Do overruns or write-offs cost you more?
Two kinds of work, two kinds of leak: fixed fee work overruns and time and materials work gets written off. The model prices both against the practice fixed cost, and the one that hurts most is not the one that gets managed.
Words on this sheet
- Contribution: What is left of the income after the costs that come with it, before the fixed costs are paid.
Finance Intermediate Monte Carlo Pro engine
After you install, this is the model to open.
Will the Fee Book Cover the Practice?
- In your spreadsheet, click the Sortia icon in the strip of icons down the right-hand edge. No strip? Click the arrow at the bottom-right to open it. You can also use Extensions, then Sortia, then Open Sortia.
- Click Start from a template and put that name in the search box.
- Pick the card with that name and click Load this template. It arrives on a new tab with real numbers already in it.
This one runs on a Pro engine, and every free install includes five full-quality runs on your own numbers, shared across all five Pro engines rather than five for each. After that, Pro is $199/year.
The answer
- Chance it does not cover
- 25% of 20,000 simulated years
- Median profit
- $35,890 on roughly $1.9M of income
- A bad year
- -$49,474 the P5 of practice profit
- A good one
- +$124,547 the P95
A practice with two kinds of work. Fourteen fixed fee engagements at $68,000, costing 62% of the fee to deliver at plan and 11% more than that in practice, and a $940,000 time and materials book that costs 55% to deliver and loses 8% to write-offs before it is billed. Against $580,000 of practice fixed cost that is $64,634 of profit, which is thin and normal.
Click Run with the overrun, the write-off rate and the engagement count all on ranges. Profit averages $36,185 with a median of $35,890, a P5 of minus $49,474 and a P95 of $124,547, and the does-not-cover flag comes back at 25.5%. In 25 of every 100 years the practice does not pay for itself. The tornado answers the question the practice head is actually asking.
Overrun comes first at -0.68, engagement count second at 0.53, write-offs third at -0.45. But read the per-point figures next to it, because they disagree in a useful way. One point of overrun on the fixed fee book costs $5,902. One point of write-off on the time and materials book costs $9,400. Write-offs cost more per point and overrun does more damage, because overrun runs from zero to thirty-five points and write-offs run from three to sixteen.
Both are worth managing and they are managed in different rooms: overrun is a scoping conversation before the engagement letter goes out, write-offs are a conversation about what gets recorded on a timesheet. The second run picks the bigger prize. Tighten the overrun to a PERT of 0, 0.06 and 0.20, which is what happens when scope and change control get written properly rather than assumed, and rerun: profit rises to $69,029 and the flag falls from 25.5% to 6.9%.
Halving the tail of the overrun takes the chance of an uncovered year from 25 in 100 to 7 in 100. What this model does not do is separate the engagements. It carries one average fee and one average overrun, so a practice where one engagement is running 80% over and thirteen are on plan looks exactly like a practice where all fourteen are 11% over.
Those are different problems with different fixes and this model cannot tell them apart. To make it yours, count your own engagements and average fee, take the overrun from the last two years of actual against planned hours, and put your real practice cost in.
The model
It arrives on a tab called Template: The Fee Book:
| Fixed fee engagements this year | 14 |
| Average fee per engagement ($) | 68000 |
| Delivery cost as a share of fee at plan | 0.62 |
| Overrun on delivery, share above plan | 0.11 |
| Fixed fee income ($) | 952,000 |
| Cost of delivering the fixed fee work ($) | 655,166.4 |
| Contribution from fixed fee work ($) | 296,833.6 |
| Time and materials income at standard rates ($) | 940000 |
| Write offs on time and materials, share | 0.08 |
| Time and materials income collected ($) | 864,800 |
| Cost of delivering the time and materials work ($) | 517,000 |
| Practice fixed cost: premises, insurance, admin and non billable staff ($) | 580000 |
| Practice profit ($) | 64,633.6 |
| The book does not cover the practice (1 = yes) | 0 |
Once it is in your sheet
- The model arrives with real numbers in it and runs as it stands, so you can press the button first and understand it second.
- Change the numbers to yours. The sheet marks which cells are inputs and which hold formulas, and most labels carry a note explaining the row.
- Press the run button at the bottom of the panel. It is labeled for the tool you are in, and the result lands on its own tab, with a written reading of it beside the figures.
Never used Google Sheets? Start here goes the whole way, in seven steps, and assumes nothing.
Next question
- Which invoice should you check before it goes out?Which Invoices Do Not Look Right?
- What is your diversification rule costing you?Which Deals Can We Actually Fund?
- Which of your cost lines are really one risk?Which Two Costs Move Together?
- What does half a point of fee cost the investor?What Fee Does the Fund Need to Clear the Hurdle?
- What gross multiple does the hurdle actually demand?Will the Fund Clear Its Hurdle?
- What does your target return cost you in risk?The Cheapest Way to Hit the Target Return
Every model like this one, and the method behind them: Monte Carlo simulation.