Recently a discussion came up regarding overhead allocation and the bidding process for projects.

Currently at a particular firm they are not using proposal projects to track the bidding process for projects.  Nor are they using a marketing project or other overhead project.  This means that sometimes a profit center might have several projects on their books which were never produced any revenue, but had cost associated with them because of labor or other associated costs attributed to the bidding process for those projects.

In order to encourage project directors to bid on projects, the executive board wanted to have the costs of bidding on projects moved into overhead so that only “awarded” projects remain on the books of the profit centers.

During the discussion we spoke of the “award date” as the critical date where a proposal project would spawn a regular project, and then have any costs associated with the proposal project moved over to the regular project in order that the labor be attributed to the regular project and the P + L of the profit center accurately reflect the project cost.  If we didn’t move cost, then the P + L for that particular project might be lopsided and look more profitable than it actually was.

The problem with moving costs from proposal to regular project however, is that if the “bidding process” lasts more than one or two periods (and in the case of this firm it can last months and months), and a lot of cost gets attributed to that “bidding process” then the act of moving the cost from an overhead to a regular project will affect both the overhead allocation and the P + L of the project, business unit and profit center, causing the financials to be incorrect in previous periods… thus, financials would need to be re-run.

As a lot of us know, re-running financial reports causes many many problems.  It is not a technology issue to re-run reports or re-run overhead allocation since these things can now be done at the mere click of a button. It is a problem with reporting to auditors, board members, executives, project managers etc.  It is a confidence problem and a planning problem, which could potentially be bigger than any technology problem.

So, how to achieve proper allocation of bidding process costs, project costs and P + L statements for projects and profit centers without re-running financials?

The problem we discovered is that we were looking at the incorrect “critical date” for moving from a proposal to a regular project.  We were looking at the official “award date” of a project as the decision point, when in fact a project could already be in the execution stage months before the award date.

So we needed to shift our focus and define that critical date not as the date when the project was awarded, but as the date when the business unit or profit center director decided to “execute” or move forward on that project from bidding work to actually doing the work.

So that is the critical difference.  To properly define the difference between over-head costs that are project related, and execution costs, you need to properly identify the place where the transition takes place from “pursuing a project” to “doing a project”.

Now, in many cases, there are projects that do not get rewarded even if they’ve been worked on for months… this is a business issue, not a technology issue.  If you have a project that your firm has been executing for months without a contract, and you end up not getting that contract, then you have basically been doing that work for free.

So the question is… at what point am I willing to say “I’m doing work for free” vs. “I’m working on a proposal or some ideas so I can win this project.”?  The distinction is very important.