4/28/2014

1

Better Profits through Better Projects

Oswald CompaniesAll Ohio ConvocationApril 23, 2014

Presented By:  Brad Wilson, CMAPSMJ Resources, Inc.

This information is copyrighted by PSMJ Resources, Inc.® All rights reserved.

Risk Management Should Be a Two-Sided Coin

Risks Rewards

Enhanced Reputation

Long‐Term Workload

Profits

Lost Opportunities

Financial Loss

Liability

2

Three Chances for “Under Performance”

1. Before You Start the Project – In the Contract

2. Running Over Budget – Project Management

3. After You’re Done – Defending Claims

3

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What is “Net Revenue Deficit”?

Uncollectable A/R

Unbillable WIP

Over budget

Negotiations

Proposal cut

2

2.2

2.4

2.6

2.8

3

3.2

3.4

Dir

ec

t L

ab

or

Mu

ltip

lier Net Revenue

Deficit

Target

Achieved

4

What Causes “Net Revenue Deficits”?

1. Fee reductions

2. Jobs in budget trouble

3. Jobs with potential quality/liability problems

4. Charges to jobs w/o contracts

5. Delays in getting charges keyed into accounting

6. Delays in getting charges billed

7. Late payment

8. Jobs with unusually high risks

NRD = Σ (Project Write‐downs – Project Write‐ups)Annual Net Revenue

5

How Can You Generate a Net Revenue Surplus?

2

2.5

3

3.5

4

Target Multiplier Viewed as a Ceiling Target Multiplier Viewed as a Floor

D.L

. Mu

ltip

lier Target

Multiplier

AchievedMultiplier

AchievedMultiplier

ProposalCut

Negotiation Cut

OverBudget

A/RWrite-

off

L.S. JobsUnderBudget

IncentiveFees

6

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Ways to Define a Fee Limit

Fee is based on delivering a defined product

Invoice based on completion, not costsLump Sum

Agreed upon target

No contractual commitment to meet the target

You should advise client if you think you’ll exceed it

Project Budget

Fee is based on actual construction cost at completion

You may have to guarantee the construction costs

% of Construction Cost

Connotes a client funding limitation

You must inform client if you don’t think you can       finish the job for this amount (usually at 75 – 80%)

Most non‐federal clients treat this as a "g‐max"

Not‐to‐Exceed Amount

You must complete the scope for "g‐max" amount

Invoice actual costs (plus profit)

Guaranteed Maximum Fee

ImplicationsContract Term

7

What’s the Risk of Losing Money?Contract Type High Medium Low

Lump Sum √

% of Construction √

Hourly (No Limit) √

Hourly not-to-exceed √

Hourly w/guar max √

Cost plus negotiated fee

√

Advantages and Disadvantages

Contract Type Advantage Disadvantage Lump Sum Can make a large profit if you

manage efficiently. Do not have to show client all costs.

You risk losing money if scope is not carefully defined, or you haven’t negotiated pay for out-of-scope services.

Percent of Construction

A high level of quality required, or rising construction costs, or a shortage of potential contractors can assure high construction costs. Profitable in booming economy.

You have no control over costs; risk losing money in a poor economic climate. Difficult to administer due to fluctuating construction costs.

Cost Plus Fixed Fee

Rewards you for value or risk incurred. Guarantees a profit when costs are estimated accurately and there’s no limit on the total amount of the contract.

Costs incurred beyond a contract limit must be absorbed in the fee; clients see a firms’s costs and may try to negotiate your costs down.

Standard Billing Rate

Simplicity in invoicing. Rates have to be continually recalculated as people receive salary increases.

Multiplier Times Salary

No need to constantly revise rates. Can be profitable if you begin work at a high hourly rate before scope is defined.

Salaries are revealed to clients. Dangerous to startwork without a contract in case of future litigation.

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How Clients Select and Contract Really Affects Profitability!

Source: PSMJ's A/E Financial Performance Surveys from 2007 thru 2011Copyright PSMJ Resources, Inc. Available at www.psmj.com

4.0% 6.0% 8.0% 10.0% 12.0% 14.0% 16.0%

QBS Lump Sum

QBS Time & Materials

Lowest Total Price

Lowest Rates

EBBT by Type of Contract

10

Lump Sum Has Become the Most Common Contract Type

11

Source: 2012 PSMJ A/E Fees & Pricing Survey

0% 10% 20% 30% 40% 50%

Percentage of Construction

Hourly (with maximum)

Hourly, Time and Materials (nomaximum)

Cost Plus Fixed Fee

Lump Sum

2011

2012

…But It Varies a Lot, Depending on Client Type

22

67

2145 56

41

2

8

93

1414

36

24 15

24 832 16 26

9 1 6 0

Transportation GovernmentBuildings

Industrial Housing Healthcare

% of Contracts Used by Various Client SectorsLump Sum Cost Plus Fixed Fee T&M w/o MaxT&M w/Max % of Const. Cost

12

Source: 2012 PSMJ Fees & Pricing Survey

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Converting to Lump Sum

1. Tested 50 proposals

Proposed T&E per RFP (with a not‐to‐exceed)

Proposed lump sum alternate for slightly less than T&E NTE

2. 75% of clients selected the lump sum option

3. Lump sum contracts were 35% more profitable

4. They now do this on virtually every proposal!

Actual Experiences of an Illinois Geotech Firm

13

Getting Better Contracts1. "Mini‐scoping" – negotiate a 

lump sum for each phase

2. T&M for front‐end, then convert to lump sum

3. Lump sum for basic services plus T&M for special services (e.g. client meetings on residential designs)

4. Unit price contracts (units can’t be hours)

5. T&M with incentives for meeting predefined objectives (e.g. meeting an accelerated schedule)

14

Common Contractual ProblemsProblems Possible Remedies

1. Extensive backup for charges

Convert to lump sum or unit price contracts "Shop fee" instead of itemized expenses Get approval to submit your standard cost reports as backup

2. Billing upon completion of large milestones

Provision to invoice monthly in between milestones

3. "You get paid when we get paid"

Up‐front retainer to accommodate extra collection time Front‐end load your invoices Have prime submit your invoice separately to the owner Contract provision requiring prime to invoice promptly and pay you promptly after being paid 

Specify terms for payment if payment delay isn’t your fault

4. Open‐ended retainage provisions

Offer letter of credit in lieu of retainage Limit retainage to an agreed upon $ amount Release retainage on contractual due date unless project is delayed because of your fault

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Common Contractual ProblemsProblems Possible Remedies

5. Vague invoicing requirements

Attach sample invoice to contract

Invoice a predetermined amount each month

6. T&M invoices requiring progress report

Lump sum contract

Separate submittal of progress reports and invoices

7. Unclear or one‐sided change management terms

Clearly specify process for approving changes

Make terms comparable for both parties

8. “Payment within 30 days of approved invoice”

Negotiate client’s approval process to be part of the 30 days

Document client’s approval process and limit its duration

9. No penalty for late payment

Guaranteed interest for late payment

Irrevocable letter of credit

Up‐front payment for "project mobilization"

Right to withhold delivery of documents (send COD)

16

Common Pitfalls in Subconsultant Negotiations

1. Sole‐sourcing major subs

2. Accepting a sub’s first proposal

3. Selecting on low bid vs. best value

4. Failing to flow down prime contract provisions

5. Not taking advantage of your purchasing power

16 Terms to Negotiate Into Your Contracts

1. Upfront mobilization fee 

2. Job cancellation fees

3. Project restart fees

4. Automatic fee escalator 

5. Limitation of liability

6. Late payment penalty

7. Sample invoice format

8. Limitation on design alternatives/time

9. Premium for client changes/reorientation

10. Lien provisions

11. No manual back‐up on reimbursables 

12. Frequent client approvals

13. Ownership of documents

14. Only stamp after payments current

15. Hazardous waste and asbestos indemnification

16. Payment of CA services tied to schedule and volume of shop drawing resubmittals required

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Work Breakdown Structure(a.k.a., Detailed Task Outline)

1. Accounting Elements vs. Scope Elements

2. Use the Organization Breakdown Structure vs. Work Breakdown Structure

3. Deliverable‐based vs. Activity‐based

4. Same WBS for Scope, Schedule, Budget

5. Include PM as Separate Task

6. Don’t Revise WBS Without a Contract Change

(55-56)

Example WBS Levels

Level Used for

1. Phase • Managing overall deadlines and major milestones• Reporting status by the PM to the client

2. Discipline • Managing disciplines or other first-level activities• Reporting status by discipline managers to PM

3. Task • Managing work elements by discipline managers• Reporting status to discipline managers

4. Subtask or Deliverable

• Estimating level of effort• Monitoring progress of each work element

Activity-Based Task Lists Require Limits

Schematic Design1. The architect shall provide 

schematic design services.

2. Alternative schemes shall be provided for the client’s review and approval.

Construction Administration1. The architect shall respond to 

contractor RFIs.

2. The architect shall provide limited on‐site observation.

3. Upon substantial completion, the architect shall perform on‐site inspection and compile a final punch list.

4. Attend progress meetings as requested by the client.

Why is this language bad for a proposal or contract?

(Generally required for early phase or late phase services)

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What is the Status of This Project?

$0

$17,379

$34,758

$52,137

$69,516

$86,895

$104,274

$121,653

$139,032

$156,411

$173,790

31-Jan 31-Mar 31-May 31-Jul 30-Sep 30-Nov

Cu

mu

lati

ve E

xpen

dit

ure

s

Projected Cumulative $

Actual Costs

$13,000

What Happened on the Way to the Bank?

22

Sample Accounting Reports1. Division Time Analysis

2. Percent Chargeable

3. Detail Verification

4. Invalid Transaction Report

5. Division Aging Report

6. Active Projects w/Completion Dates w/in 30 Days

7. Unauthorized Expenditure Detail Report

8. Active Projects w/Unauthorized Items

9. Authorization Listing

10. Items Made Non‐Billable during Period X

11. Revenue Write‐offs during Period X

12. Unbilled Receivable/ Undistributed Revenue–Audit

13. Unbilled Receivable/ Undistributed Cost Aging

14. Manager’s Project Status 

15. Operating Statement

16. Budget & Expense Report

17. Budget & Expense Exception

18. Near‐Term Financial Action

Academic Earned Value Analysis

The Process

1. Take out separate accounting 

codes for each task/activity

2. To assess status, generate a 

forecast to complete (FTC) for each 

task/activity

3. Get actual expenditures from 

accounting for each task/activity

4. Add Steps 2 and 3 to determine 

the Estimate at Completion (EAC)

5. Compute earned value

The Problems1. You need lots of job cost 

account numbers

2. Team members don’t charge their time to correct account numbers

3. PM ends up being a “timesheet cop”

4. PM has to estimate forecast to complete each month

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3-Line Graph Earned Value Analysis

1. Prepare an expenditure forecast Convert expenditure forecast

to a progress forecast

2. Estimate progress for each task3. Compute overall progress

Schedule (step 3 vs. step 1)Budget (step 3 vs. step 4)

4. Actual expenditures from accounting

Project Budget & Schedule Status

$0

$17

$35

$52

$70

$86

$104

$122

$139

$156

$174

31-Jan 31-Mar 30-May 31-Jul 30-Sep 30-Nov

Cu

mu

lati

ve E

xpen

dit

ure

s ($

000)

0

10

20

30

40

50

60

70

80

90

100

Per

cen

t C

om

ple

te

Projected Cumulative $Actual CostsEarned Value

"A" = Schedule Status= 2.3 Months Behind

A

"B" = Budget Status= $12,000 Over Budget

B

26

27

How Does Your Firm Achieve Quality/Efficiency?

0%

10%

20%

30%

40%

50%

60%

70%

80%

90%

100%

VerySmall

VeryLarge

Quality of WorkProcessesQuality of People

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10

28

What Are the Liability Risks?

0 0.5 1 1.5 2 2.5

StructuralEngineers

Architects

MechanicalEngineers

CivilEngineers

ElectricalEngineers

Claims Paid/Fees Earned

0 2 4 6 8 10 12

Condos

Wastewater

CustomHomes

Subdivisions

Schools

Claims Paid/Fees Earned

Low High

High Risk Project TypesHigh Risk Project TypesBy DisciplineBy Discipline

This claims data is provided by the Design Professional group of the XL Insurance companies, formally DPIC. 2006 X.L. America, Inc. All rights reserved. This information may not be reproduced without written consent.

29

No Procedures to Identify/address conflicts, errors, omissions 12%

Unqualified Staff 12%

Inexperienced PM 6%

Client/Project Selection 19%

Scope Mgmt 6%

Contract Terms 3%

Technical Errors/Omissions

30%

Other 12%

Causes of Claims

This claims data is provided by the Design Professional group of the XL Insurance companies, formally DPIC. 2006 X.L. America, Inc. All rights reserved. This information may not be reproduced without written consent.

30

Lessons Learned About Claims Management

70% of E&O claims aren’t just technical errors or omissions.

Most firms overemphasize the importance of contract terms (which cause just 3% of claims).

Picking the right clients/projects is key.

Sound project management is the best defense against claims.

You must have an institutionalized process to insure sound project management.

44

22

11

33

55

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What Your Clients Tell Us About A/E Firms

1. Quality is often defined differently by the customer and supplier

2. Quality and cost must be linked

3. Need a quantitative definition of quality

Satisfied but not Loyal

32%

Very Satisfied &

Loyal15%

Somewhat Dissatisfied

23%

Ready to Defect10%

Somewhat Loyal20%

Alignment with Your Client’s Quality Expectations

CO

ST

Potential for _________________

Potential for ____________________

LEV

EL

OF

QU

ALI

TY

PERFECTION

Professional Standard for Quality Meet all applicable laws, codes & standards Do what the contract says Do it as well as the average competent A/E/C

Client #2 Expectation for Quality

Firm’s Expectation for Quality

Client #1 Expectation

unhappy client

going over budget

Whose Definition of Quality?

A/E Definitions

1. Conformance with requirements

2. Conformance with industry standards

3. Suitable for intended purpose

Client Definitions

1. Understanding my problems

2. Helping me develop creative solutions

3. Effectively implementing these solutions

4. Eliminate hassles from my life

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Translating ISO-Speak1. Quality Management ‐ coordinated 

activities to direct and control an 

organization with regard to quality

2. Quality Control – part of quality 

management, focused on fulfilling 

quality requirements

3. Quality Assurance – part of quality 

management, focused on providing 

confidence that quality requirements 

will be fulfilled

4. Quality Improvement – part of quality 

management, focused on increasing the 

ability to fulfill requirements

Source: ISO 9001:2000

1. Quality Control

Check a product 

2. Quality Assurance

Act to assure

3. Quality Improvement

Examine continuously

The Quality Toolkit1. Defining Requirements Project Management Plan (PMP)

Programming Document orBasis of Design Report (BODR) orPreliminary Engineering Report (PER)

Checklist for Defining Client Requirements 

Contingency/Risk Management Analysis

2. Sequence of the “Work‐Process”

1. Quality Control Activities

35

Early

Late

Risk Management - Claims

Top four non‐technical causes of claims

Negotiations & Contracts

Client Selection

Project Team Capabilities

Communication

One or More of these are part of 93% of claims.

Contract not in place before work is started

Unclear/inappropriate scope

CA services

No long-term relationship

Litgious

Low-price selection

No experience

Tight budget

Inexperience

Lack of procedures to identify conflicts and E & O issues

Disputes not handled well

Lack of documentation on CHANGE

Scope of services not explained

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Risk Driver ResearchA/E firms in 2001 & 2009

Percentage of Claims Affected*

1. Negotiations & Contracts

2. Client Selection

3. Project Team Capabilities

4. Communication

200113%

16%

24%

27%

20096%

23%

25%

39%

*Data from XL Insurance

The Root Causes of Most Client Relationship Issues Are…

Working for the Wrong Client

38

Signing a Bad Contract

It’s Easy to Work for the Wrong Clients

39

Client in poor financial condition

17%

No formal review

of client4%

Client not receptive to ADR

1%

Contractor selection

4%

Client behind in fee payments

7%Other

3%

Client has history of claims / litigation

21%

Client inexperienced in

design issues43%

This information is provided as a courtesy of the Design Professional group of the XL Insurance Companies.

23% of Professional Liability Claims Result from Poor Client Selection

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Don’t Gamble When You Propose to a New Client

Check Them Out Carefully:1. Dun & Bradstreet

2. Credit/Banking References

3. Litigation Records (www.lexisnexis.com)

4. Other Professional Services Providers

5. Secretary of State Office

40

How Large Firms Define A “Quality Client”

1. They Demand and Are Willing to Pay for High Quality Services

2. They Conduct Their Business Activities at a High Level of Integrity

3. They Have Achievable Expectations

4. They Pay Reasonably Promptly

5. They Accept Reasonable Contract Terms & Conditions

6. They Have Substantial Long‐Term Needs for Our Services

Why Do Clients Look For Problems?

INDIFFERENCE BY SUPPLIER

68%

SERVICE DISSATISFACTION

14%

OTHER4%

NEW BUSINESS RELATIONSHIP

5%

PRICE9%

Battling Indifference• Managing your client• Superior client service• Keeping relationships fresh• Proactive communication

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Keeping Client Relationships Fresh

Time

Rela

tio

nsh

ip

Most Relationships With Intervention

How Well Do You Know Your Client?

1. Who does your client report to?2. Why are they organized the way they are?3. What are their strategic drivers?4. Where do the decision makers sit?5. What do they value & expect in their relationship with 

you?6. What do they read?7. What is their career path?8. What are their outside interests?9. What hassles can you remove from their life?

Manage Your Client Relations

Leadership1. Know your client personally

2. Understand your client’s business

3. Be an equal partner

4. Foster trust

5. Demonstrate credibility

6. Anticipate – Don’t react

Management1. Keep your files organized

2. Respond to client requests promptly

3. Meet your commitments

4. Give your client regular progress reports – whether they ask for them or not

5. Be persistent when you need input

And NO Surprises!!!!!!

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46

The Seller-Doer-Manager Model

Technical Staff toProject Managers

Type of Firm Median Mean

All A/E Firms 4.55 5.14 Staff Size 1 to 20 3.33 4.32 Staff Size 21 to 50 4.53 5.02 Staff Size 51 to 100 4.61 5.21 Staff Size 101 to 200 5.42 5.91 Staff Size 201 to 350 4.38 5.26 Staff Size 351 to 500 4.65 5.05 Staff Size over 500 4.45 5.02 Architectural 3.33 4.37 Architectural/Interiors 4.36 4.58 Engineering (Prime) 4.16 4.62 Engineering (Sub) 6.29 6.52 Engineering (Survey) 4.66 5.20 A/E 4.76 5.70 A/E/P/I 5.00 6.08

Source: 2007 PSMJ A/E Financial Performance Survey

47

0

1

2

3

4

5

6

7

Leve

l of

Mat

urit

y

PM Maturity Levels

Level 1

Level 2

Level 3

Level 4

Level 5

Level 6

The best PMs becomea principal-level position

Principals manage all projects;non-principals do the work

Principals perform (and manage) all projects

Non-principals manage small projects and/or tasks on large ones

Principals designate PMs who perform some (but not all) PM duties

Principals turn over all PM duties to PMs

Principals develop a team approach with PMs

Level 7

Firm Size

48

How Principals Work With Strong PMsActivities Project Manager Principal

Fee Proposals Prepares Approves

Fee Negotiations Participates Directs

Team Selection Requests Approves

Performance Evaluations Inputs Performs

Removing Non-performers Recommends Acts

Design/Technical Decisions Meets Standards Set Standards

Client Relations Maintains Oversees

Future Work Secures Approves

Accountability Maintains Rewards/Punishes

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Unlike Fine Wine, Bad News Does Not Improve With Age

1. Make sure clients hear it from you first

2. Take responsibility immediately

3. Present alternative solutions

4. “Your first loss is your best loss”

How Wow’ed Are Your Clients?

1. Solicit feedback (1 page surveys)

2. Internet Surveys  Ratingsource.com

Surveymonkey.com

3. Ask clients to make a list entitled, “Things consultants do that bug me”

4. Collect, summarize, share, do it again!!!!!

Keeping Clients Happy = Risk Management

Client Management Plan

1. Developed with the Client

2. Rules of Engagement Contracting Provisions Authority Matrices

3. Elements of a Client Plan Goals & Objectives Account Team Organization & Responsibilities Quality Control Process Master/Task Order Contract Change Management Process Communication Plan

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Pricing Has Levelled Off While Costs Are Still Increasing

52Source: 2012 PSMJ A/E Financial Performance Survey

2.00

2.20

2.40

2.60

2.80

3.00

3.20

Cost (Labor plus operating Overhead)

Target Mulitplier

Target Margins Have Shrunk

53

$0.00

$0.50

$1.00

$1.50

$2.00

$2.50

$3.00

$3.50

1978 2012

$1.00  $1.00 

$1.25 $1.68 

$0.75 $0.42 

Operating Profit Operating Overhead Direct Labor

Fortunately, We Are Getting Better at Managing Projects

Source: PSMJ 2012 A/E Financial Performance Survey54

 2.50

 2.60

 2.70

 2.80

 2.90

 3.00

 3.10

 3.20Target vs. Achieved Multiplier (Net Revenue Deficit)

Actual Net Fee MultiplierTarget Net Fee Multiplier

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Net Payroll Multiplier Is Starting to Recover

Source: 2012 PSMJ A/E Financial Performance Survey55

1.55

1.60

1.65

1.70

1.75

1.80

1.85

1.90

 1.55

 1.60

 1.65

 1.70

 1.75

 1.80

 1.85

 1.90Net Payroll Multiplier (Revenue Factor)

But Profits Are Still Down

Source: 2012 PSMJ A/E Financial Performance Survey56

0%

2%

4%

6%

8%

10%

12%

14%

16%

18%

0%

2%

4%

6%

8%

10%

12%

14%

16%

18%

EBBT (%

 of Net Reven

ue)

Operating Profit

0%

5%

10%

15%

20%

25%

Q1

2006

Pre

-tax

Pro

fits

(% o

f Rev

enue

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state

Hotels,

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And They Are Still Very Low Compared to Other Industries

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20

Early Risk Management Strategies Are Most Effective

Client Selection

Client Management

Quality Management

Contract Management

Legal & Insurance Protection

58

Costs

Four Risk Management Strategies

AVOID• Project & Client Selection

TRANSFER• Insurance & Contracts

ASSUME• Self-insurance

CONTROL• Systems in place to recognize & mitigate risk

Risk Management for Dummies

1. Never accept a risk you cannot quantify.

2. Don’t take on risks for things you can’t control.

3. Don’t accept responsibility for things that are someone else’s fault. (e.g. your client)

4. Be sure the rewards justify the risks.

5. Don’t bet the company on any one project.

6. Don’t publish QA policies/procedures unless you are serious about enforcing them.

7. Don’t think your attorneys will keep you out of trouble.

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21

Your Personal Action Plan

Inaction destroys ROI

Don’t go back to your office and “dump” this on someone.

Discuss the information with a partner (fellow shareholder).

Identify the area(s) of greatest concern.

Set some time‐limited goals with each other (3 or 4).

Review your risk management in light of your overall firm growth strategy.

Where to Get More Information

1. PSMJ Web Sites: www.psmj.com

2. ASCE Engineering Management Division

3. Other Professional Societies (AIA, ACEC, NSPE, ASFE, APA, Etc.)

4. PSMJ’s Monthly Newsletter – Professional Services Management Journal

Questions???

Call on us if we can help you

Brad Wilson David BursteinPhone: 857.255.3204 Phone: 770.723.9651bwilson@psmj.com dburstein@psmj.com

Sue LeComtePhone: 857.255.3205slecomte@psmj.com

Brad Wilson David BursteinPhone: 857.255.3204 Phone: 770.723.9651bwilson@psmj.com dburstein@psmj.com

Sue LeComtePhone: 857.255.3205slecomte@psmj.com

We Hope To See You Again Soon!!!!