Basic Elements of Commercial Project Management

What is Commercial Project Management?

Commercial Project management is one of two sides of the same Coin in successful Project Management. It includes a careful planning and coordination of all activities that involve money during the project’s entire lifespan. Without effective commercial management, any project can quickly become financially unsustainable.

Below are some of the key aspects of effective commercial management in Projects.

Planning (Budget or Cost Sheet): The most important component of Commercial management in projects is budgeting. Establishing a budget should involve a thorough analysis of the project’s costs, including labour, materials, and overhead. The budget should also include contingencies for unexpected costs.

Monitoring and Controlling: Once a budget is established, it is important to monitor expenses and ensure that the project stays on track and within budget. Cost control is another important component of effective Commercial management in?projects. It involves identifying and controlling costs to keep the project on track and within the budget. This can involve using cost-effective materials and optimizing labour and equipment utilization.

Procurement: Procurement is an important aspect of Commercial management in projects that involves re-negotiation of rates with vendors (Goods and Services), the acquisition of materials and services needed for the project, as well as bringing them to site only when they are needed (Just in Time). It is important to ensure that the sufficient Quotations are obtained for matching specifications and conditions from right suppliers and contractors for right materials and services suitable to the requirement of the client and that the contracts are negotiated with vendors in a way that is favorable to the project.

Risk Management: Risk management is another important element of Commercial management in projects. It involves continuous assessment, identification and mitigation of potential risks that could increase the cost of the project or lead to delays. Risk management should involve the assessment of both financial and non-financial risks (Damage to reputation), and the development of strategies to reduce the likelihood of these risks occurring.

Unexecuted order value: Unexecuted order value is an important metric in a contract because it provides an indication of the financial performance of the project. Unexecuted order value is the amount of work that has been ordered or agreed with customer as per contract, but not yet completed. It is important to track this metric to ensure that the project is staying within its budget and that all orders are being completed on time. Unexecuted order value can also be used to identify potential problems with the project and to make adjustments as necessary.?Also, this is a key indicator or future revenue in the project.

Contract management: Contract management is an important part of effective project management because it sets the parameters for the project and outlines the responsibilities of all parties involved. A contract sets out the scope, price, price basis, timeline, and deliverables of the project, and can help to ensure that all parties are held accountable for their commitments. It also helps to ensure that all parties are aware of the obligations, rights, and expectations of the project. Contract management is essential for effective project management because it provides a framework for dispute resolution and helps to ensure that all parties are held to their commitments.??To ensure that all stakeholder in a project are aware of the conditions of contract, a contract reading session is to be conducted as part of Project handing over process.

Cash Flow: Cash flow in a project is the amount of money that is flowing into and out of the project. It involves tracking the money that is spent on the project, as well as the money that is generated from it. Cash flow is important to project success because it helps to ensure that there is enough money to fund the project, and that the project is completed on time and within budget. Cash flow is also important for measuring the financial health of the project, and for ensuring that the project will be financially sustainable.

Unbilled Cost: Unbilled cost or Excess Cost is the cost of goods and services that have been provided but not yet Charged (Invoiced) on client and not paid for. It is an important metric in the Project because it allows the Project Manager and Commercial Project Manager to track how much Work is in progress and when it is due for Invoicing on the Client. Knowing the amount of unbilled cost can help to plan for future costs and ensure that the project is completed on time and within budget.

Excess billing: Excess Billing in projects refers to the amount charged on a Client more than what is billable as per progress of the project. Excess billing is an issue that must be taken seriously, as it can lead to costly disputes between the parties involved, if excess billing is not reduced over the progress of the project. It is important for the project managers to ensure that invoices are accurate, and that the customer is not being overcharged by oversight.

Key Result Areas – Effective Commercial Management of a project

Key Result Areas (KRAs) are performance areas facilitating the achievement of the final goal of a Project.

1. Establish a Standard Budget or Forecasting process: A Standard budget process should be established to ensure that all financial decisions are made in a consistent and well-defined manner. This will help to ensure that the budget is accurate and up-to-date throughout the life of the project.

2. Monitor and control expenses: Regularly monitoring and controlling expenses can help to ensure that resources are being used efficiently and that the project is staying within its budget.?

3. Utilize financial modelling: Financial modelling can be used to forecast potential financial outcomes as well as to evaluate alternative strategies. This can help to ensure that the project is making the most of its resources.

4. Forecast cash flows: Accurately forecasting cash flows is essential in order to ensure that the project is meeting its financial obligations in a timely manner.

5. Assess financial risks: Assessing potential financial risks can help to ensure that the project is prepared for any potential financial problems that may arise.

6. Establish a clear payment process: Establishing a clear payment process will ensure that payments are made on time.

7. Implement effective cost control measures: Cost control measures are essential in order to ensure that expenses are kept within the project's budget.

8. Develop accurate financial reports: Accurate financial reports are essential to measure the project's progress and to ensure that the project is meeting its financial objectives.

9. Develop a reporting system for tracking performance (Reviews): Developing a system for tracking financial performance can help to identify areas where financial performance can be improved or to find what is going wrong.

10. Customise the financial software (SAP, etc): Financial software can automate many of the tasks associated with Reporting the Project financials, such as budgeting, Variance analyses, forecasting, and cost control.

Elements of Contract contributing to effective Commercial Management

Following are some of the key elements of contract contributing to effective Commercial Management in Projects.

1. Scope of Work: The scope of work outlines the tasks that need to be completed to fulfil the project objectives. It should clearly define the deliverables, timelines, and costs of the project.

2. Payment Terms: Payment terms outline how and when payments will be made to each party. This helps to ensure that all parties are compensated for their contributions.

3. Price and price basis: Price and price basis will provide the total consideration we are eligible for the project and price basis is whether it is with tax or without tax, unit rate or lumpsum etc..

4. Price escalation:?Eligibility to claim for an increase in rates subject to conditions (i.e upon events that are mutually agreed or upon nonfulfillment of conditions by the client (eg. Readiness of site, etc)

5. Claim Management: Claim management outlines how costs towards changes to the project should be handled. This helps to ensure that any changes are properly documented and managed. Costs associated with changes due to reasons not attributable to the Project Execution company, can be claimed if proper documents are maintained and intimated to Client.

6. Risk Management: Risk management outlines how risks should be addressed to Client upon identification and managed. This can help to reduce the potential for project failure.

7. Termination: Termination outlines the conditions under which the contract can be terminated. This helps to ensure that all parties are aware of the potential consequences of terminating the contract.

Cash Flow

Payment terms and credit terms in effective management of Project Cashflow

Terms with Client: Payment terms and credit terms are an important part of effective project management because they set the parameters for the project and outline the responsibilities of all parties involved.

Payment terms outline how and when payments will be made and can help to ensure that all parties are compensated for their contributions. Credit terms outline how and when payments are due and can help to ensure that payments are received in a timely manner.

By establishing clear payment and credit terms with Client, organizations can help to ensure that both parties are held to their commitments and that the project is completed on time and within budget.

Terms with Vendor: Purchase ordering and material supply can have a significant impact on the profitability and cash flow of a project. Poorly managed purchase orders can lead to delays in delivery, additional costs, and a disruption of the project timeline. Additionally, buying materials at the wrong time can lead to higher costs and a decrease in profits. By managing purchase orders and material supply effectively, organizations can help to ensure that the project is completed on time and within budget, and that profits are maximized.

Ways to improve cashflow in projects

Following is some of many ways to improve a project Cash flow.

1. Negotiate for higher advance payment: Requesting Advance payment is one of the easiest ways to improve cash flow. This can help to ensure that the project is funded before any work begins.

2. Manage accounts receivables: Properly managing accounts receivables can help to ensure that payments are received in a timely manner. Raising invoice without delay, submission of invoice to client and ensuring the same is verified and accounted by client’s accounts department, close follow up with them for payment, answering queries on invoices without delay, etc. would increase the quality of Receivables.?Monitory ageing of Receivables and use aging as primary report for collection forecast.

3. Negotiate payment terms: Negotiating payment terms can help to ensure that payments are received in a timely manner. Both the cleints project accountant and our project commercial shall have the same understanding of the payment terms.?Payment terms must be simple to understand and shall not be agreed based on subjective terms like “satisfactory completion”, etc.

4. Monitor expenses: Regularly monitoring expenses can help to ensure that resources are being used efficiently and that the project is staying within its budget.

5. Use financial software for reports: Financial software can be used to automate many of the tasks associated with financial reporting in Projects, such as budgeting, forecasting, and cost control.

6. Offer early payment discounts: Offering early payment discounts can help to encourage clients to pay invoices promptly.

7. Do not hesitate to take a loan to complete the project on time: Taking out a loan can provide the project with additional funds to ensure that it is completed on time, so that cost escalation due to delays can be avoided, or vendor discounts can be availed, etc..

8. Encourage Project Managers to use Credit Cards: Utilizing credit cards can help to provide the project with additional credit period to settle when needed.?(Vendor Credit period + Credit card timeline)

9. Invoice discounting: Invoice discounting can help to provide cash flow to the project before payments are due from client. This decision should be taken when the project commercial finds the return on investment is higher than the interest on funds from discounting.

Handing over a project by Sales department to Project Execution department to ensure financial efficiency

1. Execution Plan: The sales department should develop an execution plan that outlines the tasks that must be completed by the project execution department as agreed with the customer after taking over the project.?This must be an exercise to be done along with the Project execution team and a continuous process till project is handed over to execution team. This should include all major tasks with timelines for completion of ?each major task and eventually the project, a detailed description of the project scope, and any special resources that may be needed, dependency to third party vendor,etc. to complete the project.

2. Documentation: The sales department should provide the project execution department with all the necessary project documentation. This should include the Signed off contract by both parties, project plan, project budget, financial statements, and any other documents related to the project.

3. Transparent Communication: The sales department should ensure that there is an open line of communication between the two departments. All necessary approvals as per Project sales guidelines must be shared along with all related communications.?This will help to ensure that any questions or concerns that arise during the transition process are addressed.

4. Training: The sales department should provide the project execution department with the details of commitment to customer on availability of any special skill and need for training to ensure that they have the skills and resources needed to complete the project as committed to client.

5. Support: The sales department should provide ongoing support to the project execution department throughout the duration of the project. This can help to ensure that the project is completed on time and within budget.

Financial modelling in Project management

Financial modelling in project management is the process of constructing a reporting model that simulates the future financial performance of a project based on current performance. It is used to estimate the expected costs, revenues, and profits of a project. It also helps to identify potential risks and evaluate the potential returns of different project strategies. Financial modelling can also be used to determine the optimal course of action for a project for a given set of conditions. If we have developed a financial model for project management, the same shall be a standard lay-out to be reviewed in all Project reviews till end of the project.

Project Reviews

Various points to be discussed during an effective project review meeting are as below.

1. Status of the project: The status of the project should be discussed in detail to ensure that all stakeholders are aware of the progress that has been made.

2. Milestones achieved and Accomplishments: Any accomplishments that have been made should be discussed to ensure that all stakeholders are aware of the project's successes.

3. Challenges: Any issues that have been encountered should be discussed to ensure that they are addressed in a timely manner.

4. Goals: The project's goals should be discussed to ensure that all stakeholders are aware of what needs to be accomplished.

5. Budget: The project's budget should be discussed to ensure that all stakeholders are aware of the financial requirements of the project.

6. Resources: The resources that are needed to complete the project should be discussed to ensure that they are available.

7. Timeline: The project's timeline should be discussed to ensure that all stakeholders are aware of when each task needs to be completed.

8. Risk management: Risk management should be discussed to ensure that all potential risks are identified and addressed.

9. Quality control: Quality control should be discussed to ensure that the project is meeting the required standards.

10. Feedback: Feedback from all stakeholders should be discussed to ensure that the project is meeting their expectations.

11. Safety: It is very important to understand the risks associated with a project and take steps to minimize or eliminate any potential hazards. This will help to ensure the project is completed safely and efficiently, while minimizing any potential costs associated with any accident.

Various kinds of risks

Various kinds of risks to be discussed during a project review are as below.

1. Financial risks: Potential financial risks include budget overruns, delayed payments, and un-planned costs.

2. Non-financial risks: Non-financial risks include technical issues, delays, and changes in customer requirements.

3. Market risks: Market risks include changes in the market (new device, technology, etc), customer preferences, and competition (short closure and awarding to competitor, etc).

4. Political risks: Political risks include changes in government regulations and policies.

5. Operational risks: Operational risks include quality control issues, delays, and capacity constraints.

6. Legal risks: Legal risks include changes in laws and regulations that could impact the project.

7. Reputational risks: Reputational risks include negative publicity and customer dissatisfaction.

8. Safety risks: Safety risks include accidents due to not practicing safety and health guidelines.

9. Cyber security risks: Cyber security risks include hacks, data breaches, etc due to using of pirated or unlicensed or free software at site.

10. Human resource risks: Human resource risks include to much of an employee dependency, employee absenteeism, untrained project engineer and inadequate skills.

Accounting related risks to be avoided in a project

The following are the accounting related risks that shall be avoided.

1. Poor financial reporting: Poor financial reporting can lead to inaccurate information and decision making.

2. Unclear accounting policies: Unclear accounting policies can lead to errors and confusion when preparing financial statements (for Example, Revenue recognition policy, definition of type of project such as POC or CCM, etc).

3. Inadequate internal controls: Inadequate internal controls can lead to fraud, errors, and misuse of funds. (To strictly follow Guidelines on Procurement such as QES, identifying right vendor, Ordering, raising invoice on client when eligible, etc)

4. Poor Costing (Project Cost Sheet): Poor costing or Budgeting can lead to overspending and can result in the project running out of funds.

5. Inaccurate forecasts: Inaccurate forecasts can lead to incorrect financial decisions and can lead to unexpected costs. Keeping a cushion in costing during initial Budgeting without reference to any head of account or risk is not a healthy practice. Such things must be communicated to Project Manager and commercial manager at the time of project handing over, who shall appropriately adjust the costing during initial stages itself.

6. Unauthorized transactions: Unauthorized transactions can lead to misappropriation of funds and can result in financial losses. (Example : Raising of PO on vendors without approval, accepting materials which are not ordered, etc..)

7. Inadequate monitoring: Inadequate monitoring of the project’s Commercial performance can lead to unexpected costs and delays. (Should conduct project review on a predetermined periodic basis)

8. Unclear invoicing: Unclear invoicing can lead to delays in payments and can result in a cash flow crisis.

9. Poor tax planning: Poor tax planning can lead to unexpected tax liabilities and can result in additional costs.

Project handing over to Client

It is to be ensured that proper reports are prepared to represent the following aspects and signed off with the client and other third parties if any on whom any dependency exist to complete the work.

1.?????Work done – Measurement book, etc

2.?????Snag list

3.?????Project completion certificate

4.?????Reconciliation of invoices and payments

5.?????Warranty establishment

Conclusion:

Overall, effective Commercial Project Management is essential for a successful completion of any project. It involves the careful planning and monitoring of the project’s budget, cost control, procurement management, and risk management. By following these best practices, projects can be kept on track and within budget.?

In successful Commercial Management of a Project, the role of a commercial project manager is very critical that involves all the aspects described above. The key to success in effective Commercial Management of a project is Commercial Project Manager’s early involvement. In addition, the commercial project manager should also be able to provide strategic advice and guidance to the Project Manager as his close partner in successful execution of the Project.

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