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Better Financial Performance Starts With Accurate Timekeeping
February 11, 2020
"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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