Are You Burning Your Cash Flow?

Project Based Organizations (PBO) are struggling when market is slow on two stages. The first is what to bid stage and the later is the bidding’s markup price stage. They feel the pressure more on the later especially if they lost many bids recently and they feel like the year is finishing by burning the overhead cash flow with no results.

The mark up price includes the hard cost, the soft cost and the profit. Hard cost is the estimated cost for material, labor, subcontractors and any cost directed to execute the project. Soft cost is the overhead cost to continue operating the business to generate more projects and to support the projects (but they can’t claim it as project expenses) and the profit which is the targeted net income out of executing the project.

Formula like Markup Price = HC+OH+Pr becomes critical when we are talking about a project with hard cost of 100 million. If you calculate OH as 1% only which this percentage is usually based on the estimated turnover and other running and future projects, it means you are adding one million extra to your markup price. That’s an evidence of no transparency and no proper system because the right formula should indicate the project contribution to the OH and to the profit.

However, let’s agree that every company calculate the three inputs differently. Moreover, there are different methods to manage the three inputs actuals and estimations to reduce it as much as possible to win the bids/tenders. I will discuss in this article the overhead impact on the mark up price.

Overhead budget depends on many factors, mainly, the size of the company, its business model maturity and current running projects and expected future projects and expansions …etc.

The most radical used approaches to reduce overhead is restructuring the company. This tell us that their business model was not sufficient and live as a start to adopt the changes faster before the loses force the company for such radical restructuring. The market force them to change before they change themselves.

So what change can the PBO do when it is needed on time with limited lose and cost and no impact on the size of the operation development?

First of all, they should have visible portfolio management system with defined cost centers for all costs. This is the first step only. If the PBO has organized Enterprise Project Portfolio Management System recorded for the last three years, they can (with confidence) develop their business model to be more sufficient to reduce their cost and increase their profit.

After that, in a portfolio and PMO management and analysis systems, the analytic skills set might be available to top management. They already know in most cases what actions they want to do. Using Portfolio Management approved methods and tools give them quality decision making on three dimensions.

1. The confirmation of their thinking based on approved best practice methods
2. The justification to the other stakeholders/partners and;
3. The reference to return back to use/improve the used model.

However, the quality of the analysis based on the quality of the used data. Here it comes the need for the leader for the PMO and portfolio management who understand what top leaders are looking for and manage the day to day activities including building the right tools, processes, procedures, forms/templates to collect, validate, and test the input and output every time the data input/output is done by asking the right questions to the operation teams and top management.

One important expected decisions as part of the OH optimization strategy and benefit of the portfolio/PMO system is the distribution of overall operations overhead cost for the portfolios and its projects. It is a challenge for many (PBO). It is always a hot topic for the portfolios performance analysis where there is no visible and credible systems. Sometimes, the portfolios’ teams fall in the trap of thinking that they are better without the (OH staff) and they can survive without their executives high cost. They become PMO extremists. To certain extent in some cases they are right. Especially where there is a chance for corruption and no visible systems.

Some companies are fat with staff and non-necessary assets. This happens where there is no KPIs to monitor the value-added analysis by each member and asset on all levels including the quantitative and qualitative contribution they did to the overall business model and profit.

Some top paid managers might not show a lot of added value beside day to day operation. However, one day their high-quality experience helps to win a big project or to solve a problem and save a lot of cost. This experience adds big value to the company. However, there are different ways to get this input with less cost. We all understand that the PBO can’t just watch their cash flow burns with no strong justification and value added. It is a difficult decision every time the top management forced to think about leaving a good qualified engineer or manager. Therefore, building the systems in the portfolio levels help the companies a lot to justify the decision of leave or stay. Moreover, it helps to minimise the time for meetings and micro-management needed from managers which many companies fall in where there is no proper systems, processes and procedures. It needs managers to step in all the time to solve the issues. It creates bottlenecks which complicate the situation (firefighting mode) further.

However, this high cost overhead should always be monitored. Again any overhead cost should be evaluated and tested regularly against its purpose and value added within defined KPIs as a business case.

One recommendation for resources optimization is the redistribution of employee workload flow and job assignments. This can be done better when there are many engineers working on the finance, admin, HR, business developments and bidding departments. Maximizing the engineers working on such departments is good. Some might say, the engineers cost more. I will say, just have a good internship program and fresh graduate employment system to let them work part time in the departments while they are getting more experience on the engineering side which allows them to step in with low cost to cover the need of the projects with some supervision from the high experience OH engineers.

In some cases, outsourcing of some positions or long leaves or limited days’/hours work could be introduced too.

The asset issue becomes more critical for contractors who have a lot of them with high cost. Without a portfolio system link to the running projects and future projects, it is burning the cash flow with no direct added value at least on the short term. A regular asset analysis is required to make decisions before the OH piles up.

Although, recuing cost is a sufficient way to limit loses. It limits also the development of the company. It might put the company on the sleeping mode with no notice because everyone thinks it is normal because the slow market conditions. One of its negative side impact is losing the good qualified staff to your active competitors. They can’t stay with no real work.

Therefore, the right advice to the PBO top management before thinking to cut cost, they should think how they let employees think as investors to make everyone purpose value-creating activities (as their contribution plan) to cut costs from their sides and to generate profit with clear periodic financial goals. It will help a lot to avoid losing the good staff and also helps to justify, the terminations for the others because everyone by then will know his added value to the organization. This period for such proposal is burning cash flow too. However, if you don’t have you should have it like you have a name for your business. So next time, it will be there when needed.

The other overhead which can be reduced rather than termination is the salaries scale, the benefits, the office size, the utilities, the supplies, the phone and Internet lines, the insurances; the cars, and miscellaneous ongoing expenses, such as marketing, advertising, travel costs, legal fees ..etc.

Finally, if your overhead calculation system is still locked in the finance department with no link to visible enterprise project portfolio system, you are limiting your options to three:

1. Adding more cost to your markup price which might be the reason of losing your bids.
2. You are chained to reduce your overhead cost blindly.
3. You are taking the wrong decisions because you don’t have the right data and right advice.

So change before the market force you to change. Some changes are so tough but necessary. You take it when you can take it. Otherwise, you collapse.

Best wishes for all

Engr. Ziad Albasir

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