Situation: A company works on a project basis, and the CEO is concerned that the return per project is too low. She is looking for ways to boost the return per project without substantially increasing project risk. How do you optimize the business model?

Advice from the CEOs:

• What are the risks and potential upsides surrounding the projects?
  • The principal risk is long-term liability, connected with residual liability following project completion.
  • This risk can be mitigated by purchasing a wrap policy; however, this can cut into the profit generated by the project.
  • It is possible to build scale more quickly with larger projects. The percentage return may be lower, but the dollars can be higher.
• What are the principal components of the company’s time risk?
  • Higher cost of money and greater exposure to fluctuations in prices and interest rates over the project period.
  • This risk can be mitigated using financial derivatives particularly over longer-term projects.
• How broad is the company’s geographical scope?
  • Currently customers are within a 30-mile radius of the company’s office primarily because company personnel are frequently at the client’s site.
  • This area will broaden as the company’s reputation becomes known.
  • Consider the creation of branch offices to extend the breadth of the company’s service area.
• What are the key variables that the company faces completing projects?
  • Payment is not received under current contracts until a project is completed.
  • This can be mitigated by creating milestones with payments due at the completion of each milestone.
  • It may be worthwhile sacrificing a level of project profit in return for more frequent payments to boost the company’s cash flow.

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