In the current economic climate, professional service firms are acutely aware of the threat posed by the erosion of profit margins. Without proper planning and monitoring, project margin erosion can sneak up on you gradually. Everything appears to be in order until, suddenly, nothing adds up. And erosion can accelerate quickly.
Margin erosion is a term used to define loss of margin dollars that can occur once a job has been won. More simply, it is a gradual reduction in gross profits over time. Every business has to worry about margin erosion. It can be caused by anything from human error, system error, bad business decisions or practices such as excessive discounting or markdowns, poor quality control or lack of sufficient inventory.
For professional services firms, issues like excessive overhead costs or capital investments ultimately affect profitability; however margin erosion on projects is generally the most significant impact on the bottom line, quickly eating into a company’s overall profitability.
Causes of Project Margin Erosion
Many things can erode margins on projects. Some are harder to control than others, but by putting a few processes in place to minimize or eliminate the major areas that give project managers and their teams the most frustration, project costs can be controlled more effectively, and organizations can realize greater financial success on their projects.
There are four primary categories that encompass many of the problems that lead to margin erosion including bad estimates, scope creep, poor resource management and issues with clients.
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