signing a Bad Contract
It’s Easy to Work for the Wrong Clients
39
Client in poor financial condition
17%
No formal review
of client4%
Client not receptive to ADR
1%
Contractor selection
4%
Client behind in fee payments
7%Other
3%
Client has history of claims / litigation
21%
Client inexperienced in
design issues43%
This information is provided as a courtesy of the Design Professional group of the XL Insurance Companies.
23% of Professional Liability Claims Result from Poor Client Selection
4/28/2014
14
Don’t Gamble When You Propose to a New Client
Check Them Out Carefully:1. Dun & Bradstreet
2. Credit/Banking References
3. Litigation Records (www.lexisnexis.com)
4. Other Professional Services Providers
5. Secretary of State Office
40
How Large Firms Define A “Quality Client”
1. They Demand and Are Willing to Pay for High Quality Services
2. They Conduct Their Business Activities at a High Level of Integrity
3. They Have Achievable Expectations
4. They Pay Reasonably Promptly
5. They Accept Reasonable Contract Terms & Conditions
6. They Have Substantial Long‐Term Needs for Our Services
Why Do Clients Look For Problems?
INDIFFERENCE BY SUPPLIER
68%
SERVICE DISSATISFACTION
14%
OTHER4%
NEW BUSINESS RELATIONSHIP
5%
PRICE9%
Battling Indifference• Managing your client• Superior client service• Keeping relationships fresh• Proactive communication
4/28/2014
15
Keeping Client Relationships Fresh
Time
Rela
tio
nsh
ip
Most Relationships With Intervention
How Well Do You Know Your Client?
1. Who does your client report to?2. Why are they organized the way they are?3. What are their strategic drivers?4. Where do the decision makers sit?5. What do they value & expect in their relationship with
you?6. What do they read?7. What is their career path?8. What are their outside interests?9. What hassles can you remove from their life?
Manage Your Client Relations
Leadership1. Know your client personally
2. Understand your client’s business
3. Be an equal partner
4. Foster trust
5. Demonstrate credibility
6. Anticipate – Don’t react
Management1. Keep your files organized
2. Respond to client requests promptly
3. Meet your commitments
4. Give your client regular progress reports – whether they ask for them or not
5. Be persistent when you need input
And NO Surprises!!!!!!
4/28/2014
16
46
The Seller-Doer-Manager Model
Technical Staff toProject Managers
Type of Firm Median Mean
All A/E Firms 4.55 5.14 Staff Size 1 to 20 3.33 4.32 Staff Size 21 to 50 4.53 5.02 Staff Size 51 to 100 4.61 5.21 Staff Size 101 to 200 5.42 5.91 Staff Size 201 to 350 4.38 5.26 Staff Size 351 to 500 4.65 5.05 Staff Size over 500 4.45 5.02 Architectural 3.33 4.37 Architectural/Interiors 4.36 4.58 Engineering (Prime) 4.16 4.62 Engineering (Sub) 6.29 6.52 Engineering (Survey) 4.66 5.20 A/E 4.76 5.70 A/E/P/I 5.00 6.08
Source: 2007 PSMJ A/E Financial Performance Survey
47
0
1
2
3
4
5
6
7
Leve
l of
Mat
urit
y
PM Maturity Levels
Level 1
Level 2
Level 3
Level 4
Level 5
Level 6
The best PMs becomea principal-level position
Principals manage all projects;non-principals do the work
Principals perform (and manage) all projects
Non-principals manage small projects and/or tasks on large ones
Principals designate PMs who perform some (but not all) PM duties
Principals turn over all PM duties to PMs
Principals develop a team approach with PMs
Level 7
Firm Size
48
How Principals Work With Strong PMsActivities Project Manager Principal
Fee Proposals Prepares Approves
Fee Negotiations Participates Directs
Team Selection Requests Approves
Performance Evaluations Inputs Performs
Removing Non-performers Recommends Acts
Design/Technical Decisions Meets Standards Set Standards
Client Relations Maintains Oversees
Future Work Secures Approves
Accountability Maintains Rewards/Punishes
4/28/2014
17
Unlike Fine Wine, Bad News Does Not Improve With Age
1. Make sure clients hear it from you first
2. Take responsibility immediately
3. Present alternative solutions
4. “Your first loss is your best loss”
How Wow’ed Are Your Clients?
1. Solicit feedback (1 page surveys)
2. Internet Surveys Ratingsource.com
Surveymonkey.com
3. Ask clients to make a list entitled, “Things consultants do that bug me”
4. Collect, summarize, share, do it again!!!!!
Keeping Clients Happy = Risk Management
Client Management Plan
1. Developed with the Client
2. Rules of Engagement Contracting Provisions Authority Matrices
3. Elements of a Client Plan Goals & Objectives Account Team Organization & Responsibilities Quality Control Process Master/Task Order Contract Change Management Process Communication Plan
4/28/2014
18
Pricing Has Levelled Off While Costs Are Still Increasing
52Source: 2012 PSMJ A/E Financial Performance Survey
2.00
2.20
2.40
2.60
2.80
3.00
3.20
Cost (Labor plus operating Overhead)
Target Mulitplier
Target Margins Have Shrunk
53
$0.00
$0.50
$1.00
$1.50
$2.00
$2.50
$3.00
$3.50
1978 2012
$1.00 $1.00
$1.25 $1.68
$0.75 $0.42
Operating Profit Operating Overhead Direct Labor
Fortunately, We Are Getting Better at Managing Projects
Source: PSMJ 2012 A/E Financial Performance Survey54
2.50
2.60
2.70
2.80
2.90
3.00
3.10
3.20Target vs. Achieved Multiplier (Net Revenue Deficit)
Actual Net Fee MultiplierTarget Net Fee Multiplier
4/28/2014
19
Net Payroll Multiplier Is Starting to Recover
Source: 2012 PSMJ A/E Financial Performance Survey55
1.55
1.60
1.65
1.70
1.75
1.80
1.85
1.90
1.55
1.60
1.65
1.70
1.75
1.80
1.85
1.90Net Payroll Multiplier (Revenue Factor)
But Profits Are Still Down
Source: 2012 PSMJ A/E Financial Performance Survey56
0%
2%
4%
6%
8%
10%
12%
14%
16%
18%
0%
2%
4%
6%
8%
10%
12%
14%
16%
18%
EBBT (%
of Net Reven
ue)
Operating Profit
0%
5%
10%
15%
20%
25%
Q1
2006
Pre
-tax
Pro
fits
(% o
f Rev
enue
)
Finan
cials
Pharm
aceu
ticals
Sofware
& Serv
ices
Insura
nce
Real E
state
Hotels,
Res
tauran
ts
Food
& Bev
erage
Media
Capita
l Equ
ipmen
t
Consu
mer Goo
ds
Health
Care
Retail G
enera
l Merc
hand
ise
Grocery
Stor
es
Engine
ering
& Con
struc
tion
Trans
porta
tion
And They Are Still Very Low Compared to Other Industries
57
4/28/2014
20
Early Risk Management Strategies Are Most Effective
Client Selection
Client Management
Quality Management
Contract Management
Legal & Insurance Protection
58
Costs
Four Risk Management Strategies
AVOID• Project & Client Selection
TRANSFER• Insurance & Contracts
ASSUME• Self-insurance
CONTROL• Systems in place to recognize & mitigate risk
Risk Management for Dummies
1. Never accept a risk you cannot quantify.
2. Don’t take on risks for things you can’t control.
3. Don’t accept responsibility for things that are someone else’s fault. (e.g. your client)
4. Be sure the rewards justify the risks.
5. Don’t bet the company on any one project.
6. Don’t publish QA policies/procedures unless you are serious about enforcing them.
7. Don’t think your attorneys will keep you out of trouble.
60
4/28/2014
21
Your Personal Action Plan
Inaction destroys ROI
Don’t go back to your office and “dump” this on someone.
Discuss the information with a partner (fellow shareholder).
Identify the area(s) of greatest concern.
Set some time‐limited goals with each other (3 or 4).
Review your risk management in light of your overall firm growth strategy.
Where to Get More Information
1. PSMJ Web Sites: www.psmj.com
2. ASCE Engineering Management Division
3. Other Professional Societies (AIA, ACEC, NSPE, ASFE, APA, Etc.)
4. PSMJ’s Monthly Newsletter – Professional Services Management Journal
Questions???
Call on us if we can help you
Brad Wilson David BursteinPhone: 857.255.3204 Phone: [email protected] [email protected]
Sue LeComtePhone: [email protected]
Brad Wilson David BursteinPhone: 857.255.3204 Phone: [email protected] [email protected]
Sue LeComtePhone: [email protected]
We Hope To See You Again Soon!!!!