Making money in tough times

Perhaps the most visible fall out so far from the economic downturn (I won’t call it a recession quite yet!) is in the number of construction companies cancelling projects or hitting the wall – caught out by a combination of rising labour costs, shortages of materials, price rises, tightening credit and being locked into fixed price contracts.

But while newspapers seem to revel in breathlessly reporting the latest failure in the sector, it is of course not just construction where there are existential challenges.

While less visible, there are similar challenges in the professional services sector and so last week I spent some time with a group of professionals discussing how they might mitigate that risk through the way they engage and execute projects – particularly over the long term.

We didn’t focus on the legal side of building wriggle room into contracts, but instead on the need for accurate price setting up front and how to guard against scope creep – which is essentially where we end up doing work for free!

The major outcomes surrounded the need for clarity, constant communication, transparency and project discipline – behaviours that should always be present but especially in times of stress where events can rapidly get away from the unwary.

Pricing conversations

Getting the project right from the start is key and the old military saying of “time spent on reconnaissance is seldom wasted” is apt when it comes to properly understanding the needs of the client; what is essential and what is nice to have; pricing expectations; and the flow of information, its quality and format.

In addition, thorough and disciplined planning up front has a number of benefits:

• It defines the key deliverables and how to achieve them
• Recognises any interdependencies that exist with other service providers which may impact on project execution
• Gains an understanding of budget parameters
• Establishes an accurate resourcing mix for more effective planning and pricing

But firms are not as good as they should be at this - too often the scope section of an engagement is either vague, too high level to be of use or is largely a proforma that has been cut and pasted from the last job, so devoting sufficient time up front allows the project plan to be tailored and options developed on pricing and timing.?This foundation also clarifies the assumptions made on information flow, quality and format, providing a basis for variation discussions if and when they happen.

Scope Creep

Having established the value of proper planning we then discussed how this might mitigate the risk of scope creep by considering why scope creep happens and the warning signals, often picked up from what clients say:

• Lack of regular communication – “too busy, we’ll catch up next week”
• Poor project management documentation and execution – “not sure where we are up to but…”
• Fuzzy borders between the work of different contractors – “it just needs doing, so I’ll do it”
• Failing to recognise variations as they occur and obtaining formal sign off - “don’t worry, we’ll sort it out later”
• Doing things for free - “yeah, no worries, we’ll do that”
• Poor client sponsorship – “not sure who can sign off, but it needs doing now”

One of our interesting conclusions was that, if properly managed, scope creep was actually an opportunity to improve profitability as opposed to a threat to it – it just came down to being confident as to what was in and out of scope by doing the hard work up front; remaining in constant contact with the client; being transparent on the issues and not being afraid to raise variations; and of course documentation discipline.?Funnily enough, builders are masters at charging for project variations; professionals less so!

Another take out was the value to all of dividing larger projects into smaller ones to ensure that progress points are achieved, scope issues resolved along the way (avoiding the “let’s have a chat at the end on the overruns” conversation) and the flow on impact of problems in early stages assessed and accommodated.

We also discussed the need to control the project team – direct contact between team members and the client for example is great, but also can allow extra work to slide through – active review of time spent by the team and clarity on their roles can help avoid this.

Finally, value was seen in giving options to the client (at the start and as issues emerged) and dry running the difficult pricing conversations internally to give the confidence to push back on doing a “gold medal job for a bronze medal price” through discussing what can be removed from the scope to meet the budget.

Overall, it all came down to exercising appropriate discipline in the engagement and execution of projects – something which is not new but which, in these extraordinary times, is so essential to reducing risk and maintaining profitability.