4 minute read
Foundations of Project-Based Finance
Business Intelligence for Designers and Project Managers
By RANDY REID
Photo Credit: AdobeStock Sodapeaw
On 6 June, in New York City, I attended an enlightening class on the business of light, conducted by Justin Smith from the Zweig Group. Justin, an engineer who returned to school to earn his MBA, was an excellent choice to lead this effort. The session was well-attended, with 16 participants almost filling the room to capacity.
Justin's presentation centered on the question: "What is it exactly that you sell?" He emphasized the importance of being able to communicate eloquently in client proposals. While every firm has experience, the challenge is to articulate what sets your services apart.
Justin stressed that the opening paragraph of any proposal should focus on vision shaping, as clients are essentially buying time to realize their vision. Most proposals start with a list of tasks and associated costs, but he argued that the emphasis should be on the value provided, not just the time spent. This approach shifts the focus from selling time to selling value. He suggested that instead of a generic opening paragraph like "We are a group of people that do...," firms should aim for statements like "We develop beautiful spaces..." He emphasized that the opening statement should reflect vision and value.
To illustrate the concept of value, Justin shared a personal anecdote about seeking a cup of coffee at 3 am in Seattle when he has jetlag. At that moment, he would willingly pay $10 or even $15 for a cup of coffee due to its perceived value at that time. The key takeaway was to understand what value clients place on services and to price accordingly. He pointed out that the decision to hire a lighting designer is often an emotional one, but it is rationalized with numbers.
A significant part of the class was dedicated to understanding key financial concepts: Value, Price, and Cost. Justin encouraged designers to link price to value rather than cost. For instance, international design projects might be more prestige-oriented and less price-sensitive, though this can vary by region. However, one participant who works in Mexico disagreed, saying her clients often perceive American firms as more expensive.
The discussion then moved to primary expenses, particularly direct labor and other expenses. Direct labor is the cost of labor that generates revenue. Indirect labor, on the other hand, includes costs that do not directly generate revenue. Justin provided an insightful breakdown of modern firms' spending: for every $1 spent on direct labor, overhead typically adds $1.64, resulting in a total cost of $2.64 per dollar of labor, with about $0.36 going to profit.
He provided a clear example: if a lighting firm earns $300 in fees per hour, $100 goes to the person conducting the lighting design, $164 covers overhead, and $36 is profit. This breakdown highlighted the importance of understanding cost structures and pricing strategies.
The class also discussed fixed fee environments. Justin posited that firms work more efficiently with fixed fees compared to hourly rates, as the latter can disincentivize efficiency. This view was not universally accepted. Edward Bartholomew pointed out, “It’s not just efficiency, it is about productivity.”
Justin also talked about premiums and how some software tools include dropdown menus for selecting premium percentages (5%, 10%, 15%, 20%). If a 0% premium is chosen, the software requires an explanation. This approach ensures that premiums are considered systematically. David Ghatan noted that some government projects limit the premium that can be charged.
An interesting point raised was the need for premiums when dealing with difficult clients, humorously referred to as "PITA" (Pain In The A--) clients. This sparked a lively discussion on how to handle challenging clients and the necessity of accounting for the extra effort they require.
Throughout the day, participants engaged in team activities involving several math calculations, reinforcing the financial concepts discussed. The content was well-received, and the consensus was that the class was extremely worthwhile.
The session provided invaluable insights into the financial aspects of project management for lighting designers and project managers. It underscored the importance of clear communication, understanding client value perception, and strategic pricing in the business of lighting.
