Project Overruns Implications for Profitability and Personnel

The income statement was created on a spreadsheet to facilitate running many scenarios. Careful review of the Table 10.8 scenario illustrates the application of various topics covered in this chapter, including raw labor rate utilization rate overhead as a sum of non-billable direct labor cost and non-billable, non-salary costs expense ratio overhead ratio and charge-out rates. The calculated values of parameters such as utilization rate (U), expense ratio (R), overhead ratio (O), and multiplier (M), when compared to values common in the consulting industry, provide a check on the reasonableness of any scenario. Unreasonable values of parameters would be cause for exploring additional scenarios until a workable income statement can be developed. 

Consider what happens if the budget is exceeded. An examination of a typical annual income statement (e.g.. Table 10.7) for a consulting engineering firm indicates that the net revenue will not increase as a result of the troubled project (unless a change of scope is negotiated with an additional fee). All expenses and labor costs incurred as a result of continued effort on the project may not be billed to the client and, therefore, will go into the company s overhead, with the appropriate overhead factor applied to the raw labor costs. Increases in overhead as a result of the project will go directly to and subtract from the company s bottom line. 

Item Professional engineer Engineer intern Technician Administrative assistant 

M = (Net revenue)/(Billable direct labor) (c) Charge Out Rates  

Persoimel category Raw labor rate, in /hr. (c) Charge out rate, in /hr. (c) 

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