The responsibility of managing risk is transferred to the project manager (PM) once a project is won. While elements of risk must be an integral part of the design, the process should include all the contributing participants in the project life cycle. This article will look at how designing a system of project tracking and visibility is a necessary element of risk reduction and will help increase the involvement of CFOs and other executives.
Mitigating Risk
Business risk, technical risk, and integration risk are inherent in every project. While integration risk is the most underestimated and least measured of the three types, it has the highest impact on the other two categories and contributes the most to project mismanagement, which leads to a higher project volatility and lower performance projection accuracy.
The PM’s role is to mitigate and make these risks visible. However, when PMs come from the field and/or have not been formally exposed to or trained on risk management – or if their managers have tried to control the risk for them due to lack of system design that reduces the risk – then the PMs often try to fix the issues on their own before the inevitable “write-down” of a job’s profits.
The CFO’s role is to help bridge this knowledge gap by educating PMs about risk and money management, as well as how to measure them correctly. In other words, there must be sufficient independent variables to measure the project progress and show what the PM may not be able to see or manage on their own.
The CFO’s Role in Maintaining Project Visibility
Linking the field/job performance to the company’s performance is the key deliverable and role of the PM, and yet one of the least addressed at the company level. The CFO has access to billing and collections information but typically does not have access to timely job-specific risk information. That information is normally held at the job/project level and mostly visible to the PM, who often works on multiple projects simultaneously.
It is typical for a PM to move money between projects and cost codes, such as material, labor resources, subcontractors, tools, and rentals, which is referred to here as horse-trading. While the CFO knows that these cost drivers should be managed and reported individually, with wins in any area belonging to the company profitability, PMs have been known to think of project costs and profits as their own lump sum to manage. Here are four scenarios:
Scenario #1: “I Made Money on the Buyout”
If PMs are the decision-makers for project purchases, then they might have negotiating power with the vendors and may have the ability to purchase the material at a price less than the estimated cost. These savings often come with a trade-off – reduced service from the vendor and, in the long run, individually incented behavior where the vendor’s salespeople can “sell” to individual PMs without the contractor’s total business in mind. If the buyout savings are allowed to be a PM’s savings on a project, then they might not work as hard to manage the project and other risks.
Scenario #2: “I’m Covering It with Change Orders”
Some companies have standard pricing or other policies in place for change orders to avoid acceptance of verbal orders by their field personnel. However, many PMs accept change orders as an excuse for a fading job without written verification on their projects. Similar to the first scenario, allowing for change orders to be dealt with on an individual basis will mask the profitability of the change orders and their true impact on the main job’s productivity and performance.
Scenario #3: “The Time/Cost Was Charged/Allocated to the Wrong Place”
Without an independent variable for measuring progress (i.e., ASTM E2691, the Standard Practice for Job Productivity Measurement), PMs have been known to move time around into different labor codes or pay items. In some cases, an entire set of overhead has been dedicated to job cost transfers.
In this way, the PM can move money among “buckets” of labor codes or even job numbers. When one code or job looks bad, PMs move the time or cost to another one to make it look better. Again, this completely masks the true picture and underlying issues.
Scenario #4: “Sandbagging”
This term refers to a situation in which a PM identifies a whole host of potential (but not likely) risks for which they are holding onto money in their projection. Then, at the end of the job, the PM becomes the hero by bringing the job in at a high margin, though the financial information throughout the duration suffered and the CFM sees wild swings in financial performance from month to month. This scenario also has a negative effect due to holding onto unnecessary reserves.