Key Takeaways
- Project margin assurance is an ongoing management process. The firms that use it, identify the leakage along the way. When margins are only calculated at the end, it’s too late for corrections.
- According to SPI Research, “average professional services firms will miss the margin target 4–8 percentage points, simply as a result of a lack of controls for tracking where it is that their teams differ from the baseline forecast from their sales.
- Both project margin erosion and revenue leakage stem from the same cause: delivery solutions separate from those dealing with billing and finance.
- There are 5 controllable drivers for the erosion of margins: scope creep without changes, misalignment of resource rates, timesheet insubordination, leakage with billing blind spots and estimation errors at project kick-off.
- Kytes engineer margin protections directly into the delivery process, enabling this through; in-line real-time P&L visibility, cost and rate-sensitive allocation logic, system enforced change order process, timesheet-to-billing integration and milestone driven invoicing, within a single connected system.
QUICK ANSWER
Project margin assurance is the active management of intended project profitability throughout the delivery cycle – not just measurement. It requires real-time cost capture, scope management, visible resource rates, and automated billing capture within a system designed to alert margin risks early enough for effective action.
The Quarter That Closed 14 Points Below Plan
At a 400-person IT engineering services firm, the PMO Head was closing out Q3 for their projects portfolio. 32 projects had closed out that quarter. They all had bid in the 28 to 32 percent margin range. The actual blended margin on those 32 projects, once closed: 14.6%.
She spent two weeks tracing that gap.
It included: 340 unplanned hours of rework on a fixed fee engagement that went unbilled. A two senior architects charged out below their loaded rate for 6 weeks; A missed email chain with client for milestone billing on three projects. Low quality reporting from one GCC team, that result in a Q3 timesheet non-compliance rate of 38%. (hours were delivered, just not reportable). These are small things, not a big, obvious project overrun.
Individually, these missed beats were almost negligible but across 32 projects, they compounded into that 14 point gap that was only apparent once the quarter was done.
This is exactly the problem that Project Margin Assurance is designed to address.
What Is Project Margin Assurance?
Project margin assurance refers to the practice of sustaining, tracking and defending margin at proposal and delivery, as opposed to finding it only at closure; this means Project Margin Assurance can no longer live exclusively in Finance as a control activity which occurs after the delivery has occurred and been closed out. It is a live management discipline where traditionally margin measurement only answers “the question” “what margin did we deliver?” This discipline, however, answers “The question” – “What margin are we tracking toward at this time?”, and “What does the team have to do today, this week to achieve” or “Protect”. The margin you set and measure to be delivered must be used.
How Is Project Margin Calculated?
Project margin is the ratio of project profit to project revenue, expressed as a percentage
The total cost represents direct labor calculated at loaded labor rates; materials; subcontractor costs; portion of overhead allocation plus project specific charges. Total revenue equates to contract price plus all approved changes. To accurately apply the formula real time requires real time visibility for the cost- (resource cost rate, hours incurred, expenses-), and the revenue – (contract value, approved changes, what was billed) -sides – only really possible with a PM tool and your Finance tool integrated. If these were separate entities then what gets reconciled are only the numbers, which is why it’s often done late i.e at month end and margins get eaten over months without anyone realizing.
What Is the Difference Between Project Margin and Project Margin Assurance?
Project margin is a number. Project margin assurance is a process.
Project margin is used to report what actually took place. It is historic and reports back but is very ineffective for actual project controls. SPI Research states on their Professional Services Maturity Benchmarks: The average company runs about 4 – 8% lower on margin then on their bill rates due to not monitoring this gap in between budget and actual in real time.
The practical difference is when you find out. Organisations that measure at close run a historical audit: accurate, but too
late. Organisations that run a live control system catch erosion in time to act.
What Causes Project Margin Erosion?
Project margin erosion is the progressive loss of planned profitability during delivery. The causes are predictable. With
the right systems, they are preventable.
Scope Creep Without Change Orders
Any out-of-scope hours delivered outside a formal change order are simply costs, with no offsetting revenue. When working in IT Services, scope creep accumulates in many ways: informal client requests, verbal “add-ons,” small additional services that never quite warrant a trip back to the change order process – they all pile up, adding up to many, many weeks of unbilled effort.
Resource Rate Misalignment
Each system should allow a manager to track progress in 6 area of your business: time based performance to scheduled, cum cost to date, forecast cum cost to complete, utilization including bench cost, current billing, margin compared to target. Very few will address the 4th, 5th or 6th. Those are the are that will hemorrhage money when it goes.
Timesheet non-compliance
Timesheet correctness is a form of financial control; when the hours are not entered timeously, the cost position is under-stated for that project, the billing position is incomplete and all margin calculations thereafter will be incorrect. Wrong information used for decisions perpetuates the original error.
Revenue Leakage from Billing Gaps
Realized margin goes below calculated margin where milestone billing is not in the cycle of the workflow when clients don’t do a signature on time, when timesheets slip out of the month when change order revenue not recorded in the month incurred for as cost. Even when controls are in place for the cost it has impact due to process breakdown.
Weak Estimation at Project Initiation
If you quote for a project that hasn’t been estimated based on known historical costs or known, real resource costs you’ve got it wrong from delivery. Winning 28% margin for a project that needs 12% to keep people safe is, effectively, a 16% margin no one is aware of until you wrap up.
What Is Revenue Leakage and How Does It Destroy Project Margin?
Revenue leakage is the earned revenue amount never invoiced or billed to the client. It is different than cost overrun that erodes margin by escalating expenses. But the end result for a project is the same – it loses anticipated margin.
“The most typical causes include hours that were approved as billable but never made it to the invoice; scope increases that were delivered without any scope control agreement (change order); unaccepted project milestones that the billing process doesn’t know it should initiate; or under-billing for senior resources when rate tables go overlooked.
From a portfolio of 30-40 live projects this equates to tens of millions of dollars of delivery and no revenue being recognized. And in total; it is over 15% of total bid project margin when compounded with cost escalation due to the combination of scope creep and rate misalignment. These revenue leakages and erosion of profit margin are both ultimately caused by a lack of integration between the systems that manage delivery and those that collect the cash.
How Do You Protect Project Margin During Delivery?
Set an Explicit Margin Target at the Project Level
Every single project should have an output margin target – a percentage the project should be profiting by – not a revenue / cost target. This should guide each of the delivery decision of that project. Without an output margin target, all the other decisions about margin are down to individual interpretation, which never ends well.
Track Cost Against Budget Every Week
When cost burn deviates from plan early on, the choice remains: tweak the resource mix, seek a change order, or escalate a risk alert the the client. Most of that work should be closed out by month end; it’s already burned. Conversations regarding margins now shift to post-project reflection.
Make Change Orders a System Requirement
The single best solution against Scope creep is structural. The PM system should not allow the scheduling of any task out of scope without a prior change order. If software implements scope management (not just a PM’s opinion) then the informal creeping comes to a halt.
Enforce Timesheet Submission Within the Billing Window
Organizations utilizing automated reminders, manager follow-up procedures, escalation capabilities, and a compliance system displayer to the finance department have improved accuracy billing and cost results compared to team s depending on manual contact.
Review the Billing Position Every Week
Every project should show a real time billing status: Contracted, billed to date, approve of hours not billed yet, and pending of change Orders. The Finance of the project is able to review this every week to correct some of billing errors before being losses for ever.
How Does AI Enable Proactive Margin Monitoring?
Managing the margins of 40 projects without automating Margin management in project platforms does not lend itself to manual reviews-most reviews occur at best only monthly, if then. If projects drift into losses, they go unseen. When margins are part of the projectsplatform itself, then the margin monitoringis automated.
Cost burn is tracked minute by minute, non-compliant Timesheets arecaught before the billings open, and costs where the cost rate > billing rate can be discovered at the project’s outset- not after the billing cycle has already run.
Milestone achievements trigger Billing, automating and expediting margin realization.
How Does Kytes Build Project Margin Assurance Into Every Engagement?
When we worked with IT services, EPC, pharma, and GCC businesses, it always followed the same rhythm. Margin is built during the initial estimate and a report at closing the project. And everything in the middle is managed on a couple of spreadsheet, status meeting and everybody’s mental notes – nobody is good controlling 30 projects, that quickly.
The 14 points difference highlighted in the story above?
It’s no freak, it’s the result of having to many moments without margins. Kytes is an AI Powered PSA / PPM platform for companies that run project and protect margins as an operations process. Connecting your full opportunity to cash chain to let PM, RM, and CFO know where margin must be defended at time they make decisions.
Real-time project P&L;
Each project has a living P&L: current planned revenue, cost to date, forecast completion cost and current margin vs plan. The Head of the PMO gets a view of the total portfolio margin with automatically triggered alerts on when it exceeds defined levels.
Cost-rate-aware allocation
When a resource is scheduled into Kytes, the system immediately reveals the billing and cost rates. This allows you to see the margin impact prior to resource commitment, not at the end of the month.
System-enforced change orders
No task can be given out that wasn’t already contracted within the workflow using the system. Work order routes to get it approved and captured revenue, as well as updates the budget.
Timesheet-to-billing automation
Billable Backlog When an employee has signed off on hours in his/her timecard they update not just the project’s cost positioning and it updates our billable backlog automatically. There are neither delivery system nor the billing system due to they both fall between the.
Milestone billing with auto triggers
When a milestone gets marked “complete” and signed off by the customer Kytes will automatically create the invoice and assign the revenue recognition entry into the corresponding accounting period. Any revenue that escapes through invoicing gaps can never occur.
Frequently Asked Questions
