Maximizing Project Success Through Effective Burn Rate Management

Professional services project managers looking for ways to better understand and control the execution of projects and improve project margins will inevitably be told about the value of project burn rates. But what exactly are burn rates, and why are they crucial to project success?

Every project is built on a budget, and the successful execution of projects, the financial health of a professional services business, and the satisfaction of its clients will all depend on how well project managers can perform against budgets. This is where burn rates come in. The insights below will help you get a better grip on your projects and delve into the meaning of project burn rates.  With a deeper understanding of burn rates, project managers will be better positioned to positively impact project outcomes.  

Defining Project Burn Rates

“Burn rate” refers to the rate at which a project consumes its allocated budget or resources over a specific time period, akin to a candle wick burning down as it is slowly consumed. This rate is typically measured in the amount of money spent, such as dollars per month, and provides visibility into a project’s expenditure rate. By tracking burn rates effectively, project managers can assess how quickly funds or resources are being depleted, allowing them to make informed decisions that keep projects on track and on budget, with healthy project margins.

Whether or not your professional services business is tracking project burn rates, they still exist, with project actuals burning down against the plan, and they determine the overall success or failure of a project. Businesses that don’t track project burn rate and leave burn rate performance to fate are much more likely to experience surprises that lead to margin dilution and revenue leakage; those that actively monitor burn rates are better able to proactively control whether performance tracks against expectations and financial projections, ensuring a healthy burn rate for healthy business performance. Whether your project has a good burn rate or a bad burn rate often comes down to how active project managers are in tracking and interpreting your team’s work performance against the plan.

Tracking and Monitoring Burn Rates

To effectively monitor burn rates, project managers need to maintain accurate records of project expenditures and regularly compare them with the planned budget. These expenses include compensation for full-time, part-time, and contract workers that are devoting their hours to the project, any purchases of software, hardware, or other materials needed to complete work, and any other expenses that go toward the completion of the tasks at hand. This ongoing financial tracking helps identify any significant deviations from project scope and enables managers to make timely adjustments to prevent cost overruns or resource shortages. By keeping a close eye on burn rate, project stakeholders gain better visibility into the project’s financial health and can proactively address potential risks.

Interpreting Burn Rates

Beyond tracking, managers will need to interpret the data at hand. The interpretation of burn rates largely depends on the project’s specific context and objectives, which should be defined at the start of a project in its statement of work (SOW) and contract. A faster burn rate may indicate that a project is progressing rapidly, utilizing resources efficiently, or facing unforeseen challenges that require additional funding in order to reach the set goal. On the other hand, a slower burn rate may suggest slower progress, underutilization of resources, or effective cost control measures. The key is to analyze the burn rate in conjunction with other project metrics to gain a comprehensive understanding of project performance and find a rate that matches the timeline and preferred financial outcome that your managers have defined prior to project start.

Burn Rate’s Impact on Decision Making

Burn rates play a critical role in decision-making throughout the project lifecycle. By understanding how quickly resources are being consumed, project managers can make informed decisions about resource allocation, timeline adjustments, scope changes, and risk mitigation strategies.

By extrapolating burn rate data, project managers can forecast the future trajectory of the project’s finances and identify potential risks well in advance. This foresight enables project teams to address issues promptly, seek alternative funding sources, or make proactively adjustments to project plans. Burn rate analysis can also help businesses steer away from projects that are likely to have a negative impact on the business. By having a clear understanding of burn rate and analyzing historic burn rate performance data on similar projects, stakeholders can make more accurate predictions about a project’s overall financial viability. These insights can help businesses make informed decisions about whether or not to take on a project or what other projects can be taken on simultaneously.

Burn rates also serve as a valuable communication tool between project managers and stakeholders by providing a concise and easily understandable metric to convey financial status, progress, and challenges. Transparent and regular reporting of burn rates fosters trust and enables stakeholders to make informed decisions, align their expectations, and support necessary actions to keep projects on track. By taking the guesswork and overreliance on hindsight out of project management, your teams become better equipped to take on bigger, more challenging projects that have the potential to significantly expand your business.

Surfacing Contextual Insights With Kantata

It’s not enough to simply calculate burn rates. Professional services companies need to adopt technology that helps them fully leverage burn rate data for long-term success. With the Kantata Professional Services Cloud, your business will not only have the data needed to understand project performance, but also robust project workspaces that give project managers the contextual insights they need to surface risks and make proactive, impactful decisions.