Re: Calculating end of project profit margin
From: Steve House [MS Project MVP] (sjhouse.remove.this_at_to.send.hotmail.com)
Date: 11/20/04
- Next message: raduga_fb: "Problem about Font Formatting (Project 2003)"
- Previous message: Mike Glen: "Re: Need to report by Resource/time period/Finance category"
- In reply to: Andrew (Bangkok): "Re: Calculating end of project profit margin"
- Messages sorted by: [ date ] [ thread ]
Date: Sat, 20 Nov 2004 05:03:57 -0500
Just a couple of thoughts - a little late at night and not really able to
fully focus on your explanation. But why not use assign the individual
resources to the tasks at their true rates and then apply your markup to the
task total? Project can do a very good job of calculating the true cost of
the project without fudging averages at all if you'll let it. Simply list
all the resources as individuals by name with their real cost to you. For
your example, you wouldn't have a single resource "Guys" with some sort of
prorated or average cost rate. Instead you have 2 resources - Senior Guy
with the rate of 1500 and Junior Guy with the rate of 700. The Rate Tables
would be used if a resource gets different rates for different tasks, not to
track rate differences between SG and JG with both of them lumped together
as the aggregate resource "Guys". So if your organization has 100
individuals you might assign to tasks, your resource pool would have 100
names, each with their own unique rate schemes. When you assign them to
your task you assign SG for 20 hours and JG for 80 hours. Project then
gives you the true internal cost of that task which you subtract from the
amount yo bill the client to calculate your margin. Why break down the
BILLING rate on a per resource basis at all? The client doesn't need to
know anything about their relative compensation, all that should matter to
him is what the total he has to pay to get the task done so bill him the
same rate per hour regardless of who you send on the task. One of the key
differences between work as an employee and work as a contractor is that the
employee is paid for his work effort but the contractor is paid to deliver
the finished product and the client could care less what effort or cost was
required on the part of that contractor to achieve it. You guys are
obviously contractors, why bill using a business model like an employment
agency<grin>?
-- Steve House [MVP] MS Project Trainer/Consultant Visit http://www.mvps.org/project/faqs.htm for the FAQs "Andrew (Bangkok)" <AndrewBangkok@discussions.microsoft.com> wrote in message news:4A9298FF-A677-48CD-B11E-11987030FED5@microsoft.com... > Sorry, I may have been a little unclear in my earlier post. > > We do actually bill fixed price for the entire project. However the > project > progress is tracked at the task level so when tasks are deleted or added > there can be some adjustment to the total price. With the swings and > roundabouts theory in place it tends to even out most of the time but not > always. Anyway, that's not my most immediate problem right now. > > Due to the market conditions here it is possible to use a billing rate for > resources that allows for a handsome profit margin. The thing is that > there > is a significant difference between the rates for the various resources. > So > for example, if I have a project that will take 100 hours and two guys - > Senior Guy and Junior Guy. Rate for Senior Guy is 1500 Baht/hour and I > need > him for 20 hours = 30,000 Baht. > > Rate for Junior Guy is 700Baht/hour and he will do the remaining 80 hours > = > 56,000 Baht. Total Project: 86,000 Baht. > > If I used the average of the 2 rates to calculate the price that would be > 1,100 Baht/hour * 100 = 110,000 Baht. Good if you can get it, but > unfortunately clients aren't that dumb. So I use the current Cost field > to > calculate price for each resource and roll that up to a total. > > During the projects it is not uncommon for there to be overruns of effort > for tasks. Due to the built in margin this has not been seen as a problem > as > the internal cost of resources is so low that a project can overrun by > nearly > 4 times the initial estimate before it starts to lose money. Yes, I know > that is not great project management and I'm putting measures in place to > address that and in order to do so effectively I want to be able to > quantify > the effect this is having on the bottom line. The CEO knows this is a > problem but I need some hard numbers to give impetus to the change and > then > to be able to measure the effect of the change. > > So, I have used an average cost for internal resources to calculate the > cost > of the project and hence the margin for the entire project. Right now, > I'm > using a Custom field to do that so I can only use one rate for everyone. > That works ok, as the cost for the Senior Guy is about 250 baht/hour and > the > junior guy is around 200Baht/hour. Using the formula above this gives me > a > total cost of 21,000 Baht if I use the actual costs for each resource or > 22,500 if I use the average for the entire project. Still a difference > but > not too bad. > > I then use another Custom Field to track the actual internal cost using > the > actual hours worked and the average cost. This then gives me the Actual > margin for the entire project. > > BTW I know I could use the Cost Rate Table to record the internal costs > for > each resiurce but it still doesn't give me the ability to track the > increase > or reduction in margin. > > Anyway, during the course of the project I can export the numbers to Excel > and graph the rise and fall. This will give an indication that things are > going bad but the thing I really want to know is how bad it will be at the > end. This is where the earned value feature would be useful. > > The reason I want to know that is that it will allow me to assessthe > effectivness of any action taken to reverse a project going down the tube. > If halfway through I can predict a project will make a loss if nothing is > done, then take some action intended to prevent that, I can then see if > that > action is working during the second half of the project. > > This would all then be fed back into the initial planning process so > hopefully it won't happen again. > > This is a good idea (at least I think so) but how to do it? > > > > "Steve House [MS Project MVP]" wrote: > >> Are you tracking a group of people as a single resource - 5 engineers >> with a >> salary range of 20k to 40k averaging 30k being listed "Engineers" >> "Avail=500%" "Rate=30k" or are you listing each engineer as a single >> individual, max avail of 100% and their true loaded labour cost as the >> rate? >> If you list all your resources as individual people rather than dealing >> with >> groups the inaccuracies you ascribe to using avaerage salaries goes away. >> If we have task "Fidget Widgets" and assign individual resources Bill & >> Joe >> to do it, Project's cost field will accumulate the true loaded salary >> costs >> for Bill and Joe and so reflect our true internal costs. If we take Bill >> off and send Fred instead, Project would use Fred's rate, not Bill's, in >> calculating the costs. >> >> I'm confused why you would bill on a per task basis. Billing for the >> complete project makes sense but it's not like the client has an option >> whether tasks are done or not, that's governed by the project scope and >> the >> requirements of the deliverables - the tasks to be done being driven by >> the >> work required to produce the deliverables. If a task is dropped, that >> deliverable isn't done and the project scope changes, hence a new bid to >> the >> client for the work. But he's still paying for the whole deal, not >> individual tasks except in the aggreate. If I'm the client having a house >> built by a contractor I don't pay separately for the east, west, north, >> and >> south walls of the foundation but it's very likely that they are listed >> as >> separate tasks in the plan - instead I pay for the foundation, walls, >> roof, >> whole completed package in one total lump sum. Maybe I'm naive, but it >> seems like trying to track margins on a per task basis would create a sea >> of >> numbers that don't actually do much to assist the decision-making >> processes >> of managing either the project or the firm - they might look impressive >> but >> it seems to me that such micromanaging would obscure more than enlighten. >> I'm still not going to assign someone to a task who is not competant to >> do >> it just because he's the cheaper resource <grin>. >> >> -- >> Steve House [MVP] >> MS Project Trainer/Consultant >> Visit http://www.mvps.org/project/faqs.htm for the FAQs >> >> "Andrew (Bangkok)" <AndrewBangkok@discussions.microsoft.com> wrote in >> message news:AA3FD268-9D59-41EF-B7B4-0A0B9637DDB2@microsoft.com... >> >I thought of that and I may well have to use that approach if nothing >> >else >> > comes along. >> > >> > We are billing on a fixed price basis for both tasks and project. I'm >> > therefore using the existing cost fields to calculate the total cost as >> > that >> > allows me to assign different rates for different resources and those >> > rates >> > vary widely for each skill set. Also, as a percentage of total project >> > work, >> > the effort from the more expensive resources is much less than that for >> > the >> > lower levels. >> > >> > So if is used an average of the billing rates in a Custom Field, the >> > results >> > would be skewed. I guess I'd get some indicative trend results but not >> > close >> > enough to aculaity to be really meaningful. >> > >> > I can get away with using an average of salary plus overheards for >> > calculating internal cost because the difference in salary rates for >> > senior >> > and junior staff is not all that great (this is Thailand, remember). >> > Again >> > the end result is not 100% accurate when totalled, but it is much >> > closer >> > to >> > reality. >> > >> > The best solution would be if I could assign different rates to the >> > same >> > resource and then have them both appear in an earned value report. >> > >> > "Steve House [MS Project MVP]" wrote: >> > >> >> Are you billing based on time & materials (actual work), a fixed >> >> amount >> >> per >> >> task, or a fixed price bid for the project? Was thinking that if your >> >> reversed your usage of the fields, using the existing cost fields for >> >> internal costs (which is what they're already computing when you use >> >> burdened labour costs for the resource rates) and the custom fields >> >> for >> >> the >> >> billing/revenue data then you might be able to get what you want from >> >> the >> >> earned value Estimate at Completion fields. But whether that'll work >> >> depends on the basis for the revnue stream. >> >> -- >> >> Steve House [MVP] >> >> MS Project Trainer/Consultant >> >> Visit http://www.mvps.org/project/faqs.htm for the FAQs >> >> >> >> >> >> "Andrew (Bangkok)" <Andrew (Bangkok)@discussions.microsoft.com> wrote >> >> in >> >> message news:9228A6A0-7BA9-45FC-8B4C-E23B583E4F4F@microsoft.com... >> >> > Using Custom fields I have set up my project to calculate the >> >> > estimated >> >> > and >> >> > actual profit margin. The Task Cost field uses the billing rate and >> >> > the >> >> > Custom Field that calculates the Estimated Internal Cost uses the >> >> > formula: >> >> > [Work]*avaerage rate for resource (salary + average overheads). >> >> > Subtract >> >> > one >> >> > from the other in another Custom Field and you have the margin. >> >> > >> >> > Actual Internal Cost uses the formula [Actual Work]*average rate. >> >> > Subtract >> >> > that from Cost and you have the Actual Margin. >> >> > >> >> > This is fine but I really want to see what the Profit Margin will be >> >> > at >> >> > the >> >> > end of the project. Using Actual Work lets me see the margin >> >> > decreasing >> >> > or >> >> > incresasing on a daily basis but I can't see where it is likely to >> >> > end >> >> > up, >> >> > based on the current trend. To make it easy to see I'd also like to >> >> > be >> >> > able >> >> > to graph this somehow. >> >> > >> >> > Any ideas how to do this? >> >> > >> >> > After this is achieved the next step is to role it out across the >> >> > enterprise >> >> > so we can see the overall picture across multiple projects....but >> >> > one >> >> > thing >> >> > at a time. >> >> > >> >> >> >> >> >>
- Next message: raduga_fb: "Problem about Font Formatting (Project 2003)"
- Previous message: Mike Glen: "Re: Need to report by Resource/time period/Finance category"
- In reply to: Andrew (Bangkok): "Re: Calculating end of project profit margin"
- Messages sorted by: [ date ] [ thread ]
Relevant Pages
|
