why organizations start such projects which have low profit?
Answers
Explanation:
Most project managers are familiar with the budget allocated to their projects. But do they understand the profitability built into those budget figures? While projects are undertaken to solve problems, they may also represent profit to certain organizations. Maintaining the level of profit built into the budget may be critical for continued success of the organization. However, if the project manager does not participate in pricing the project and understand the level of profit expected from the project, success may be elusive. Completing the project to the satisfaction of the client is one thing; completing the project to the satisfaction of the organization may be something else entirely.
Completing the project on-time and within budget is the goal of every project manager. It should also be a goal to complete the project profitably. Every organization is entitled to make a reasonable profit on its business endeavors. This same belief holds true for projects, as well. This paper will investigate the methods of planning for profit and maintaining profitability throughout the project.
But experience tells us that 99.9% of projects change somewhere between initiation and closeout. How does a project manager handle these changes to maximize profits? To begin, the project manager must ensure that all changes are beneficial to the project. Even those that are requested by the client should be evaluated for their contribution to project success. Every change should be subject to impact analysis, particularly cost and schedule. When analyzing the ‘cost’ of a change, the PM should include the same rate of profit originally planned in the contract price. If the price to the client included a 10% fee, then all changes should include a 10% fee. Often, when a change is requested, the PM prices the change and neglects to include a profit margin. Or, even worse, a small change may be requested and no change in price or schedule is made to accommodate the additional work. These small, insidious changes will eat away at the profit margin
Once the optimal point is reached, the cost of increased quality programs far outweighs the incremental benefit realized.
However, achieving quality and profitability goals without customer satisfaction are not worthy objectives. Clients demand that project managers deliver quality solutions on time and within budget. Dissatisfied clients often lead to overrun projects, little or no profit, and little opportunity for repeat Business.
One phenomenon that increases schedule risk and therefore reduces profitability is path convergence. The basic concept is quite straightforward and uses simple math:
That is the basic path convergence calculation, which assumes that each of the three predecessors is independent of each other. However, if two of the activities share common resources, then there is an additional factor which is added to the mix: the likelihood that an activity is completed on time given that the other activity sharing the resource also finishes on time. Whether or not this increases or decreases the odds depends on the quality of the resources, etc., but the point is that it increases the variability of the result, and increased variability equals increased risk which may result in reduced profitability.
Resources and their availability are another important aspect of the project that contributes to its profitability. As mentioned earlier, time and materials contracts using labor category rates can be made more profitable by using lower-end staff on the project. Conversely, if they are not available and higher-end staff must be substituted, then profit margins decline.
Conclusions
To maintain profit levels as originally estimated, project managers need to:
Participate in developing the pricing structure of the project
Take the time to develop a SOW that thoroughly and clearly defines the requirements of the project and the individual deliverables the seller is to produce
Ensure that changes to the original SOW include the same margins as the original pricing
Beware of scope creep
Adjust the price of the project in accordance with the risk associated with successful completion of the project
Understand what satisfies the ultimate customer
Recognize continuous improvement methods become increasingly more cost effective to implement and the quality improvement efforts should be re-examined routinely.
Have the right people with the right talents working on the project.