Hourly Billing: Strategies for Profitability and Trust

1. Overview of Revenue Models in Project Management

Choosing the right revenue model can make or break both profitability and client satisfaction. Whether it's Fixed Price, Time and Materials (T&M), or Hourly Billing, each model serves a unique purpose. However, organizations must align their billing practices with their broader goals to truly thrive.

At OptiConsult, a growing consultancy, project manager Morgan is tackling balancing revenue optimization with maintaining client trust. The firm has long favored Fixed-Price contracts for their predictability, but Morgan is beginning to question whether this model sacrifices too much flexibility. To improve transparency and adapt to client needs, they are considering a shift towards Hourly Billing—a move that could redefine how they do business.

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Understanding Project Revenue Models

Fixed Price Contracts: Clients pay a predetermined amount for a project, regardless of the time and resources invested. While this model offers certainty for clients, it can lead to scope creep and reduced profitability if not carefully managed.
Time and Materials (T&M): Clients are billed based on the time spent and materials used. This model provides flexibility but can lead to unpredictability in costs for clients.
Hourly Billing: A subset of T&M, hourly billing charges clients for the hours worked, often with predefined hourly rates. It combines flexibility with transparency, allowing for adjustments as project scopes evolve.

Morgan realizes that Hourly Billing fits well within OptiConsult's services, especially for projects where requirements may change or are not fully defined at the outset. By billing clients based on actual hours, the firm can adapt to changes without renegotiating contracts, and clients appreciate the transparency in billing.

The Importance of Hourly Billing

Hourly billing brings several benefits to both service providers and clients:

Flexibility: Adjusts to changes in project scope without the need for contract amendments.
Transparency: Clients can see where time is spent, building trust.
Adaptability: Rates can be customized based on the expertise required for specific tasks.
Improved Profitability: Aligns revenue with effort, reducing the risk of underestimating project costs.

For Morgan, implementing hourly billing means that OptiConsult can better manage resources and timelines, ensuring that the company is compensated fairly for the work performed. It also fosters stronger client relationships, as clients are informed about how their investment is utilized.

Applying Hourly Billing to Internal Projects

Hourly billing isn't just beneficial for client-facing projects; it can also revolutionize internal project management. By treating internal initiatives as profit centers, organizations can:

Enhance Accountability: Team members become more conscious of how they spend their time.
Improve Resource Allocation: Managers can identify which projects consume the most resources and adjust accordingly.
Facilitate Cost-Benefit Analysis: Companies can better assess the return on investment for internal projects by assigning a monetary value to internal efforts.

At OptiConsult, Morgan proposes applying hourly billing practices to internal projects like system upgrades and process improvements. By doing so, the company can ensure that internal efforts are aligned with strategic objectives and that resources are utilized efficiently.

2. Setting Up Effective Hourly Billing Practices

With a clear understanding of the benefits of hourly billing, Morgan at OptiConsult moves on to setting up effective practices that align with both the company's goals and client expectations. A critical aspect of this setup involves choosing the right pricing strategies to ensure profitability and competitiveness.

Standard Hourly Rates vs. Custom Rates

At OptiConsult, standard hourly rates for different professional roles have been the default approach. This method simplifies billing and ensures consistency across projects. Standard rates make it easier for the accounting team to generate invoices and for clients to anticipate costs, fostering a sense of reliability.

However, Morgan recognizes that custom rates can be advantageous in certain situations. For instance, a high-profile client might require specialized expertise or faster turnaround times, justifying a higher rate. Alternatively, offering discounted rates to a non-profit organization could build goodwill and long-term partnerships.

When to Implement Custom Rates:

Project Complexity: Complex projects requiring niche skills may warrant higher rates.
Client Relationships: Long-term clients might receive custom rates as part of a loyalty program.
Market Conditions: Competitive markets might necessitate custom rates to win contracts.

Balancing standard and custom rates allows OptiConsult to tailor pricing for each client while maintaining the company's profitability.

Professional Category Pricing

Another strategy Morgan employs is assigning rates based on professional categories. Each role—such as junior consultant, senior analyst, or project lead—has an associated hourly rate reflecting their expertise and value contribution.

Benefits of Professional Category Pricing:

Maintains Profitability: Ensures higher-cost resources are billed at rates reflecting their experience.
Simplifies Budgeting: Facilitates accurate project budgeting and financial forecasting.
Promotes Fairness: Provides a transparent structure that can be communicated to clients.

For example, billing a senior analyst at a junior consultant's rate could erode profit margins. OptiConsult ensures that each team member's time is valued appropriately by adhering to professional category pricing.

Billing Categories and Rate Overrides

While standard rates and professional categories provide a solid foundation, Morgan understands the need for flexibility. Occasionally, specific tasks or resources require billing categories that override default rates.

Introducing Billing Categories:

Task-Specific Rates: Certain tasks may be billed at different rates due to their nature or urgency.
Resource Overrides: Individual team members with unique skills might have custom rates for particular projects.

By implementing billing categories, they can adjust rates for:

Special Projects: Charging a premium for projects requiring expedited delivery.
Discounted Services: Offering reduced rates for strategic partnerships or community initiatives.
Client Agreements: Honoring negotiated rates that differ from standard pricing.

Advantages of Rate Overrides:

Tailored Billing Strategies: Allows OptiConsult to meet diverse client needs without overhauling the entire pricing model.
Competitive Edge: Provides flexibility to adjust rates in response to market demands.
Simplified Management: Billing categories can be managed within the existing financial system, avoiding complexity.

Morgan ensures these overrides are applied carefully to protect overall profitability. Documenting the reasons for rate changes and securing necessary approvals helps OptiConsult maintain transparency and accountability in its billing practices.

3. Billing Methods and Calculations

Having established effective hourly billing practices, Morgan at OptiConsult focuses on selecting suitable billing methods and calculations to support the company's revenue management. Choosing the appropriate billing method matters to capture the services' value and ensure client satisfaction accurately.

Billing by Completed Tasks vs. Billing by Resources

To determine the best fit for OptiConsult's projects, Morgan evaluates two primary hourly billing methods to balance company needs with client expectations.

Billing by Completed Tasks

Overview: Billing occurs upon completing specific tasks or milestones, each assigned an estimated number of hours and a corresponding rate.

Ideal For: Projects with clearly defined deliverables and timelines.

Advantages:

Predictability: Clients know costs upfront.
Efficiency Incentive: Teams are motivated to complete tasks promptly.
Simplified Invoicing: Billing tied to task completion is straightforward.

Challenges:

Scope Changes: Adjustments can complicate billing.
Estimate Accuracy: Discrepancies between estimated and actual hours can affect profitability.

Morgan's Application: For projects like market research studies, where phases are distinct, Morgan uses billing by completed tasks to provide clarity and predictability.

Billing by Resources Over Time

Overview: Billing is based on the actual time people spend on a project within a billing period (e.g., weekly or monthly).

Ideal For: Ongoing services, support contracts, or projects with evolving scopes.

Advantages:

Flexibility: Adapts to changes without renegotiating contracts.
Accuracy: Clients are billed for exact hours worked.
Efficient Resource Use: Encourages effective time management.

Challenges:

Cost Uncertainty: Clients may find total costs harder to predict.
Administrative Effort: Requires meticulous time tracking and reporting.

Morgan's Application: For long-term consultancy engagements with shifting requirements, Morgan opts for billing by resources over time, allowing OptiConsult to meet client needs while ensuring fair compensation.

Estimated Hours vs. Actual Hours

Another key decision is whether to bill based on estimated or actual hours, impacting profitability and client satisfaction.

Estimated Hours

Overview: Billing uses the projected time a task or project is expected to take.

Advantages:

Predictability: Clients receive a clear upfront cost.
Simplified Billing: Reduces administrative tasks by relying on initial estimates.

Challenges:

Profitability Risk: If actual hours exceed estimates, profits can suffer.
Client Trust: Overestimating may lead to dissatisfaction if clients feel overpaying.

Morgan's Consideration: For routine tasks with slight variation, Morgan uses estimated hours, ensuring accuracy by involving experienced team members in the planning process.

Actual Hours

Overview: Billing is based on the actual time recorded by team members working on the project.

Advantages:

Fairness: Clients pay for the exact time spent.
Flexibility: Accommodates scope changes or unforeseen challenges.

Challenges:

Cost Overruns: Projects taking longer can increase client costs.
Administrative Load: Requires diligent time tracking, which can complicate invoicing.

Morgan's Consideration: For projects with uncertain scopes, Morgan prefers billing based on actual hours, maintaining open communication to manage client concerns about costs.

Billing Methods and Calculations Summary

Billing Method	Overview	Ideal For	Advantages	Challenges
Billing by Completed Tasks	Billing occurs upon completing specific tasks or milestones, each assigned an estimated number of hours and rate.	Projects with clearly defined deliverables and timelines.	Predictability, Efficiency Incentive, Simplified Invoicing	Scope Changes, Estimate Accuracy
Billing by Resources Over Time	Billing is based on the actual time spent within a billing period (e.g., weekly or monthly).	Ongoing services, support contracts, or projects with evolving scopes.	Flexibility, Accuracy, Efficient Resource Use	Cost Uncertainty, Administrative Effort
Estimated Hours	Billing uses the projected time a task or project is expected to take.	Routine tasks with slight variation.	Predictability, Simplified Billing	Profitability Risk, Client Trust
Actual Hours	Billing is based on the actual time recorded by team members working on the project.	Projects with uncertain scopes.	Fairness, Flexibility	Cost Overruns, Administrative Load

Configuring Projects for Hourly Billing

Having decided on the appropriate billing methods, Morgan configures projects within OptiConsult's management system, bridging strategy and execution.

Best Practices for Configuration:

Select the Appropriate Revenue Method:
- Set Billing Method: Align the billing method with the project's nature—by completed tasks or by resources over time.
- Define Hourly Rates: Ensure rates are accurately assigned, whether standard, custom, or overridden.
Enable Flexibility:
- Allow Adjustments: Configure the system to permit changes between estimated and actual hours when necessary.
- Set Permissions: Control who can modify billing settings to maintain accountability.
Incorporate Non-Billable Hours:
- Enable Non-Billable Logging: Team members can log non-billable hours for comprehensive tracking.
- Establish Guidelines: Define what constitutes non-billable time.
Automate Calculations:
- Use Software Tools: Leverage project management software for automatic revenue calculations based on configurations.
- Keep Data Updated: Regularly update project data to ensure accurate billing.

Morgan's implementation: Through careful project configuration, Morgan ensures billing accurately reflects the work performed, fosters transparency with clients, and improves administrative efficiency by leveraging automation.

4. Managing Non-Billable Hours and Revenue Leakage

As Morgan continues to refine OptiConsult's hourly billing practices, a critical area of focus emerges: managing non-billable hours and preventing revenue leakage. If not adequately controlled and tracked, non-billable time can significantly impact the company's profitability. Morgan aims to establish clear policies and practices to address these challenges.

Policies for Non-Billable Hours

Non-billable hours refer to the time team members spend on activities that are not directly billable to clients. These can include:

Training and Professional Development: Attending workshops, certifications, or internal training sessions.
Administrative Tasks: Internal meetings, reporting, and administrative duties.
Internal Projects: Work on company initiatives that don't generate immediate revenue.

While non-billable activities are essential for business growth and employee development, they must be managed effectively to minimize their impact on revenue.

Guidelines for Managing Non-Billable Time:

Set Clear Policies:
- Define Non-Billable Activities: Specify which activities are considered non-billable.
- Allocate Time Budgets: Set limits on time spent on non-billable tasks.
Prioritize Billable Work:
- Encourage team members to focus on billable tasks during peak hours.
- Schedule non-billable activities during slower periods or off-peak times.
Monitor Non-Billable Hours:
- Regularly review non-billable time to identify trends or areas of concern.
- Adjust policies as needed to ensure they remain effective.

Morgan's implementation: OptiConsult introduces a policy where team members can allocate up to 10% of their weekly hours to non-billable activities like training and internal meetings, ensuring that the majority of time is dedicated to client work, thereby protecting the company's revenue.

Time Tracking Practices

Revenue leakage occurs when billable work is not captured and invoiced appropriately. Even small amounts of untracked time can add up, significantly affecting profitability.

Strategies for Effective Time Tracking:

Implement User-Friendly Tools:
- Use intuitive time-tracking software that integrates with project management and billing systems.
- Ensure the tool allows for easy entry of both billable and non-billable hours.
Establish Consistent Processes:
- Require daily or real-time logging of hours to increase accuracy.
- Provide guidelines on how to categorize time entries.
Train Team Members:
- Conduct training sessions on the importance of time tracking.
- Share best practices and common pitfalls to avoid.
Regular Audits:
- Perform periodic reviews of time logs to identify discrepancies.
- Address any issues promptly with the team.

Morgan's Approach: Roll out a new time-tracking system at OptiConsult that prompts consultants to log their hours daily. The system distinguishes between billable and non-billable hours and is configured to prevent submission without complete entries. They also schedule monthly audits to ensure compliance and accuracy.

Avoiding Scope Creep

Scope creep occurs when a project's requirements expand beyond the original agreement without adjustments to timeframes or budgets. This can lead to unbilled work and erode profitability.

Strategies to Manage Scope Creep:

Clear Contracts and Agreements:
- Define Project Scope: Clearly outline deliverables, timelines, and responsibilities in the contract.
- Include Change Control Clauses: Specify how scope changes will be handled and billed.
Effective Communication:
- Regular Updates: Keep clients informed about project progress and any potential issues.
- Document Changes: Record all client requests and approvals for scope adjustments.
Proactive Management:
- Monitor Project Scope: Continuously compare actual work against the agreed-upon scope.
- Address Changes Promptly: Discuss any deviations with the client immediately.
Adjust Billing Accordingly:
- Amend Contracts if Necessary: Update agreements to reflect new requirements.
- Bill for Additional Work: Ensure that any extra work is captured in billing.

Morgan's Experience:

In a recent project, OptiConsult noticed that the client requested additional features not included in the original scope. To address this, they:

Scheduled a meeting: Discussed the additional requests with the client to understand their needs.
Revised the agreement: Provided a proposal outlining the impact on timelines and costs.
Obtained approval: Ensured the client agreed to the new terms before proceeding.

Proactively managing scope creep, Morgan prevented unbilled work and maintained the project's profitability.

Incorporating Non-Billable Hours in Billing Calculations

While non-billable hours are not charged to the client, accounting for them in billing calculations is relevant to ensure overall profitability.

Considerations:

Overhead Allocation: Factor non-billable time into overhead costs, which can be incorporated into billable rates.
Productivity Metrics: Use the ratio of billable to non-billable hours to assess team efficiency.

5. Assigning Billing Categories and Flexibility in Billing

As OptiConsult continues optimizing its billing practices, the need for flexibility in assigning billing categories becomes apparent. Different projects and tasks often require unique considerations, and adapting billing rates accordingly can enhance client satisfaction and profitability.

Reassigning Professional Categories for Specific Tasks

At OptiConsult, team members are typically assigned billing rates based on their professional categories, such as junior consultant, senior analyst, or project lead. However, there are situations where reassigning these categories for specific tasks makes sense.

Adding Flexibility Through Billing Categories:

Specialized Expertise: Certain tasks may require specialized skills beyond a team member's usual role. For example, a junior consultant with expertise in a niche software tool might be billed at a higher rate for tasks utilizing that skill.
Task Complexity: Complex or high-stakes tasks may justify higher billing rates, even if performed by team members with lower professional categories.
Client Requirements: Clients may request specific team members for their expertise, allowing for rate adjustments to reflect the value provided.

Examples:

Cybersecurity Assessment: Morgan assigns a senior analyst to perform a cybersecurity assessment, a task requiring specialized knowledge. Although the analyst's standard rate is $150/hour, for this task, Morgan reassigns the billing category to reflect a rate of $200/hour due to the expertise involved.
Urgent Support Requests: A client requires immediate support outside of regular hours. Morgan reassigns the billing category for the responding consultant to include an emergency service rate.

Reassigning professional categories for specific tasks ensures that OptiConsult's billing accurately reflects the value delivered, allowing the company to be properly compensated for specialized services..

Tailoring Billing Rates per Project or Client

Adjusting billing rates to meet unique client agreements in a competitive marketplace can be a strategic move. However, you must balance customization with maintaining profitability.

Strategies for Tailoring Rates:

Volume Discounts: Offering reduced rates for clients who commit to a large volume of work or long-term contracts.
Strategic Partnerships: Providing preferential rates to clients in exchange for future business opportunities or referrals.
Market Positioning: Adjusting rates to enter new markets or sectors where OptiConsult seeks to establish a presence.

Balancing Customization and Profitability:

Cost Analysis: Conduct a thorough cost analysis before offering adjusted rates to ensure reduced rates will not compromise profit margins.
Value Proposition: Emphasizing the value provided at the customized rate helps maintain perceived service quality.
Contractual Safeguards: Including clauses allowing rate reviews or adjustments after a certain period.

Example:

Non-Profit Organization: OptiConsult aims to expand its services into the non-profit sector. Morgan negotiates a tailored rate with a prominent non-profit client, offering a 15% discount off standard rates. The agreement includes a clause for rate reassessment after one year, ensuring that the partnership benefits both parties.

Thoughtfully tailoring billing rates allows OptiConsult to secure new business and build strong client relationships, all while safeguarding financial health.

Adjusting for Overtime and Special Circumstances

Projects sometimes go differently than planned, requiring team members to work overtime or under particular conditions.

Policies for Handling Overtime:

Overtime Rates: Establish clear policies that define overtime rates, typically higher than standard rates to compensate for additional effort and potential employee burnout.
Pre-Approval: Internal approval is required before team members can log overtime hours to ensure it's necessary and justified.
Client Agreements: Include terms specifying how overtime will be billed in client contracts.

Managing Client Expectations:

Transparent Communication: Inform clients promptly when overtime work is anticipated, explaining the reasons and potential cost implications.
Documentation: Keep detailed records of overtime work to support billing and address any client inquiries.
Alternative Solutions: Where possible, offer options to adjust project timelines or scope to avoid overtime costs.

Special Circumstances:

Travel Requirements: Additional expenses and billing rates may apply if a project requires team members to travel.
Hazardous Conditions: Projects involving high-risk environments may warrant higher rates for the added complexity and insurance costs.

Implementing Policies:

Standardize Special Rates: Define rates for exceptional circumstances and include them in the billing policies.
Educate the Team: Ensure all team members understand the policies and procedures for logging overtime and exceptional circumstances.

Proactively managing overtime and particular circumstances allows OptiConsult to protect profit margins while delivering exceptional client service.

6. Revenue Forecasting and Financial Management

Effective financial planning is vital for sustaining profitability in an hourly billing model.

Forecasting Revenue from Hourly Billing

To predict future revenues, Morgan employs a combination of estimated hours and historical data:

Utilizing Estimated Hours: For upcoming projects, Morgan aggregates the estimated billable hours based on project scopes and timelines. This provides a preliminary revenue projection that helps in setting financial expectations.
Leveraging Historical Data: Analyzing past projects with similar scopes allows Morgan to refine estimates. Historical data reveals patterns in billing, resource utilization, and potential pitfalls, leading to more accurate forecasts.

Capacity Planning is also integral:

Aligning Resources with Revenue Goals: By assessing the availability and workload of consultants, Morgan ensures that resource allocation supports the projected revenue. This alignment helps in avoiding overstaffing or understaffing, which can impact profitability.

Incorporating Overhead Costs into Bill Rates

Overhead costs—such as office space, utilities, equipment, and administrative salaries—affect the overall service cost. OptiConsult incorporates these costs into bill rates to maintain profitability:

Calculating Total Overhead: Summarizes all indirect expenses.
Allocating Costs Fairly: The overhead is distributed across the projected billable hours. This ensures that each project contributes its fair share to cover operational expenses.
Adjusting Bill Rates Accordingly: Adding a portion of the overhead to the standard billing rates accounts for these hidden costs without surprising clients with additional fees.

Balancing Billable and Non-Billable Time

Maximizing billable hours is interesting, but overworking staff can lead to burnout and decreased productivity. These are strategies to balance billable and non-billable time:

Scheduling Non-Billable Activities Strategically: Non-billable tasks like training, team meetings, and administrative duties are scheduled during slower periods to minimize impact on revenue.
Setting Targets for Billable Hours: establish realistic utilization rates for consultants (e.g., aiming for 80% billable time), leaving room for necessary non-billable activities.
Monitoring and Adjusting: Regular reviews help you identify if non-billable time exceeds planned limits, allowing for scheduling or resource allocation adjustments.

These practices contribute to stable profitability and support the company's long-term business health.

7. Automation

Embracing automation is a step toward optimizing hourly billing revenue management. Leveraging technology enhances efficiency and accuracy and provides actionable insights, enabling organizations to focus more on delivering value to clients.

Automating Time Tracking and Invoicing

Implementing software tools for time tracking and invoicing offers several significant benefits:

Reduced Human Error: Automation minimizes manual data entry, decreasing the likelihood of mistakes in recording hours or generating invoices.
Streamlined Invoicing Processes: Automated systems can generate invoices quickly and consistently, improving cash flow and reducing administrative workload.
Real-Time Data for Decision-Making: Access to up-to-date information on billable hours and project progress aids in making informed decisions promptly.

For example, time-tracking tools automatically log the hours team members spend on tasks, categorizing them as billable or non-billable. This data integrates with invoicing systems to ensure clients are billed accurately and on time.

Project Configuration Best Practices

Setting up projects effectively within management systems is crucial for supporting hourly billing:

Define Default Settings: Establish standard billing rates, revenue recognition methods, and billing categories to maintain project consistency.
Allow Project-Specific Overrides: Enable flexibility by permitting adjustments to default settings for individual projects or clients when necessary.

Tips for Effective Configuration:

Use Templates: Create project templates with predefined settings to save time and ensure uniformity.
Document Changes: Keep records of overrides or customizations for transparency and future reference.
Train Team Members: Ensure staff are proficient with the management system to maximize its capabilities.

Leveraging Technology for Revenue Management

Robust tools enhance revenue management through advanced features:

Customizable Billing Categories: Adjust billing rates for specific tasks or resources without overcomplicating the pricing model.
Automated Revenue Calculations: Software can automatically calculate revenue based on configured rates and recorded hours, increasing accuracy and efficiency.
Real-Time Reporting and Analytics: Access to current financial data allows for proactive management, identifying trends, and making strategic decisions.

Benefits:

Increased Efficiency: Automation reduces manual tasks, freeing up time for strategic activities.
Enhanced Accuracy: Automated calculations minimize the risk of billing errors.
Better Financial Insight: Real-time analytics provide a clearer picture of the organization's financial health.

Technology enables organizations to improve their hourly billing practices, ensuring efficient and effective revenue management.

8. Client Communication and Transparency

Effective client communication and transparency in billing practices allow for building solid and long-lasting relationships. Morgan at OptiConsult understands that clients appreciate clarity and honesty, which can lead to increased trust and repeat business.

Communicating Billing Practices to Clients

Clear communication regarding billing methods and rates sets the foundation for a positive client relationship:

Explain Billing Methods: At the outset of a project, Morgan explains how hourly billing works, including whether billing is based on estimated or actual hours and how rates are determined.
Provide Detailed Proposals: Breaking down services, rates, and potential additional costs helps clients understand what to expect financially.
Educate Clients: Sharing insights into the billing process, perhaps through informational materials or discussions, demystifies the process and builds trust.

Benefits:

Reduces Misunderstandings: Clear explanations prevent confusion or disputes over invoices.
Builds Confidence: Clients who understand how billing works are more likely to feel confident in the services provided.

OptiConsult’s approach:

Initial Meetings: During initial consultations, Morgan thoroughly reviews the billing structure with the client.
Written Documentation: All billing terms are documented in the contract, and clients are encouraged to ask questions. N

Building Trust Through Transparency

Transparency in billing practices strengthens client relationships:

Detailed Invoices: Providing invoices that itemize services, hours worked, and rates allows clients to see exactly what they are paying for.
Regular Updates: Keeping clients informed about project progress and any changes that may affect billing fosters openness.
Access to Time Records: Offering clients access to time-tracking reports can further enhance transparency.

Examples of Transparent Practices:

Monthly Reports: Morgan sends monthly reports summarizing work completed, hours billed, and any upcoming tasks.
Open Communication Channels: Encouraging clients to discuss any billing concerns promptly ensures issues are addressed quickly.

Advantages:

Enhances Trust: Transparency demonstrates integrity and honesty.
Improves Client Satisfaction: Clients appreciate knowing where their investment is going.

Managing Client Expectations

Effectively managing client expectations is crucial, especially when project changes occur:

Set Clear Expectations Early: Morgan ensures that clients understand the scope, timelines, and billing terms from the beginning.
Use Detailed Contracts and Agreements:
- Outline Billing Terms: Contracts include detailed billing methods, rates, and payment schedules.
- Include Change Management Procedures: Agreements specify how changes to the project scope or requirements will be handled and billed.
Communicate Changes Promptly:
- Inform Clients of Variations: If there are any deviations from the original plan, Morgan communicates these immediately.
- Provide Options: Presenting clients with choices on how to proceed empowers them and maintains satisfaction.

Strategies for Managing Expectations:

Regular Check-Ins: Scheduled meetings to discuss progress and any concerns.
Transparency About Challenges: Being upfront about potential delays or issues builds credibility.

Role of Contracts and Agreements:

Legal Clarity: Contracts protect both OptiConsult and the client by clearly defining obligations.
Reference Point: They serve as a reference throughout the project to ensure alignment with agreed terms.

Morgan's Practice:

Customized Agreements: Tailoring contracts to each client ensures that unique needs and expectations are met.
Review Sessions: Before finalizing agreements, Morgan reviews all terms with the client to confirm understanding.

9. Key Takeaways on Hourly Billing Revenue Management

Throughout this exploration of hourly billing revenue management, we've uncovered several critical strategies and best practices that can significantly enhance profitability and client satisfaction. Here are the essential takeaways to keep in mind:

1. Choose the Right Billing Methods and Practices

Select Appropriate Billing Methods: Decide between billing by completed tasks or by resources based on project nature and client needs.
Balance Estimated vs. Actual Hours: Understand the trade-offs between billing based on estimates for predictability and actual hours for accuracy.
Configure Projects Effectively: Set up projects within your management system to support your chosen billing methods, allowing for necessary adjustments.

2. Implement Flexible Pricing Strategies

Use Standard and Custom Rates: While standard rates provide consistency, custom rates allow you to tailor pricing for specific client needs or market conditions.
Assign Billing Categories Thoughtfully: Reassign professional categories for specific tasks when specialized expertise is required, ensuring billing reflects the value delivered.
Adjust for Overtime and Special Circumstances: Establish clear policies for handling overtime to protect profit margins and manage client expectations.

3. Prevent Revenue Leakage and Manage Non-Billable Hours

Set Policies for Non-Billable Time: Clearly define non-billable activities and manage them to minimize impact on profitability.
Implement Accurate Time Tracking: Use tools and practices to capture all billable time to prevent revenue leakage.
Avoid Scope Creep: Proactively manage project scope through clear contracts and communication to ensure all work is appropriately billed.

4. Leverage Automation and Technology

Automate Time Tracking and Invoicing: Utilize software tools to reduce human error and streamline billing processes.
Configure Systems for Flexibility: Set default billing settings but allow project-specific overrides to adapt to unique needs.
Utilize Advanced Features: Use technology offering customizable billing categories, automated revenue calculations, and real-time analytics.

5. Enhance Financial Management and Forecasting

Forecast Revenue Accurately: Use estimated hours and historical data to predict revenue, aligning resource capacity with revenue goals.
Incorporate Overhead Costs: Factor in all operational expenses when setting billing rates to maintain profitability.
Balance Workloads: Strategically schedule non-billable activities and set realistic utilization targets to maximize efficiency without overworking your team.

6. Prioritize Client Communication and Transparency

Communicate Billing Practices Clearly: Educate clients on billing methods and rates to build trust and prevent misunderstandings.
Maintain Transparency: Provide detailed invoices and regular updates to foster strong client relationships.
Manage Expectations Proactively: Set and manage client expectations, mainly when changes occur, with clear contracts outlining billing terms.

AI in Project and Portfolio Management Today

This image was, of course, generated by AI

We look into the current role of artificial intelligence (AI) in project management, highlighting some tools and services available today (Q4 2023) to project and portfolio managers.

Although AI has significantly advanced in many sectors, its incorporation into project management is still developing.

For a better perspective, let's discuss the difference between two primary types of AI: generative AI, especially Large Language Models (LLMs) such as GPT, Llama, or Bard, and AI models designed for specific applications, such as project management.

Generative AI models, trained on extensive datasets, are proficient in conversation and content creation—tasks reserved for humans until last year. Some models can interact with non-AI tools, such as calculators or code interpreters.

On the flip side, deterministic AI are custom-trained and are consistent and reliable, making them ideal for automating tasks in project management since they offer the same output for a given input. Familiar deterministic examples include chess engines and grammar checkers.

So, why does this distinction matter? Your experience with AI and the value it can deliver for you and your team significantly depends on grasping this difference. For instance, while AI platforms like DALL·E are exceptional at generating art or text, analyzing niche areas like project budgeting or risk assessment requires the specialized approach of a custom-trained model.

Existing project management tools can utilize generative pre-trained models such as the GPT API or open-source LLMs like Llama from Meta by interacting with them similarly to human conversation: they present a textual prompt to the model and subsequently use the model's response within the tool.

Developing custom-trained models is more complex but might yield better results. Now, training a model requires large datasets, computational resources, and deep AI expertise. This is why fine-tuned models to a specific dataset are still rare in many AI solutions.

In short, being aware of the distinction between pre-trained models offered as a service and custom-trained to specific needs will give you clear expectations about the options accessible to you and your team.

With this out of the way, let's explore a selection of AI applications in project management, highlighting which are available today and still in development or their early stages. Remember, we're just taking a quick peek at some AI tools in project management. This isn't a full list, and since AI changes so fast, some of these might already be old news!

Peace Treaty Between Waterfall and Agile

Waterfall and Agile have struggled to get along, dividing project managers who would adopt one or the other methodologies out of the deep belief that one is wrong and the other is right.

We are all familiar with the pitfalls of the Waterfall approach: its need to forecast everything at the outset and its inflexibility in adjusting to emerging needs.

Agile methodologies opened up a new way to understand project management for many, but somehow, along the way, they have been frequently misunderstood.

AI may improve each methodology, making them better at what they do and providing a clearer roadmap to using one, the other, or hybrid solutions.

AI Solutions

AI can mitigate the constraints of the Waterfall method. It can help project managers optimize resource allocation and enhance the precision of duration/effort estimations. This AI application still needs to be fully operational for the abovementioned reasons related to training models. Still, its potential is significant as it counteracts the limitations and biases inherent in human data processing. We will have to wait to see this functioning.
Assessing User Stories: AI's capability extends to evaluating user stories and requirements for clarity and coherence. Tools like GPT are accessible for checking the alignment of a user story structure with industry best practices, saving hours of back and forths. This is available for immediate use.

Human Bias in Project Management

Every one of us brings a set of biases to the table, often influencing independent decision-making. Take project justification, for example: despite relying on standardized ROI templates, project sponsors can, either intentionally or unintentionally, skew data to favor their preferred outcomes.

AI Solutions

Objective Decision Making: AI promises decisions free from emotional biases. Is this project aligned with the company strategy? Should I raise concerns or even kill my project? Well-trained models can answer these types of questions without hesitation.

However, while AI eliminates emotional biases, it can still reflect biases in its training data. For instance, the AI might tilt toward Western perspectives if the data predominantly originates from Western cultures. But one clear advantage is that AI is immune to external pressures or motivations. There are no out-of-the-box models available yet.

Risk Identification Across Methodologies: Identifying risks is an area where AI can bring significant value. The challenge, again, lies in the maturity of the technology. Effective risk identification requires comprehensive training data, including historical risks, team member performance histories, task categories, budgets, and even factors like holiday schedules. Many businesses today don't have such extensive datasets, making this an area of ongoing development. AI's applications in this domain are promising, but we will need more time for effective implementation.
Sentiment Analysis: One of the immediate applications of AI in project management is to gauge the mood of a team by examining their interactions and comments on project management platforms and collaboration tools like Slack or MS Teams. This capability is readily available and can be utilized by project managers today.

Transparency in Project Management

Possibly our favorite. Projects engage participants from diverse backgrounds within an organization and outside of it. The responsibility for effective communication largely falls on the Project Manager, who frequently finds it challenging to ensure that every stakeholder is reached and is exposed to the information in a way they will understand.

These communication challenges persist even at higher levels, such as program and portfolio management. And yes, dashboards provide good visual representations, but genuinely understanding them for informed decision-making can still be an obstacle for many.

AI Solutions

Data Transformation for Stakeholders: Generative AI is great at interpreting and summarizing complex data into recipient-adapted information. If you have consolidated your project data on a project management platform, AI can adeptly restructure it, making it accessible and understandable for all stakeholders. This capability is in active use today.

Let’s see how a PPM tool like ITM Platform makes this possible:

When your organization manages projects with different incumbents, such as project managers, team members, and other participants, PPM tools are indispensable for handling, consolidating, and providing grouped information. It functions like a working pyramid, where the most distilled information originates from the data at the base, offering dashboards that present overall information in a structured manner.

AI brings to the table the interpretation of all this data in a more human-readable and adapted way. Don’t know how to read an Earned Value chart or a Cumulative Flow diagram? No problem. All the underlying data, including financials, time estimates, reports, issues, and risks, are fed into the AI, which in turn delivers a human-readable report for you.

AI can interpret massive amounts of project and portfolio data.

AI will determine which information is relevant and which is not, providing a high-level summary and highlighting the details you should focus on.

Communication Augmentation: Tools such as chatGPT currently support project managers in enhancing the efficiency of their communication, especially in multi-language environments. To make good use of this, basic “prompt engineering” training can make it even better. Coursera and Udemy offer excellent courses on this topic for users.

AI Capabilities in Project and Portfolio Management: Now and in the Future

Here are the main points we've seen as a quick recap of what is widely available today and what is emerging on the horizon. Remember, these are just a handful of them used to illustrate our path in adapting AI in project portfolio management.

AI Solutions for Project and Portfolio Managers

Language Model Assistance: Draft clear and concise messages, emails, and reports using AI language models.
Team Morale Analysis: Analyze team comments on platforms like Slack and MS Teams to understand team sentiment.
Customized Data Presentations: AI transforms complex data into presentations tailored for different stakeholders.
User Story Analysis: Use AI to review user stories for clarity and compliance with industry standards.
Automating Tasks: AI helps create, edit, summarize, train, and utilize tool-specific features to improve efficiency.

Future AI Applications in Project and Portfolio Management

Predictive Project Forecasting: AI could offer more precise estimates of project parameters and early identification of potential obstacles.
Automated Risk Analysis: AI might be capable of predicting project risks by analyzing historical data across multiple projects.
Proactive Decision-Making Assistance: AI could suggest optimal actions in real-time, aiding project managers in keeping projects focused and aligned with objectives as they evolve.

A Note on Security and AI Usage

When using AI models with your data, be aware of potential privacy exposures. If you're training your own models, privacy concerns are less prominent. However, with third-party AI services, particularly AI-as-a-service, choose providers that guarantee your data won't be stored. Additionally, avoid sharing any information that could disclose details about your company, its employees, or other sensitive data.

How to integrate project management into your organization

Some 84% of Project Management Offices fail within four years because of the disconnect with the business.

Solid integration is the solution.

When you install a PMO or any other form of project portfolio management structure, your number one task is to connect with the rest of the company, its processes, and people.

Why it matters?

Project portfolio management can’t survive by itself. The PMO must receive and provide information.
Solid integration avoids data duplication and errors.
Project portfolio management must be aware of the reality of the company. It is not an island but an active participant.
Embedding project portfolio management into the business will provide the PMO with a strategic perspective.

To do so, identify the business areas your PPM (Project Portfolio Management) needs to connect with, the potential benefits of integrating information systems, the stakeholders involved, and how to transform integration into value.

The next task is implementation: connect data sources and transform them into actionable information. This is where your PPM tool and all other systems, such as ERP, CRM, and HRM, need to talk.

This article describes the most common functional areas of the organization and the information traditionally exchanged. It will serve as a roadmap to meaningful integration of project portfolio management and how to create a solid and sustainable PMO.

As a guiding principle, we will use the concept of a “single source of truth”: the information can reside in several places, but only one is the origin.

This article will not focus on master data such as users, providers, etc. Instead, we will focus on the “living data” related to ongoing projects.

Budget

Budget allocation for projects can be fixed or flexible, with guardrails based on time or milestones.

In either case, the project budget usually belongs to another one with more resources linked to the program, portfolio, department, or business goals.

The budget is generally made up of figures representing the main items, such as the cost of labor, purchases, expenses, or revenue.

Typically this information resides in the ERP (Enterprise Resource Planning, such as SAP), although the source can be the PPM tool.

Purchasing

If your projects require the consumption of goods or services, they are typically organized around budget accounts that include their purchases. Purchases are planned under the auspices of the project, but a third-party system carries out the procurement process.

For example, the construction project manager will detail all the materials and services required to complete a milestone, configuring the purchase planning. This plan goes to the procurement system or ERP, which handles the purchase status and financial flow. Then the PPM system is informed about the status of each purchase, most importantly, when it is executed.

This way, both the PPM and the procurement system or the ERP remain up-to-date on the overall purchasing status of the project.

Revenue. Revenue recognition

Similar to purchases, if your projects generate revenue, they are typically budgeted in the company’s accounting system and managed within the PPM or the ERP, creating synchronization.

In the case of advanced revenue recognition management, revenue is managed within the PPM since it is fundamental to the working of the project. For example, suppose revenue is recognized based on the project progress or milestone delivery. In that case, the progress of the project determines the amount recognized as revenue for each period.

Actual or forecasted values should be synchronized with the accounting system to reflect the project status accurately.

Stock

Projects using stocked and consumed materials can also benefit from integrating the Stock Management System.

Consumption will typically affect the budget, forecast, and actuals.

Effort estimates

Estimating effort is one of a project manager's most challenging and essential tasks. Often an accurate estimate will determine project expectations in terms of schedule and cost.

A frequent setup is

The resource management department makes initial effort estimates based on professional profiles. For example, 250 hours of analysts and 1,250 hours of engineers. You can also estimate based on the complexity of the tasks.
The project manager will make a more nuanced estimation, probably by tasks, assigning time to specific resources.
These estimated hours are translated into cost and revenue estimates using standard costs and rates, transforming hours into money.

Time and materials estimates become the most accurate way of forecasting the cost of a project, later allowing for regular comparisons with the initial budget. Depending on how accurate you need your ERP to be at a given time, the synchronization of PPM → ERP can be done regularly at the beginning and end of the project.

Time estimates can be done outside the PPM solution. However, it's not recommended since the distribution of hours is tied to working days, calendars, and other variables related to the project.

Time entries

Similar to the effort estimates, the time logged by team members will impact the money spent.

If the PPM is not the source of the time entries, it needs to collect them from any timesheets you use. This data is vital for effort and budget control because it represents the time and money invested. Once the PPM ascertains the actual hours spent per project, it translates them into actual costs, which can be fed to the ERP or accounting system.

Clients

If you execute projects for clients, it is likely that you have a CRM tool (Customer Relationship Management, such as Salesforce).

The sales and marketing teams will benefit from having an accurate real-time picture of how projects for clients are progressing, the revenue they are generating, and the risks identified by the project manager.

This is probably the best way to get your sales area excited about PPM!

Workflow

Organizations that have a project workflow in place, a gating system, or an authorization mechanism will typically use their PPM solution for this if it has these capabilities.

In complex environments where the workflow also depends on other external factors or areas unrelated to the project management discipline, a Workflow Management System may be required to interact with project statuses and gates.

Project intake

Organizations tend to use the PPM tool to create the idea-to-project cycle within the definition of a strategic plan. After all, project portfolio planning is one of the pillars of PPM.

When demand for projects is not created at a specific moment in time or the flow of ideas and proposals is significantly high or inherently decentralized, there should be a system to gather all project proposals from across the organization, together with the essential information required to evaluate them.

This flow can be achieved using forms, spreadsheets, documents, or any collaboration system that allows information gathering in a structured fashion.

Planning/schedule/tasks/sprints

More often than not, planning can be done within a PPM system since they specialize in offering you the tools to do just that. In some cases, planning can be done in one tool (for example, MS Project), then imported into the PPM.

Project and portfolio schedules can flow from the PPM tool to third-party systems.

Risks and Issues

One of the fundamental jobs of a project manager is managing risks. Because of it, risk and issue management are typically performed within the PPM tool, with the exception of organizations with strong risk management that goes beyond projects.

In a typical scenario, risks – and any subsequent issues – will be managed within the PPM, with tasks created to handle the risks and calculate the costs.

Documents

Most PPM tools offer ways to store or reference essential documentation (specs, contracts, etc.) Although the document management business itself usually relies on integrations with third-party systems.

Social, collaboration, work management

A project is an orchestrated set of human interactions. This is why most PPM tools provide a collaboration system or integrate with a specialized tool –such as Slack or MS Teams.

Some PPM tools allow projects to be managed, or at least nourished, via a collaboration tool. This way, users can not only interact among themselves but also report progress or time spent without leaving the collaboration tool.

[Link to Slack inttegration]

Reporting/Dashboards

Last, and probably the most frequent integration, is the one that feeds data from the PPM tool to a Business Intelligence system.

Even though most PPM tools have robust reporting capabilities, the truth is that projects don’t exist in isolation from the rest of the organization. Business dashboards require an integrated view of all the organization’s activity, including projects, production, operations, marketing, and sales.

To get there, it is crucial for the PMO to be able to provide accurate real-time information that will seamlessly integrate with the information coming from the rest of the company’s areas.

How can ITM Platform help integrate your PMO into the organization?

Glad you asked.

There are three main ways, to a different degree of complexity and performance, that will allow you to do so.

Manual imports and exports

The simple way. All data can be exported from different lists within ITM Platform or the reports.

In addition, you can import from several sources such as CSV or MSP.

Extensions

Extensions enhance the standard functionality of ITM Platform.

The standard extensions available in your environment are developed by ITM Platform or a certified partner.

With the help of custom extensions, you can create additional functions, alter standard behavior, and connect ITM Platform with other applications.

They allow you to respond to events, such as updating tasks or purchase amounts and respond with actions like sending an email or requesting more information from users.

You can also program recurring actions using the scheduler and synchronize ITM Platform with your ERP, CRM, or any other application used in your organization.

Creating an extension doesn’t require advanced programming skills and can be done within ITM Platform, without any programming language or tool.

If you want to know more about extensions, read the docs on GitHub or the help center.

API

With the ITM Platform API, you can quickly and easily integrate your existing company applications, build your own, or synchronize data with your favorite data analysis tools such as MS Excel, Tableau, or Power BI.

ITM Platform’s API is built using the REST architecture, so you should be up and running swiftly if you are familiar with REST APIs.

Programming with the API is the most powerful and flexible way to integrate ITM Platform, and requires programming skills.

Building in custom integrations is going to bring powerful benefits to the smooth running of your PMO. ITM Platform will help you with any method you chose.

Conclusion

A resilient value-driven project portfolio management must implement effective information integrations with the business’ value chain. In this article, we have explored best practices and the most common cases.

A guide to revenue recognition and project management

How we count revenue really, really matters. After all, it’s one of the key indicators of a company’s health. The revenue recorded on our balance sheet tells shareholders that their money’s safe, assures customers of our competence and allows us to reinvest confidently for a thriving business.

It’s surprising then, that revenue recognition, the process by which businesses decide which transactions qualify as revenue, is not generally understood outside accounts departments. Cash doesn’t count as revenue until you’ve earned every single penny of it. This is especially true in industries such as consulting and construction, which typically involve long, complex projects.

This is why revenue recognition should be on the radar of PMOs and project managers, as well as CFOs. What’s the point of bringing in a project on budget and on time, if we aren’t keeping track of the revenue that it’s adding to our books?

While there are numerous methods for recognizing revenue, we’re going to cover the most common ones, giving pointers on how to choose the right one for your project. Read on to learn more about the following:

What is revenue recognition?
The difference between cash flow and revenue
5 golden rules that set the standard for revenue recognition
Methods for calculating revenue recognition

What is revenue recognition?

With long-term projects or those involving B2B, the structure of payments can be tricky. Should the client pay upfront, in the middle of the project or when all deliverables have been received? The answer to this question lies in the generally accepted accounting principle (GAAP) of revenue recognition, which holds that we only count revenue once the money has actually been earned.

Payment on provision of service

In day-to-day life billing is a fairly straightforward affair. Let’s say a customer tries out a fashionable new restaurant; she’s served a delicious meal and happily pays up. This is what we call payment immediately on provision of service. Our restauranteur can record the revenue.

Payment before service

Now imagine the customer is so delighted with the meal that she decides to celebrate her 40th birthday in the same establishment, six months from now. This time it will be a blow out affair, with a guest list of 60 well-wishers. Planning to close off a large section just for her, the restaurant asks for payment before the party. This is what we call deferred revenue. We won’t record it as revenue until the cash has been earned, that is when the birthday girl is blowing out the candles on the cake.

Payment after service

In another scenario, the happy customer recommends the restaurant as caterers for her workplace’s corporate entertaining. The company can order a fully catered meal any time they have guests and pay on account at the end of each month. This is accrued revenue. The restaurant can record the cash as earned from a meal served on the 1st – even if they don’t get paid till the 30^th.

For a PPM tool with integrated revenue recognition, trust ITM Platform. Start your free trial today.

Cash flow and revenue are different

The most important principle to understand here is that cash and revenue aren’t the same thing. Just because the cash is in the bank doesn’t mean that we can recognize it. If the buyer cancels the order or the goods or services are not delivered, we can refund them.

This principle becomes even more important in situations involving complex projects. Different industries use different models to calculate revenue recognition. Before we look at these various methods, it’s worth understanding the basic framework which underpins any contract based on revenue recognition.

5 golden rules of revenue recognition

Before work starts, an organization can decide which transactions count as revenue using globally accepted standards. In line with this international framework you must:

Draw up a contract with the customer.
Identify contractual performance obligations (those pesky promises made by the sales team).
Determine the transaction price.
Link the transaction price to the contractual obligations (define the point at which the client will hand over the cash).
Recognize revenue when the performing party satisfies the performance obligation.

What these five steps mean is that you need to have a contract with a customer, a product or service to deliver, clear pricing, and delivery terms. When the delivery terms are met, you can recognize the revenue.

Methods for calculating revenue recognition

Now it’s time to see how this works in practice with some examples.

Percentage-of-completion

Using this method, we calculate revenue recognition by multiplying the progress of the project during set periods by the total revenue budget. Complete 10% of the project and you can recognize 10% of the revenue. Periods are typically monthly, quarterly or by trimester.

Example: The railway

Your company, Silver Railway, wins a two-year contract to build a 1,300-mile railway. The total budget is $100 million, invoiced in eight separate equal payments every quarter.

You apply the percentage-of-completion method which corresponds to the miles built every month (as a percentage of the total).

Silver Railway warns the client that progress won’t be the same every month. The number of miles you can build each month will depend on the difficulty of the terrain, whether you have to build a station along the way and so on.

So, let's now see how revenue recognition and progress unfold over time.

Notice that because you chose the percentage-of-completion method, revenue recognition – the vertical blue bars – is equal to the miles built.

Now, let's compare revenue recognition with the actual revenue (when you invoice the client).

In the first quarter to March 2021, Silver Railway builds 4% out of the 1,300 miles. That allows you to recognize 4% of revenue ($4million), although you present the client with an invoice for $12.5 million as agreed. Revenue of $8.5 million has been deferred.

Linear Distribution by Milestones

Next, let’s turn to revenue milestones. The value of each milestone is the proportion of estimated hours needed to perform it, multiplied by the total revenue budget. Unlike the percentage-of-completion approach, the pace of progress isn’t the key factor. What matters is hitting the milestones.

Example: The software project

You’re developing a medium-sized software for a retail company, Rain Forest, which includes four modules: Inventory, Orders, Purchasing, and Shipping. The total revenue budget is $100,000, with an estimated delivery time of six months for all four modules.

Payments are agreed as follows: 30% at the beginning, 30% after the order module is done – estimated by the third month – and 40% at the end.

You opt for the milestones method, assigning each module to a milestone, knowing that the two first milestones are more labor intensive than the last two.

There are four milestones, each one recognizes revenue based on the effort involved.

Because the method is linear by milestone, each milestone recognizes the same amount every month: Inventory $14,400/mo, Orders $16,000/mo, Purchases $10,400/mo, and Shipping $14,400/mo. (See the table). On the graph, amounts represent accumulated revenue.

Now let’s track the revenue recognition and cash flow.

Notice that we billed $30,000 before having worked a single hour, which counts as deferred revenue. By the second invoice, we’ve completed $75,200 worth of work, but only billed $60,000, leaving us with $15,200 of accrued revenue. This is money we’ve earned but not yet billed.

Fixed Price per Period

This is the simplest method because it divides the total revenue budget by the number of periods within the project, applying the same revenue recognition amount per period.

Example: Software as a Service

Your company, Sales Muscle, develops and distributes software as a service (SaaS) using a yearly subscription. Clients pay 12 months upfront (deferred revenue).

Under the fixed price per period model Sales Muscle has the money sitting in the bank, even though it has yet to earn it. If the customer cancels the service during the year or has any complaints, you can refund them using the remaining balance.

You’ll recognize the same amount each month until you reach the end of the year when all deferred revenue is finally recognized.

Clients pay $24,000 for the service. So, Sales Muscle can recognize $2,000 every month until the end of the year, when the deferred revenue becomes zero.

For a PPM tool with integrated revenue recognition, trust ITM Platform. Start your free trial today.

Bill rate per estimated hours

Here you multiply the bill rate per professional category by the estimated hours of each task, by the progress made per period (Rate x Estimated hours x Progress). The beauty of this approach is that you can bill customers the estimated – rather than actual – hours.

Example: The professional services

Your consultancy company, The Fifth Big, has bagged a significant contract to transform the financial processes of a big client.

To calculate the total price, you estimate the hours by consultant profile – partner, senior, junior – over time. The final price is $100,000, divided into two payments. One on signature of the contract and the other 50% at the project's sign-off.

Because hours are the driver of costs and revenues, The Fifth Big uses the bill rate per estimated hours method.

Because we billed $50,000 at start of the project, every month until July our accounts show deferred revenue that decreases as revenue recognition progresses. From August to the end of the project, we are working but not billing, which generates accrued revenue until December (see full table).

Direct Revenue Recognition

This method recognizes all revenue, regardless of status.

Example: The reseller service

Your company, SureStart, runs value-added projects for clients, but some of your clients want to centralize the acquisition of goods and services, such as software licenses and small acquisitions, through yours.

Every month, your client tells SureStart which goods and services they require, so you apply the direct revenue recognition method to recognize revenue as it happens.

Conclusion

With so many PMOs adopting the revenue recognition approach, it’s not a case of one size fits all. Our brief overview has revealed the many different methods available across industries. Whichever you settle on, there’s no doubt that tracking every penny of income has never been more important.

You can’t spend on salaries, record profits or invest without a good idea of what’s actually yours to spend. The rewards for understanding and applying revenue recognition criteria to projects are not just greater financial control but also the ability to embed your project management practice into the overall business strategy. And the PMOs who get that will strengthen the long-term resilience of their companies.

Tracking Projects Based on Agile Methodology

Unlike with Waterfall-managed projects (Gantt), a schedule is not required for projects based on agile methodology since they are not predictive. Therefore, the method for tracking progress differs significantly.

The following article explains how to track progress in projects managed using agile methodology, with special focus on the Burndown Chart and Cumulative Flow Diagram (CFD).

Likewise, tracking progress will differ depending on whether the project is managed using Scrum or Kanban. These techniques have similarities, but also significant differences in purpose.

Burndown Chart

Represents the dynamics of tasks completed.

The Burndown chart is generally used when all tasks are determined from the beginning.
Let’s look at an example:

Notice that the backlog shows tasks that are created on the same day. Let’s see what happens if we move one to “Completed” status and another to “In Progress”.

If we follow the completion rate of tasks, we will eventually leave the work column pending to zero.
However, if we add “To Do” tasks as the project or sprint continues, we will notice anomalies in the trend because instead of reducing the backlog, it will increase.

Expected line of progress

This is a straight line that connects the number of tasks in the “To Do” status on the Y-axis to the beginning of the interval on the X-axis. By the end, there should be no pending tasks (Y-axis =0), so the line is steadily declining.

If the tasks are of similar size, the number of pending tasks at any point in time should follow the expected progress line.

Actual line of progress

Represents the actual number of tasks pending by intervals. That is, the overall pending tasks at the start minus those completed. We’ve explained this concept before with a bar chart example.

The slope of the progress line indicates the “velocity” and determines the number of tasks completed per time block (usually a sprint).

How to interpret a Burndown chart

On-track: The expected and actual line of progress are together. If it keeps this pace, the project will end in time.

Behind schedule: If the actual progress line is above the expected line, it means that the team is delayed and should have completed more work at this point.

Ahead of schedule: If the actual line of progress is below expected, it is progressing at a faster pace than expected. You can finish earlier than expected or add tasks. These interpretations are valid as long as the tasks are the same size, i.e. the time to solve them is similar.

Burndown Diagram Limitations

The Burndown diagram only represents the completed work. It reports the pending work, but it doesn’t reflect what is in progress.

Burndown works best on sprints or short projects and makes less sense with long-term projects. In long-term projects, pending work goes through many changes in order for the estimates to make any sense. That is the main reason why Burndown is not recommended for the Kanban technique.

The Burndown diagram does not represent scope changes, as changes in the backlog are not displayed effectively. These limitations are overcome by the Cumulative Flow Diagram.

Cumulative Flow Diagram (CFD)

A Cumulative Flow diagram is a stacked area chart that shows, for each time interval, the number of tasks per status.

Reading the Cumulative Flow Diagram

As you go along, the diagram shows the flow of tasks by status. It is called ‘cumulative’ because it does not measure increments between intervals but counts all the tasks for each status, regardless of whether or not that was their status before.

This solves the main problem with Burndown, as it reflects situations in which not all to-dos are created on the first day.

The CFD provides two fundamental pieces of information in agile management: Work in Progress (WIP) and Cycle Time (CT).

The ‘In Progress’ bandwidth represents work in progress (WIP).

The space between time intervals represents the average time it takes a task to move from one status to another, the Cycle Time (CT).

Limitations of the Cumulative Flow Diagram

Despite solving the main limitations of the Burndown chart, the CFD has its own limitations.

It does not reflect whether any task is not progressing
Nor does it indicate the individual cycle time, that is the amount of time that a particular task has remained at a single stage.

Tracking Tasks by Status

This way of tracking progress is the simplest because it reflects the percentage of tasks in each status at any given time.

The standard status types – ‘To Do’, ‘In Progress’ and ‘Completed’ – are independent of the number of columns on the Agile board because each column is based on one of these three types.

Tasks per status can be seen in either the group or swimlane view.

You can also eliminate one of the statuses and in turn the chart will be recalculated based on 100 and display the remaining statuses.

Here we have removed the ‘Completed’ status and now you are left with ‘To Do’ and ‘In Progress’.

Implementation of a PMO: people, organization and documentation

The users are the ones that bring a project management system to life, either as collaborators or external consultants. It is imperative that the PMO believes, manages and offers support to all of them.

Collaborators or suppliers, everyone is a source of talent.

Responsibilities

A good PMO provides a framework that helps project managers allocate resources correctly because:

Projects frequently borrow resources from other business units.
Assigning responsibilities haphazardly normally leads to management problems down the line.

A PPM software tool offers various options to help you define the roles in each project from configuring access permissions to the specific function of every project member. You can also assign a ‘task manager’ to each task. This task is now converted into a sub-project and the assigned task manager can follow up on it.

Organization

Integrating the company org chart into a PMO tool is a useful way to classify and identify projects/people/activities etc. within the functional hierarchy. Later on, you can also use it to analyze outcomes.

Capacity: Planning and Follow-up

Managing capacity is a task requiring the utmost efficiency. It is crucial for the PMO to find the balance between:

Efficient management that avoids both over-allocation of resources and non-productive time.
The competing demands of business units and cross-unit projects vying for a limited pool of resources.

Managing capacity should be linked to demand management. Frequently, over-allocation of resources is a sign that you cannot keep up with demand. The PMO should have the means to identify this situation and the power to fix it.

The following example offers an excellent module that allows the PMO to plan globally, while analyzing individual capacity and availability.

Whatever its responsibilities are, at the very least the PMO should offer a long-term view of the demand on resources and raise a red flag when imbalances are detected.

Communication

If people are the beating heart of project management then communication between them makes project management possible.

The PMO’s role is to set up formal communication channels, and to promote and facilitate informal communication between collaborators.

Formal communication is related to following up on tasks; it involves specific channels to help team members learn the status of projects and tasks.

The PMO must define key moments when relevant information will be delivered to stakeholders, with the PPM system as the backbone of this process.

Formal communication ensures that the required information is delivered to the relevant people in a timely fashion.
Informal communication enhances efficiency, enabling team members to discuss and deliver information with all the background at their fingertips.

Documentation

Whether it is a task, risk or purchase, every element of every project can generate its own support documentation.

The PMO has several roles when it comes to documentation. The main priority is to reinforce clear management, standardize procedures and ensure that information is properly used.

Defining which documents are indispensable, when they should be created and to what entity they should be assigned.
Defining documentation formats, in coordination with other business units.
Offering an access system to templates and supporting documents, as well as the procedures to use them.

Depending on the responsibilities, the PMO may use some features or other benefits of its PPM tool. For example, the role of project templates can associate documentation models in the different sections of the project.