Reading Time: 5 minutes

In last week’s blog on project portfolio management, I discussed the benefits of being able to compare projects across a diversified project portfolio. As I said in that blog, the use of project costs as a size measure only works when all projects are consistently tracking the same things. That includes labor.

If you’re doing a fixed price project, it’s essential to manage all costs – including labor – to ensure that you can deliver the project and make money. For example, if your outsourced contractors are lazy about submitting their time entries, you could end up in the red before you know it. Unapproved labor costs and labor costs that exceed the budget may not be reimbursed. If your company is dealing with limited cash flows, you need to be watching when large direct project outlays need to occur.

In the business world, there are many projects done in HR, marketing, and accounting, where there is no tracking of labor costs. When salaried employees are completing an in-house project, it’s easy to skip the tracking and managing of labor costs. After all, you aren’t paying them specifically to do the project, so why should their costs be associated with the project? There are a few good reasons to do so.

Tracking labor costs on all of your projects allows you to compare them. When you’re tracking complexity and labor costs, some pretty interesting metrics can be analyzed. These metrics allow you to weigh the effectiveness of different personnel with the objective of improving project staffing decisions. When you have to make project selection trade-offs, it’s easy to assume that outsourced projects cost significantly more. But, time is limited, and choices often have to be made. So, understand the amount of labor that is being consumed on all of your projects to make better project investment decisions.

Tracking and managing labor costs can feel like a lot of work. I’m here to tell you that it’s not as hard as you think if you structure your project well. Here are three ways to make managing labor costs a little easier.

Structure your project for maximum effectiveness.

Break the project down so that deliverables you are tracking money on, can be accomplished in one to four weeks. Have your activities defined so that you can allocate the costs individually. If you break the project down too far, you will spend a ridiculous amount of time trying to decide where to apply the time. If you don’t break it down far enough, the results will not be meaningful.

The sweet spot is in activities completed in one billing cycle. Avoid having a bunch of activities in progress at the end of the billing cycle with nothing finished. Just like Scrum – you want to deliver something regularly.

You might be talking about a business project where there is no client – and there doesn’t seem to be anything that you can deliver until the end. Take, for example, a project to organize a large multi-day retreat for the partners or the leadership team. There aren’t a lot of deliverables that compare with delivering working software. But there are many, many questions to research and decisions to make. There are contracts to sign, and communications to disseminate. Think of each of those items as a deliverable that comes out of each activity. Many projects have no client paying the bill. You can still break the project down so that there is consistent progress from month-to-month.

As you structure your project, I find it helpful to think ahead about how you (and your client, sponsor, or other leaders) want to get budget reports. I use the term primary activity to indicate the bucket of activities in any group that will be summed to provide executive budget reports. Your executives don’t want a two-page income statement every month. They need a 20,000 foot view. And they need to know that you are managing costs. If you want to read more about how to break down a project effectively, read this blog on a four-step process.

Have a clear policy on how labor costs are going to be budgeted and tracked.

Every organization is different. Companies that generate revenue from client billings are typically pretty good at tracking labor costs. Lawyers track their time in six-minute increments while other companies don’t track labor costs at all.

If you are not able to bill your time to a client, who wants to spend time and money setting up an effective time tracking tool? And is there really such a thing if you have a bunch of multitaskers on your team? (In my experience, those tools work for people who are good at starting a task, and finishing a block of work on that task, without getting distracted by phone calls, texts, or even just off-topic thoughts.)

What’s important is to have a policy and enforce it across the board. Are you planning to create your budget using the individual labor costs for everyone who plans to work on the activity? OR, are you planning to use an average labor cost for each activity, given the people who are likely to be working on it? Do you have overhead numbers that you can include? I find that using an average labor cost for each activity works surprisingly well, is reasonably quick, and allows last-minute changes that won’t destroy your project plan.

Designate a money manager for each activity and outline that job in writing.

Everyone has a different idea of what it means to manage labor costs. For me, managing costs means ensuring that the value of the work you are billing for has been delivered. In today’s business or legal world, this is harder than it is in a construction world. Yes, you can bill for hours worked, but when your client gets the bill, will he or she understand the value?

It also means delivering the work that was specified in the most efficient way. Our technologies are constantly evolving. Gone are the days of boxed software that you can master in a few days. There are constant updates to operating systems, desktop programs, and mobile apps. Every update unleashes new bugs, a changed interface, and new features. Who pays for time wasted when you have to stop and fix a software incompatibility issue arising after that last operating system update? Sometimes, the answer is easy, but what happens when your work is slowed down by technology issues? What happens when writing a document that should have taken you 10 hours takes 20 because you just weren’t on your A-game that week?

In a traditional project management world, project managers spend a lot of time on earned value management. I’ve written before on why I believe we need to rethink the use of earned value on business projects. I won’t repeat that blog here, but it’s important to understand that it’s nearly impossible to reliably estimate progress on some activities. And if you can’t do that, the rest of the process falls apart.

I recommend an approach that I borrowed from the Scrum world. Don’t recognize any income until the activity is finished. If you are breaking your scope down into activities that can be completed within four weeks, this shouldn’t be a huge problem.

So, the job of the money manager becomes one of ensuring that bills are fair, reasons for budget variances are outlined in writing, promoting efficiency, and understanding and predicting when problems, including cash flow shortages, might occur. Easy? No, but it can be done without unnecessary time and effort.

Need help managing labor costs? Give me a call.