With a daily opportunity to talk with construction companies looking to improve their business processes, the conversation will inevitably turn to project management. One aspect of project management often debated by management is whether project managers should be more operational or financial focused. In reality, project management falls into two distinct business models. The more traditional model focuses on the operational aspects of managing a project. The second model puts a stronger emphasis on the financial aspects of executing a project.
Business owners should evaluate their business models to determine if their current approach is delivering the desired results. The term “project management” itself carries a broad definition of responsibilities and meaning. This is clearly demonstrated by reviewing the Project Management Institute, (PMI) definition of project management: “Project management is the application of knowledge, skills, tools and techniques to project activities to meet the project requirements.” Thousands of articles endeavor to share wisdom and guidance addressing what project management means in terms of:
- Schedule management
- Team/resource management
- Risk management
- Cost management
There are far fewer discussions around what financial business processes should be driven by the project manager (PM) versus the company’s accounting department.
This article explores the differences in the business model in which the PM is supported by accounting as opposed to the PM driving the project accounting activity. The differences in the two approaches are determined by the level of involvement by the project managers in the financial processes within the company.
During an analysis of different companies, there are a number of companies in which the project accounting processes are controlled by the accounting staff. In these instances, the key processes are being completed, but without operations and accounting connected, there may be a cost to the overall profitability of the project. In these situations, accounting handles the data entry, runs the necessary reports and updates key items in the financial accounting systems, such as budgets and change orders.
The separation of the financial and operational aspects of project management creates a disconnect between the actual financial performance and what job cost has reported.
A great example of this is, when asked by management what key job-costing reports PMs take into consideration when executing their jobs, the project managers often reply “None, the data is not correct.” In many instances, the PM is monitoring job cost in an offline spreadsheet or other disconnected systems.
Operating under this model can cause inefficiencies for the whole organization and can potentially erode profit margins. Diving deeper into these problems by talking with accounting and management on why this business model is in place, one might discover a variety of different statements that all have the same familiar themes:
- “Project managers don’t understand project accounting.”
- “My project managers won’t enter the data in the system.”
- “We don’t trust PMs in the accounting system.”
- “Our project managers don’t have time.”
- “Timely data entry of project costs”
- “Limited or incomplete job-cost details”
- “Erroneous data posted to job costs”
The most interesting takeaway from meetings and client analysis is that, in most cases, the subject of getting project managers more involved in the financial data is taboo and not open for discussion. The lesson in these examples is that when the project manager is not in sync or on the same page with the accounting team, then the true financial picture of the project becomes blurred.
The danger of a disconnected project manager is the lack of visibility of a project’s “shadow numbers.” Shadow numbers comprise a large group of items that can have either a positive or negative effect on project profitability.
They are called shadow numbers because they typically are not reflected in the job costs of a project until later in their lifecycle. The old adage clearly demonstrates this problem; you can only manage what you can measure, and you can only measure what you can see. The following business processes can create shadow numbers:
- Potential change orders
- Project issues
The issue here is that they are not reflected in the job-cost reporting in order to provide an accurate picture of potential margin gain or fade. At the end of the day, the goal should be real-time, accurate job-cost reporting that demonstrates the overall health of a project.
Project Managers Drive Project Accounting
Do project managers have to do all the data entry on key business processes? Not exactly, but if you want one truth in job costing, there are a number of key financial processes in which the project manager needs to have a direct interface from a financial perspective:
- Project budgets
- Material purchasing
- Subcontract commitments
- Labor-cost review
- Material and subcontractor invoice approval
- Change-order budget changes and impact
- Estimate at completion, EAC and/or cost to complete monthly updates
- Revenue recognition
So why are some project managers so reluctant to get involved in the financial side of executing a project? Outside of the few PMs who will not change their behavior, it may be the current business model or processes that prevent more involvement from more project managers. In some cases, the easiest way to modify behavior to gain more involvement is to reward the team.
- Create an incentive program and reward positive results.
- Review current processes and report shadow numbers.
- Align business processes to provide a job-cost report the PM can actually use.
- Give the project manager access to the project accounting system so that he/she has ownership.
The project manager paradigm is shifting from a purely operational role to a blended financial and operational leader. Are your business processes aligned to support this shift?