You’re a Project Manager and have 22 people on your project – should everyone charge their time for work completed, and should all time be invoiced to the customer?
At the surface, this seems rather straightforward. However, it’s surprising how many project managers don’t understand the fundamental difference between; (a) Charging time to the project for work completed, and (b) Invoicing the customer for work completed.
Let’s explore this critical philosophy a little further beginning with the first point – which happens to be the easiest! In short, everyone who works on the project, to complete some aspect directly related to the project, should charge their time to the project accordingly. This is not open for interpretation or discussion, and should be regarded as a directive written into project management governance for the organization.
In order to understand the true cost of the project, one must accurately record the time spent to complete the project. This data can be used for future planning, including; project estimating, resource planning, profit margin, etc.
This edict becomes even more critical for project managers when the cost of the job begins to exceed plan. A robust Project Controls program should be able to identify this risk well in advance, analyze the issue, develop recovery plans, and implement changes to prevent future occurrence.
To use a very simplistic example:
- Your project is to build a box
- Your budget is $15 (15-hours) to complete the build
- You have a team of 22 people (@ $1/hr)
- Each person has spent 1-hour working to complete the build
At the completion of the project, you have spent 22-hours and the cost is $22
A simple example, but you can see that it cost you more and took longer to complete the project than planned. ‘Why’ is another topic altogether.
If 7 individuals did not to charge their time to the project, it would still have cost more and took longer than planned.
If we state that all time to complete a project must be charged to the project, it stands to reason that all time charged must be invoiced to the customer, right? Well, no!
This brings us to the second point, which can be a little more difficult for some to understand. For a number of reasons, an organization may elect to invoice a customer for less than the cost to complete the project. Again, a topic for another day.
Keeping with our very simple ‘box’ project:
- The sales team has decided to sell the box for $15
- Although $7 less than the cost to build, they have elected to offset this loss by marking up the cost of the part inside the box.
Once again, very simple, but you can see here the Sales group feels they have a better chance of winning a bid by taking a loss on the packaging and making it up on the contents.
Of course, there are other cases where, for example, something went wrong with estimating and the actual cost of the project exceeds the plan. Perhaps there were mitigating circumstances and it’s possible to recover the additional cost through change orders. However, an organization may again elect to invoice the customer for the contractual cost – forgoing often contentious change orders, and preserving a relationship that will benefit the organization in the future.
In closing, it is important that this fundamental concept of Project Management be incorporated in organizational governance. Understanding the true cost of a project will serve to benefit the organization.