Project Peformance Metric - % Profit, Multiplier, etc 1

[Todd E]

Question (or poll) of the group -- how do you typically see evaluation of project performance. My new firm uses project multiplier and gross margin (engingeering and environmental firm). Previous firms used profit on net revenue (for engineering) or profit on gross revenue (for construction management). Any feedback on using project-based multiplier for evaluating performance of a single project?

 

[alchemon]

Project multiplier. Management sets what our project target should be. Multiplier basically is "What We Get Paid/What We Spend = multiplier. Profit and overhead are included in the overall target multiplier. The multiplier is set at the beginning of the year, and then each job is judged on that.

It is not a bad way to track job performance, but you have to make sure you handle things like subconsultant expenses, etc. correctly (net vs gross revenue).

 

[Todd E]

Have you seen it used on a project by project basis INSTEAD of profit % (gross or net)? They don't use %, which is a little different for me to get used to. I'm used to multiplier on a monthly income state (what's our breakeven this month, what's our effective multiplier this month). Adding to the grey-ness of multiplier, we have multiple offices, each with thier own breakeven which may change as much as 0.5. Each project has a target multiplier assigned based on the estimate.

Great point about subs and expenses. Those things help the net revenue since we usually have a markup. On multiplier, not sure how it plays into the equation.

 

[alchemon]

Normally, the individual projects are NOT listed with a % profit. You can run a report to list the actual profit by a specific projects, but you have to bear in mind, management may be looking at 100 projects at one time. They focus on the outliers, the ones with very high and very low multipliers.

The multiplier for each is listed as a quick check. Depending on the service line, for us, I have seen TARGET multipliers vary by almost +/- 1.0 depending on the service line. As I mentioned, management sets the targets annually as it will vary with overhead percentages and profit targets.

The projects are normally listed with a RAW dollar profit (or projected profit), however:

Raw dollar profits can be deceiving - say you make $2000 profit on a $10,000 fee, this is better (percentage wise) than a $10,000 profit on a $100,000 fee. The multiplier already has a assumed profit built into it (it is really a certain amount of cents per net revenue). Therefore, as long as the job is running at or above the multiplier, then the project is "making money" (aka meeting the firm's profit goals). You also have to keep in mind, that many projects now are hourly or hourly not to exceed. So, you can basically only run as effectively as your multiplier. Therefore, often profit goals are not set, but rather net revenue goals (since if you are hitting the multiplier, you are being profitable).

The important thing, on the multiplier, is to know what your job's multiplier is, and make sure to meet or exceed it. Sub consultant mark-up can help, just make sure it is being accounted for correctly. The easiest way to run a high multiplier, assuming you normally bill at hourly rates, is to keep your direct labor costs as low as you can, obviously.