Margin Management

The manner in which the margin is managed in a project gives an indication of the efficiency of a Project Manager. In any project, the management expects that the margin at which the sales were concluded shall be maintained or bettered during the course of the project. This is one of the most challenging tasks of the Project Manager as he has to manage several factors which directly or indirectly influence the accomplishment of this task during various stages of the project, including the pre-project phase.

The most important factor which influence the project margin is the accuracy of the budgetary estimates and data used by made by the sales team while concluding the sales. Any of the following mistakes that can happen during the tendering phase can have a telling impact on the project margin:

  • Incorrect Engineering Proposal which do not meet the functional specifications of the customer.
  • Invalid quotes or wrong quotes from the sub-suppliers.
  • Selection of inefficient sub-suppliers.
  • Incorrect estimate of labor and material.
  • Underestimating the contingency funds, especially in R&D projects.
  • Oversight of regulatory and quality requirements which have significant financial impact.
  • Closing the deal at very low margin due to market pressure.
  • Incorrect currency exchange rates in Global Projects at the time of quoting.
  • Inadequate insurance coverage.

In addition to the above, there are several factors associated with the execution phase of the project, which affect the Project Margin. Some of them are as given below:

  • Rework due to engineering mistakes.
  • Product failure or procedural errors not covered under insurance.
  • Poor quality of the materials or products.
  • Accidents due to poor HSE practices.
  • Exposure of budgetary estimates to the sub-suppliers.
  • Additional scope added to the project on good will without any costs.
  • Incorrect estimate of commissions and fees for the agents involved in procurement.
  • Additional expenses due to change in government regulations.
  • Penalties due to the delivery of a less efficient solution or product due to engineering errors.
  • Impact of currency exchange rate variation in the absence of currency hedging in global projects.

As it can be seen, some of the potential factors which can cause margin erosion are beyond the control of the Project Team. This aspect needs to be considered while assessing the efficiency of the Project Manager and the Project Team. The manner in which the Project Team handles such issues to minimize their impact on the Project Gross Margin will definitely give an indication of their management and professional capabilities. The experience and stakeholder relationship management skills of the Project Manager plays an important role in the Margin Management. The causes of margin erosion should be analyzed thoroughly during the periodic review of the project so that necessary corrective actions can be taken well in time. Failure to conduct comprehensive periodic review of the project by the management representatives can lead to project failure which can damage the reputation of the organization. It is the responsibility of the Project Manager to keep the management informed about any significant negative changes in the margin and to propose the corrective actions. He should use the amount allocated for contingency in a judicious manner while managing the project margin. The management in turn shall ensure that the Project manager gets the necessary support from all parties in order to ensure the success of the project.

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