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Why Project Managers Need to Know About Finance

Written by Moein Varaei
Why Project Managers Need to Know About Finance

Project Managers (who may start a project as Bid Managers) must understand that they manage the profitability and income of the organisation. In short, Project Managers manage a part of the business.

There are many reasons for starting a business. One of these reasons is to make money. Money is not everything, but it is definitely one of the factors of being in business.

If you are in the business of project delivery, (e.g. Engineering Consultants, Architectural Firms, Contractors and the like), then you make money only through delivering projects.

So, the business owners and leaders of these types of businesses must empower and hold Project Managers (PM) responsible for making sure their projects are profitable. Because, if all the projects are profitable then the business enjoys a healthy profit margin.

In fact, if the structure of your business is such that you have shareholders, there is a direct correlation between your projects’ profitability and the company's share price, and hence the value of your business.

It is also worth noting that pay rises and bonuses can only come out of profits. So, there is possibly an added incentive for Project Managers to go the extra mile to ensure their projects are profitable.

PM Must Know How to Prepare a Profitable Financial Proposal

Typically, businesses cannot afford to win projects that are not profitable. If many of your projects are losing money, your business may be forced in to borrowing money and paying interest on funding a money losing project. Double Trouble!

I believe Project Managers don’t plan their project to be a loss-making project. So, if it ends up losing money, there could be a number of reasons. Two of them are that:

    • Either the Project Manager did not manage the project efficiently; 
    • Or the Bid Manager was not experience in bidding and the financial aspect of a project.

Financial Offers

Here are some questions for you:

    • How do your Project Managers calculate and determine the proposed fee? Do your Project Managers do it using any of the following methods?
        • Bottom Up
        • Top Down
        • Percentage of Construction Cost
        • Aligning Bottom Up with Top Down
        • Similar Projects
    • Or do you use a combination of some of the abovementioned methods? I would say use all of them. The more ways you use to arrive at your fee, the better your understanding of where the fee amount should be.
    • Do your Project Managers prepare a project program and develop a Work Breakdown Structure (WBS)?
    • Do your Project Managers have the right experience to understand the scope fully and to be able to develop the WBS?
    • Do your Project Managers have an understanding of what the client is willing or would be expecting to pay for this project? Do you know this market? Do you know this client?
    • Have you done a similar project before?
    • Do your Project Managers allow for contingencies, subs-contractors and other expenses?
    • Do you have a percentage profit that you typically use?

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