Better Financial Performance Starts With Accurate Timekeeping
February 11, 2020
Principals and managers at architecture/engineering (A/E) firms are often surprised to hear us say that while software packages can make time entry and tracking easier, they don’t necessarily make it more accurate. But, it’s true. The simplicity of the time entry function in these packages can, without proper policies and training, lead to inaccuracies.
Backing up a step... the root of the problem is that historically projects were billed hourly, and the only way to generate revenue was to record time. Even now, with projects largely moving to a lump sum billing structure, the attitude that “you must be billable” is still pervasive. And, this attitude can cause problems when team members feel that they can’t record time to anything other than projects.
Proper Timekeeping Starts with Proper Project Setup
What we’ve found is that in order to record time correctly, you have to set projects up correctly. Often projects are defined too loosely, with project managers (PMs) or principals who are eager to start making progress not giving proper consideration to who is expected to be on the project and in what proportions. It’s essentially a free-for-all until a problem arises, and then the PM tries to correct things on the fly.
Phases and tasks get added without much thought, and eventually there is little relationship between what the client expects and how the project is set up. The problem tends to come to a head when people start miscoding their time because what they are actually doing isn’t defined in the system.
We’ve learned that this type of issue can be avoided if the principal or PM sets the project up fully and defines the individual people or the type of people who will be allowed to code time on the job. If someone hasn’t been authorized to log time, they must get permission first. This feels a little counterintuitive, since billing time is a good thing! But this approach helps prevent inaccurate time entry by someone who isn’t quite sure where their time should be logged and just makes their “best guess” based on what they see in a drop-down list.
It also helps prevent the significant amount of effort that can be required at the end of each month to figure out where time should have been coded. And, of course, reallocating hours can make a job that seemed to be doing well from a financial perspective look not so good, and this becomes a point of contention among PMs.
"What we've found is that in order to record time correctly, you must have projects set up correctly."
Eliminating the “Principal Tax”
While we have great respect for A/E firm principals, they would be the first to admit that they are the biggest offenders when it comes to logging time incorrectly. This is true because as the owners, where they log their time gets much less scrutiny than anyone else in the firm. And even if a problem is detected, PMs are reluctant to bring it up. Nobody wants to bite the hand that feeds them!
The term used for the practice of essentially spreading out their billable time across projects is the “principal tax.” Unfortunately, this practice causes firms to think they are much more billable than they are since the principals bill at the highest rate.
The key to eliminating the principal tax is to account for their work by setting up specific tasks and budgets, and then requiring that they bill their time accordingly. This may mean that they miss their utilization rate goals, but a principal should not be highly billable anyway. Poor financial results follow when a principal is working too much in the business rather than on the business!
Addressing the “Project Manager Tax”
Another timekeeping issue that can affect financial performance is considering project management tasks to be non-billable time. Ideally, there should be a code set up in the system for these necessary activities, because while they’re sometimes thought of as “paper pushing” that doesn’t advance the project, nothing could be further from the truth. But spreading time across all projects and not charging the client for it produces a “project manager tax” that A/E firms should eliminate.
Proper Recording of Rework
Firms can also run into problems if they don’t record rework time properly. It should be noted as a direct, non-billable cost. However, many firms record it as indirect or “overhead” time. The problem with that approach is that you don’t know how many hours it actually took to complete a job. And, if you later use this project as the basis for quoting another similar one, you’ve set yourself up for failure.
Similarly, when a project goes over budget, the additional hours must be recorded as direct, non-billable time. They should not be logged as indirect, because doing so makes the project look more profitable than it atually was.
Ultimately, we’ve learned that by setting up projects properly, placing restrictions on who can log time to them, providing some training and guidance, and ensuring that everyone from principals to front-line employees record their time accurately, firms can enjoy much better financial results.
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