Project Management · Module 1 · Week 1 Written Lesson
Module 1 · Project Pursuit · Week 1 · Self-paced
The instructional core of Week 1. This lesson develops the reasoning that the videos illustrate and that the Business of a Project quick reference documents in full.
Written Lesson · the complete walkthroughVersion 2.0The starting point
By the time the project team begins logging hours to a project, the firm has already made several decisions that shape the environment in which the team will work. The firm has assessed the opportunity, priced it, and weighed how the opportunity fits within the firm's broader economic performance.
This lesson explains how the firm brings work in, and how that work interacts with the firm's economic model.
Every project moves through the same sequence of decisions before it becomes a project. Weston & Sampson refers to this sequence as the pursuit.
Consider a public works director in a midsize town whose department has been evaluating an inflow and infiltration problem in an aging sewer system for two years. During an unrelated site visit, she mentions the problem to a Weston & Sampson project manager. That mention constitutes a lead, an initial signal that a project opportunity may exist.
The lead becomes an opportunity once Weston & Sampson determines that the signal warrants further evaluation. This evaluation considers whether the scope is well defined, whether qualified staff are available within the required timeframe, and whether the client relationship justifies the investment of pursuit hours. The resulting determination is the Go/No-Go decision, the choice to commit the firm's pursuit hours to the opportunity or to decline it.
A Go decision results in a proposal, a written commitment to a defined scope, fee, and schedule. An award follows when the client selects Weston & Sampson to perform the work.
Each stage adds assumptions that the project team will later inherit, verify, or revise.
The point at which a project manager enters this sequence determines the nature of their involvement, and a project manager does not always control that timing.
Some pursuits move through the lead and opportunity stages without the eventual project manager assigned, and the project manager joins only at award. A project manager involved during lead, opportunity, or proposal helps shape the assumptions behind the scope, fee, schedule, and staffing plan. A project manager who joins at award begins by testing those assumptions against the current project conditions.
Regardless of the entry point for the project manager, assuming leadership of a project means assuming a new economic input for the firm. Successful project leadership requires understanding the basic economic engine that governs the firm and within which every project operates.
The economic engine
The overall performance of our firm is determined by relatively few variables.
Weston & Sampson measures its labor economics against net service revenue, the portion of a project fee the firm earns through its own labor.
A project fee sometimes also includes direct expenses and reimbursable expenses, amounts Weston & Sampson excludes from Net Service Revenue under its accounting practice. Direct expenses are subconsultant or vendor fees the firm passes through on the project’s behalf. Reimbursable expenses are out-of-pocket costs, such as travel and permit fees, billed through to the client at cost. Neither amount is present on every project. When present, both pass through the firm without becoming part of its own earned revenue.
Consider a town that signs a contract for a roadway rehabilitation project. Weston & Sampson will design new pavement sections, coordinate a geotechnical subconsultant for soil borings, and manage construction administration, for a fee of $400,000. Of this fee, $72,000 covers the geotechnical subconsultant's services, a direct expense. This project carries no reimbursable expenses. When evaluating the net economic impact of the project on the firm's operations, Weston & Sampson removes this amount from the fee, and the remaining $328,000 represents the Net Service Revenue the firm earns through its own labor.
Net service revenue funds three categories of cost. It funds the direct labor of the staff performing the work. It also funds an allocation for the firm's overhead, including rent, software, marketing, and the labor of staff who do not bill their time directly to a project, known as indirect labor. The amount that remains after the firm covers these costs represents profit.
The basic cost model for the firm is represented in the chart below. The chart illustrates how much of each revenue unit is spent on our costs and the approximate amount we aim to retain as profit.
The billing rate
Consider an environmental scientist at Weston & Sampson who earns an annual salary of $72,800. Divided across 2,080 working hours, her wage cost is $35 per hour.
Her billing rate on a Phase One site assessment may be approximately $114 per hour. This difference reflects the additional costs that each billable hour has to cover beyond the employee's wage. Each hour of her work carries a proportional share of the firm's overhead, the same rent, software, and non-billing staff time described in the previous section, along with a proportional share of the firm's profit target. The wage, the overhead share, and the profit share together determine the billing rate.
Dividing the billing rate by the direct labor cost produces the Direct Labor Multiplier, or Effective Labor Multiplier, the ratio Weston & Sampson uses to evaluate its labor economics.
In this example, the direct labor cost of $35 per hour, multiplied by the firm's 3.25 direct labor multiplier, produces a billing rate of approximately $114 per hour, consistent with the firm's 1.60 overhead factor and 20 percent profit target.
Pursuit meets the model
The Go/No-Go decision described earlier produces two figures for every pursuit, a fee target and a win probability. The fee target is priced using the same economic components described above. The win probability is the project manager's estimate of how likely the firm is to convert that priced opportunity into signed work.
Multiplying the fee target by the win probability produces the weighted opportunity value of the pursuit, the amount of future net service revenue the firm can reasonably plan against before the opportunity is won. Each opportunity the firm pursues to the proposal stage generates a projected addition to future revenue, sized by how likely the firm is to win it.
Consider a three-person environmental team that can produce approximately $18,000 of billable work per week. The team currently holds $126,000 of signed work under contract, representing seven weeks of funded work, which we call “backlog.”
A new lead arrives for a Phase Two site assessment valued at $180,000. The project manager estimates a 30 percent probability of winning the work. Multiplying the fee by the win probability produces a result of $54,000, the weighted opportunity value of this pursuit. Adding this figure to the seven weeks already under contract extends the team's probable funded runway to ten total weeks.
This potential funded runway helps the firm decide how many resources to commit to the pursuit and when to commit labor to the team. A team staffed against an accurate ten-week runway can be scheduled and retained with confidence. A team staffed against an inflated win probability is committed against revenue that may not materialize, leaving its wages, overhead, and profit target uncovered for the period the revenue fails to arrive. This is why accurate fee estimation and win probability is so important during the Pursuit stage. The way we evaluate and characterize pursuits today creates the project conditions we will work through in the future.
Weston & Sampson uses this projection to determine whether to hire additional staff, maintain current staffing, or reassign personnel to another team. If the project manager's 30 percent estimate is closer to 60 percent in practice, the firm plans for a team that becomes understaffed within a month and pursues its next round of backlog later than it should have. If the estimate is closer to 10 percent, the firm may focus staff against work that does not materialize, leaving their wages, overhead, and profit target uncovered by revenue for that period.
Overstated fee targets or win probabilities create a forecast the firm cannot rely on. Staffing and capacity decisions then rest on work that may not arrive.
Across the firm
The underlying economics remain constant across practice areas, though the scale of the figures may vary.
Summary and next week
The videos that follow present each stage of this sequence through the perspectives of the individuals involved, including the public works director who initiates the lead and the project manager who evaluates the opportunity, builds the fee, and carries it through the Go/No-Go decision.
The Business of a Project quick reference presents these same figures in full, including the formulas used to calculate each one, for use when executing this process independently. The Quick Reference provides a single page summary for use during a meeting.
The fee reflects assumptions about scope, effort, staffing, schedule, and risk. The forecast reflects assumptions about revenue and probability.
In Week 2, you will make one of those pursuit decisions yourself. You will evaluate the Town of Millbrook opportunity, test the available evidence, and decide whether Weston & Sampson should commit pursuit resources. The Estimated Net Revenue and win probability you record will become the same planning inputs described in this lesson.