Business Metrics

Learning Series

September 07 2016 // 5:00 AM

Seeing into the Future and Accurately Accounting for Your Backlog

Written by Aaron Mitchell | @PAEVENaaron

Seeing into the Future and Accurately Accounting for Your Backlog

In my past article What’s Your AE Firm Doing About Bad Debt? I pointed out that sales are the number one most important aspect of your AE business – more important than collecting and more important than doing great work for your clients.  If you don’t sell work, you’ll never have the opportunity to perform great work.  If you never collect the fees owed for the projects you work on, then it really doesn’t matter whether you did great work or not, you generated no money for your time spent.

This article is meant to focus on the sales aspect of your business and how to track and account for your backlog.  I will also outline a free Excel backlog tool that can be used by you or your business.  First we need to define backlog as it is meant in this article.  Backlog is a collection of both future awarded work and future opportunities.  Future awarded work is projects that your business proposed on and received contracts for.  Future awarded work can either be work that hasn’t started yet or work that is currently being worked on, but may be large enough of a project that the work spans over a few months of time.  Future opportunities are those projects that you have sent out proposals for, but you have not yet been awarded or denied the project.

What every AE business wants to know is how much work is coming down the pipeline.  In other words, how many dollars can we anticipate to earn and how many hours does our staff need to spend in order to get that work done.  The more accurate your backlog is, the more accurate your company can be with decision making.  An accurate backlog will help your company know whether you need to sell more work in future months to keep busy during that time period.  An accurate backlog can also warn you that a huge work load is coming and you either need to prepare your troops for long hours or decide to add more staff.  An accurate backlog is a must for an AE firm to be able to make good decisions over short periods of time, which directly affects the future of the company.  The decisions that are made must be made all of the time.  These decisions aren’t just sporadic.  The backlog is the future pulse of your company, and your business needs to monitor that pulse constantly and adjust as needed to keep the firm healthy moving into the future.

Now let’s talk about how to generate your company’s backlog and keep it up to date.  Whether a project is under contract or a future opportunity, ideally you know what period of time this project will be worked on and completed.  The first task to building your backlog is to determine and distribute portions of project fees to assigned months in which the project will be worked on and invoiced.  For example, if you have a project that has a total fee of $25,000 and it will be worked on over the next 3 months, September through November, you may assign $10,000 of that contract to be worked in September, $10,000 of that contract to be worked in October, and $5,000 of that contract to be worked in November.  In other words, the project manager for this project anticipates that 40% of the project will be completed in September, 40% in October, and 20% in November.  You can compile your backlog by calculating this for both future awarded work and future opportunities. 

The question now is what to do about future opportunities, since those aren’t guaranteed dollars.  The answer to this important question is to have the individual responsible for each proposal estimate a percent chance of winning for each potential project.  This creates a weighted proposal dollar amount. That determined percent chance of winning each potential project is then used in your backlog to estimate how many dollars the firm will likely earn in a certain month from future opportunities.  Let’s say you proposed on a $5,000 project and based on your experience with the client and knowledge of the project you estimate you have a 25% chance of winning it, and if you do win the project, all of the work would likely be completed in the next month.  When adding this proposal to your backlog the estimated income due to this project in the next month would be $1,250.  We got to that number by multiplying the contract amount ($5,000) by the estimated percent chance to win (25%).  You would do this same thing for all potential projects.  Larger future opportunities would span over multiple months, and the project’s fee would be distributed out to the anticipated months the work would be completed, but the estimated income amount for that project would be multiplied by the estimated percent chance to win across all of the multiple months where the project is distributed.

In case your head is spinning right now because you having trouble visualizing what we are talking about, see the spreadsheet below for an example of how your business can easily create a backlog that is trackable.  Note that you can download our Backlog Report spreadsheet (shown below) from PAEVEN’s Toolbox and Templates.
 
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The spreadsheet shown above can be easily used by your company for predicting future backlog.  The spreadsheet also includes an easy to read report output to summarize your backlog and determine your staffing requirements and income shortfalls for each future month.  A preview of that generated report is shown below:
 
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The final step is to keep your backlog up to date.  Projects and proposals are essentially living and breathing things.  Schedules change, scope adjusts, and many other factors can play a role in requiring projects to be updated in your backlog to keep it accurate.  I recommend that on a weekly basis all project managers update not only the dollar amount distributions from month to month, but also update estimated percent chance to win for each future opportunity.  By getting in a routine of the entire company updating projects weekly and then reviewing your backlog, your company will be in a great position to make wise decisions that benefit your company’s future.

The future can be scary, especially if it is unknown.  Your business needs to be run based on numbers, not speculation or hopes.  Establishing and maintaining a company backlog is a must if your company wants to continue or improve the success the company is currently experiencing.  How does your company track their backlog? 

Aaron Mitchell, PE, SE
amitchell@paeven.com

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