How Commercial Directors can help reduce project financial risk?
As a Commercial Director it is your responsibility to systematically reduce financial risk on a project at company level. Intval can help. Find out more.
As a Commercial Director it is your responsibility to systematically reduce financial risk on a project at company level. As you are not typically involved with the day to day running of projects, you need to rely on your commercial managers. In order to do this, they need to be suitability trained and understand your view of the world in terms of the importance of risk mitigation and when they should be raising flags to get your assistance.
The Importance Of Project Variations
Why are project variations so important? To start with, average annual contractor profit margins in the UK are only 3.9% - significantly lower than other countries. This is due to a highly competitive landscape in which tenders are secured at very low margins and profitability relies significantly on post-contract performance.
Uninstructed variations can have a major impact on the risk profile of a project. These could include their complete removal from a payment application, an inability to pay your supply chain, difficulty forecasting, and so on.
In the end, the most like cause of a delay in issuing instructions is the desire of the Contract Administrator/Employers Agent to have the cost of a variation agreed before they instruct it. So it’s of paramount importance for your organisation that you are ‘strategically’ pursuing the agreement of variation costs, and not leaving it down to chance. And the only way to ensure this is through mitigating all the key risks, which commercial managers have to deal with in spades.
These risks come on top of several other hurdles, like a COVID-related lack of face time with the client PQS, juggling multiple projects, receiving slow responses from subcontractors, sending and re-sending breakdowns and substantiation, and losing track of when and how costs are being agreed.
Key Risks To The Variation Approval Process
First of all, as Commercial Directors you don’t typically have the ability to take an instant deep dive on a project, particularly relevant when it comes to assessing the risks of a project and identifying which of your commercial managers may need some extra support from you.
Then, there’s the trend (or risk, shall we say) of your Commercial Managers providing overoptimistic internal reporting. Of course, it’s human nature to an extent, but you’ll always run the risk of getting to the end of the job without it being as profitable as you’d hoped.
In a different context - think about how much your Commercial Managers have on their plate. When they’re overstretched, there’s a heap of risks involved, including unsatisfactory performance, lack of consensus during the cost approval process, more chance of mistakes and, on a human level, a higher risk of unhappiness or poor wellbeing.
Finally, the biggest risk is that as a Commercial Director, you’re personally responsible for your Commercial Managers. Meaning that if you don’t have some kind of early warning system that allows you to stay ahead of the curve every time a new red flag appears, you’re always going to be one step behind.
You need to have the confidence that your managers are tactically managing the process of agreeing on variation costs. In a nutshell, they need the right kit.
These risks are all relatively easy to avoid, provided you stay vigilant and aware of both their existence and their ability to sabotage what could (and should) be a relatively painless process. It’s about adopting a strategic solution for the agreement of project variations. A piece of software… like Intval perhaps? Try it out today and you’ll see your projects become easier before your eyes.