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Federal Market Intelligence for Small Business |
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Column: Financial Management of Contracts for the Project Managerby Michael Smigocki, CPA, CVA, Senior Managing Director, Federal Strategies Group, LLCThe overall profitability (or lack thereof) of a Company is predicated upon the financial performance of its contracts. While many Project Managers do a great job of developing strong relationships with their customers, many lack the tools or financial training necessary to profitably manage their contracts. This article will discuss the best practices that successful contractors employ with their PMs. It All Begins With a Budget The initial cost proposal or contract budget forms the foundation that PMs should be evaluated against in terms of financial performance of the contract. Thus, it is important that the PM be involved in both the technical and costing portion of the proposal process, and have an in-depth understanding of the assumptions built into the budget including:
PM’s have very little control over the indirect rates of a company, the one exception being the hours personnel assigned to the PM are charging indirectly. Thus, most companies will not hold PMs responsible for indirect rate variances when analyzing contract profitability. Invest in a Strong Accounting and Reporting System Without useful, timely, and accurate project financial reports, it is extremely difficult for the PM to profitably manage contracts. There is a wide array of accounting and project management systems available for contractors that provide the financial performance data that will enable PMs to make timely project management decisions. However, many companies fail to make such investments in their accounting and reporting system, yet still hold the PM accountable for financial performance. Contract Type Impacts Financial Management There are three primary types of contracts a company will be awarded: (1) Cost Plus; (2) Time and Materials; and (3) Firm Fixed Price. Each of these contract types carry different financial risk factors that should be addressed. A Cost Plus contract carries the least amount of financial risk. The government will reimburse the contractor for all costs incurred as long as they are allowable and allocable, and the Company has not exceeded contract or funding limits. Thus, it is important for the PM to know the actual costs being incurred on a monthly and inception to date basis, and to manage the cost to achieve the contract objectives within the contract value. In addition, the PM needs the ability to know when the contract is approaching the 75% completion level to provide the proper notification to the government. A Time and Materials contract requires the PM to focus on two principal areas: (1) labor utilization; and (2) the hourly compensation cost of personnel. Maximizing the number of hours charged to the contract as well as utilizing labor at or below the budgeted hourly cost will maximize profitability of the contract. However, this is where it is important that the PM understand the minimum qualifications for each labor category specified in the contract. Substituting personnel into higher labor categories when they do not meet the minimum standards can result in audit issues and potential repayment of funds to the government. A Fixed Price contract carries the most amount of financial risk. It is imperative that the PM have a handle on the cost budget and its assumptions. The most important management tool a PM can utilize is monthly estimates to complete. If large variances are resulting from this analysis, management will be in a position to make the necessary decisions to “right the ship”. Finally, scope creep must be addressed with the CO at the time of such request for additional work. Other Useful Tools A few other tools for Project Managers to utilize include: Financial Management for Project Managers is a skill set that should be learned by all PMs. Establishing a reward system for PMs whose financial performance exceeds expectations follows the best practices of successful contractors.
Michael Smigocki, CPA, CVA is the Senior Managing Director of Federal Strategies Group, LLC. He provides government contract and management consulting, M&A advisory, litigation support and expert testimony to the government contracting industry. Contact him at MikeS@FedStrat.com.
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