Project Profit Analysis Management is a process of reviewing periodically, usually weekly, the changes in each project's profit margin. Knowing how much and why the profit margins have changed provide management the ability to preview the financial finish line throughout the project. It gives management and the construction scheduling software they are using a "heads up" and allows more time to address problems at earlier construction stages. This process usually results in improved profits.

Common Approach

A common approach to managing projects in construction scheduling software is to set a budget for all the activities required to complete the project and then compare actual costs against budget. Many accounting systems use this approach which is frequently referred to as "Cost Accounting".

There are major weaknesses using this approach to manage project profitability. They include the time differential between activity in the field and posting of information by accounting, running behind schedule, allowing actual costs to exceed earned value, and not identifying the reasons for missing budgets.

The time differential between field activity recorded in the construction scheduling software and posting of information can adversely affect profits. When an invoice is not posted and related to work completed & billed, project profit margins look better than they really are. Or, if cost accounting reports are reviewed weekly and payroll is bi-monthly, a portion of weekly payroll will not be posted nor reflected on the cost accounting report.

It is important to know in the construction scheduling software if the project is running behind schedule because the project completion date may not be met unless additional resources are utilized. Using additional resources often results in profit erosion as actual costs exceed budget. Alternatively, if the project completion date is allowed to extend, on-going general conditions may eat away at the profit margin.

Allowing actual costs to exceed earned value during the completion of an activity indicates the cost to complete may exceed budget. If this occurs without a change in scope (i.e. change order), the additional cost must be borne by the contractor and the profit margin is reduced accordingly.

Not identifying reasons for missing budgets, such as a bad estimate, non performance by a subcontractor, not billing the owner for a change order, or simply not billing the owner because a subcontractor's invoice was missing at invoice time makes it more difficult to review the project at its completion and gain knowledge to improve future bids and control projects in your construction scheduling software.

The Project Profit Analysis Approach

To effectively manage profit margins, accounting information needs to be analyzed against actual field activity recorded in construction scheduling software on a timely basis. This can be accomplished by daily synchronization of relevant information between the accounting system and a central server that integrates field reporting, scheduling and project management.

For accounting and the central server to communicate timely, a "common denominator" for both is required. Frequently, the cost code is used as this "common denominator".

The budget can be imported from accounting to the central server one time at the beginning of a project. Actual costs can be imported from accounting on demand, preferably daily.

Every day field reports should be transmitted electronically to the central server and include sub-contracting crews, work accomplished (% complete or work put in place), materials received, and self perform labor.

Gathering these sources of information into construction scheduling software is required to produce a comprehensive Project Profit Analysis Report. This report can identify by cost code the budget, approved owner change orders, approved subcontractor change orders, contracted (committed) costs, actual costs, earned value, percent complete, cost to complete, over committed, open committed and unbudgeted on-going general conditions.

This report produced weekly can track the reasons why the current profit margin of a project is different from the original budget: change orders, buyouts, cost to complete, over committed, over general conditions, and on-going general conditions due to extended project end dates.

The original profit is equal to the budgeted profit. With the project 95% complete, the change order margin shows a reduction of profits because approved subcontractor change orders exceed approved owner change orders. The profit margin is increased as buyouts were less than budget. Both cost to complete and over committed indicate additional profit erosion. Although General Conditions are currently on target, Excess General Conditions show additional profit erosion because the project will not be completed on schedule. The current expected profit margin, consequently, is about twenty thousand less than originally planned.

As with any approach, Project Profit Analysis Management is only as good as the timeliness and accuracy of the information entered. It is important that field activity and progress be entered every day and accounting remains current in the posting of accounting related activity.

With integrated field, construction scheduling software and project management information interfaced with accounting, management has the basis to make better decisions earlier throughout the life of a project.