PROJECT MANAGEMENT 101 AT WESTON & SAMPSON
MODULE 0
Work the Economic Model
Weston & Sampson signs a $400,000 roadway rehabilitation contract. A geotechnical subconsultant performs part of the work. The project runs at the target ELM.
How much project profit does the contract return?
What is given
- Contract value
- $400,000
- Geotechnical subconsultant, at cost
- $72,000
- Markup our firm adds to that cost
- 15 percent, which is $10,800
- Overhead rate
- 1.85
- Breakeven rate
- 2.85
- Target ELM
- 3.30
Round each answer to the whole dollar. Take profit as what is left, so the parts add to the total.
Step 1Net Revenue
Written Lesson, Section 0.2.1, Fees and Net Revenue
A fee is not revenue our firm earns. Part of it passes through to other parties. Other direct costs are the amounts our firm pays out and the client repays at cost, with a small markup where the contract allows.
| Line | Amount |
|---|---|
| Contract value the client pays | $400,000 |
| Geotechnical subconsultant invoice, at cost | $72,000 |
| Markup our firm adds, 15 percent | $10,800 |
| What the client pays for the subconsultant | $82,800 |
Our firm keeps the $10,800 markup. It is revenue our firm earns, and it is not labor.
Net Revenue is the contract value less the other direct costs at cost. The markup stays in.
What is the Net Revenue on this contract?
Two tries. After the second the page shows the worked solution and carries the correct value forward.
Subtract the subconsultant cost at cost. The markup is revenue our firm earns, so it stays.
$400,000 − $72,000 = $328,000
A common wrong turn is subtracting the $82,800 the client pays, which gives $317,200. That figure is Net Labor Revenue, the revenue from our own staff alone. It is a real number and it answers a different question.
Step 2Direct labor
Written Lesson, Sections 0.2.2 and 0.2.4
The Effective Labor Multiplier is Net Revenue divided by direct labor. Turn the formula around, and it shows how much direct labor a fee can carry at a given multiplier.
Our firm targets an ELM of 3.30. Every dollar of direct labor has to produce $3.30 of Net Revenue for the project to hit the target.
How much direct labor does $328,000 of Net Revenue support at the target ELM?
Two tries. After the second the page shows the worked solution and carries the correct value forward.
Divide Net Revenue by the target ELM.
$328,000 ÷ 3.30 = $99,394
Dividing the $400,000 contract value instead gives $121,212. That plans labor against money our firm never held, because $82,800 of it belongs to the subconsultant.
Step 3Overhead, then profit
Written Lesson, Section 0.2.2, The cost model
Every hour of direct labor carries overhead with it. The overhead rate says how much. What remains after direct labor and overhead is the project profit.
For pricing and budgeting, our firm uses an overhead rate of 1.85. One dollar of direct labor carries $1.85 of overhead, so the two together cost $2.85. That is the breakeven rate.
What is the project profit?
Two tries. After the second the page shows the worked solution and carries the correct value forward.
Overhead first, then take profit as the residual.
Overhead = $99,394 × 1.85 = $183,879
Profit = $328,000 − $99,394 − $183,879 = $44,727
Profit is 13.6 percent of Net Revenue. The same labor at breakeven would need $99,394 × 2.85 = $283,273 of Net Revenue, and the contract produced $328,000.
The $10,800 markup from Step 1 is part of the $328,000 Net Revenue, and direct labor and overhead do not change with it. Every dollar of markup therefore carries straight to profit: without it, Net Revenue would be $317,200 and profit would be $33,927, exactly $10,800 less.
The answer
The contract is worth $400,000. Our firm earns $328,000 of it, spends $283,273 of that reaching breakeven, and keeps $44,727.
A fee is not revenue. Take the pass-through out first, and what is left has to carry direct labor, overhead, and profit in that order.
The project manager controls the labor line. Every hour added above the plan comes out of the $44,727, because the fee does not move.