In the dynamic landscape of creative services, project profitability is critical to success. If you’re not making money on your projects, it’s time to find a new profession.
While maintaining profitable projects may seem straight forward there are actually quite a few considerations to keep in mind. So in this article we’ll dive into tangible and non-tangible reasons why your projects are not turning a profit.
A few basic things to cover before we dive in.
What is project profitability?
In short it is a measure of the financial gain a project brings to your agency after all costs are accounted for. Basically it’s a key performance indicator that can make or break your agency’s financial health.
The formula for project profitability is:
Project Profitability = Project Revenue - Project Costs
Project Revenue is the total income from the project, while Project Costs include both direct and indirect costs associated with the project.
Why Do Some Projects Fail to Make Profit?
Pointing fingers at a single department or individual may seem like the natural response when a project fails to turn a profit, but this is seldom the full story.
Let’s discuss 3 different project management levers to pull that effect profitability but also form part of a holistic process.
A range of factors interplays in these instances. Let’s delve into a few.
The sales process is an often overlooked, yet crucial determinant of project profitability. For example, if a project sells at a price that fails to cover its costs, it is already doomed to financial failure, no matter how flawlessly it is managed later on.
So, how does this situation arise? We find that many creative services are priced based on the cost of delivering a similar service to a previous client. This –although logical, fails to consider:
- Whether the previous project was genuinely profitable.
- Whether the required resources and skillsets are available to fulfill the project within the agreed timeline.
- Whether the project management department has the capacity to manage it adequately.
Overlooking these considerations deprives a project of its best chance to succeed and turn a profit for the agency.
Consider the following scenario. A logo design project was sold to a prospective client for $25k. This price was set based on a previous logo project which sold for $20k, with a 25% addition factored in to accommodate inflation. The logo was to be delivered 3 weeks after the contract was signed.
After the deal was sealed, the team realized a potential hurdle. Even though the design team had confirmed their bandwidth, the available designer didn’t have the specific skillset to produce the type of design needed.
There were a few option to consider:
- The agency could choose to proceed with the underskilled designer, however, this would double the project timeline from the originally promised 3 weeks to 6 weeks.
- An alternative approach would be to reassign a busy designer who has the required skillset. But that move would divert her attention from a project she is currently fully immersed in, thereby causing delays there.
- Lastly, they could opt to bring in a contractor who is capable of meeting the project’s timeline but at a cost that’s twice as much. This would effectively sideline the underskilled designer who, while still on the payroll, would be idling away his time.
This table visually represents how a delay in the project due to an unskilled designer leads to an increase in project costs and a decrease in profit, turning it into a loss.
|Cost Rate (USD/hour)
|Billable Rate (USD/hour)
|Profit Margin (USD)
|Profit Margin (%)
|Client unsatisfied with the doubling delivery date.
|Other project will risks delays for 3 weeks and cause the skilled designer to ramp back up furthering delaying the project.
|Project becomes genuinely unprofitable.
Leveraging the Sales Process
Leverage the sales process to maximize project profitability. To do so, consider the following steps:
- Pricing Strategy: Review your pricing methods. If they’re solely rooted in historical precedents, it’s time to reevaluate. Develop a strategy that factors in the cost of each project independently, considering its unique requirements, complexities, and deadlines.
- Profit Margin Estimation: Embed a desired profit margin in your pricing strategy, ensuring profitability from the onset. Once selected make sure your team knows that’s the goal and why it’s important.
- Honest Time Estimation: Consider the required skills and resources and make realistic time estimates. Consult with all departments involved.
- Capacity Planning: Keep the project management team’s bandwidth in the picture. Ensure they can adequately handle the project before signing off.
Before we jump into this one let me ask you a question. Who should own the project process? Most would say project management. I would agree with that only if the project managers actually had an active hand in defining the process. Otherwise it is not feasible to think someone let alone a group of people can effectively enforce a process they did not define. More on this later.
Side note: do you happen to have a cadence by which you’re reviewing your project processes? We’ve got meeting templates, training videos and spreadsheets that you can use for free in the Agency Profit Toolkit. Grab your copy at the link below!
A project process goes far beyond closing the deal, allocating a team and starting a project. Here are some other considerations to get you started.
- Communication Expectations: Did you know that our employees spend 312 hours a year in meetings. This can really eat into profitability if communication expectations aren’t clearly defined externaly and interally. Not to mention the loss of nearly 23 minutes each time before we manage to refocus. This accumulates to significant lost work hours on a daily basis.
Here’s something to get you started:
- Identify who will own the communication for the duration of a project. Do this on the agency and client side.
- Figure what channels you will use to communicate. The method matters less than the clarity it brings to your interactions. I personally opt against slack or for client communication.
- What is your response window for getting back to the client? What is the client’s response window?
- What are your canned responses when a client sends you 45 questions at 4:45 on a Friday?
- What is escalation path for project roadblocks, client delays, etc? Who will be involved and how will challenges be resolved?
- Change Management: Changes are often inevitable in any project. Define an agency wide process for handling them. You may want to add this to your Statement of Work for every deal you sign. Include where scope changes are to be submitted. What constitutes as out of scope. Who reviews the requests. What possible impacts on time and budget that change will have. Finalize it by getting signatures from project leaders on the client and agency side. If change management expectations are set it out of scope changes can hardly eat your budget.
- Risk Management: If you are a specialized shop it’s likely most your risks look the same. If you have been recording them over time you should a have great starting points in order to identify risk that press on your project profitability. But if your’e a full service shop your risks can vary so, it’s important to make the time to do a risk assessment. This is best done once you have an estimate and high level requirements. Perform the assessment again once the requirements are locked in.
- Project Closeout: How you finish is much more important than how you start. So even before you start define what finished actually means.
- What does success mean to the client?
- What is the definition of done? (not the same as success)
- Where and how will deliverables be sent?
- Will documentation accompany the deliverables?
- Will you hold a retrospective only internally or involve the client?
These are just a few elements that give your projects more structure so they stop bleeding profit. Now let’s put this into terms we all can understand.
Let’s say you sign a web development project for $102,000. it will take 600 hours to complete, which means your blended billable rate is $170 per hour. The internal cost is $48,000 so your internal bill rate is $80 per hour. As it stands your projected profit margin is 52.94%. For the project to be profitable to your agency your profit margin can’t drop below 45%.
Let’s see how conservative process issues can eat into your profitability:
|Revised Profit Margin
Now, let’s break this down and see exactly how these process issues gnaw at your profitability:
Unfettered Communication: The team expends an additional 15 hours in communication, both internally and with the client, pushing costs up by $2,550. The effect? Your profit margin drops from a healthy 52.94% to 51.24%.
Client Dictated Change: With no clear change management process in place. The client dictates a change in scope that can’t be argued well since the scope is loose. The costs swell by $6,800, driving the profit margin down further to 47.25%.
Unforeseen Risk: The project hits a speed bump – the tool to migrate content didn’t work on the client’s legacy CMS. A solution needed to be found so the team now had to spend an additional 20 hours on the project. Your profitability took another hit, down to 44.51%.
Unexpected Request: Your team didn’t plan to provide documentation at the project close. However, the client had a different expectation. It takes 15 more hours from your team to complete this addition. The final blow to your profit margin sends it tumbling to 42.74%, well below your 45% benchmark.
You see how easy profitability can be lost even in just four areas of a process. Trust me, there are many more.
A project process is not an option it is a necessity to maintain your profitability. Although putting a process together may seem time consuming or costly with your resources. You would do well to ask yourself:
Would you rather spend the time now getting this right or keep?
Or would you rather keep spending losing on non-profitable projects for who knows how long?
An Intangible: Organizational Clarity
Having the best processes in place won’t translate into successful project outcomes if your organization lacks clarity.
When Clarity Crumbles
Lack of organizational clarity becomes apparent when critical decisions need to be made and no knows who makes them. As an example, when a client asks for something out of scope. Is it the PM, the AM, or senior leadership who enforces scope? Who has the responsibility to stop team members from billing hours when the project is reaching budget? These are not just administrative details, but pivotal aspects that can significantly influence the profitability of a project.
When we are confused we are not effective.
A Bit of Influence but No Authority
A common issue in many organizations is the unclear roles and responsibilities of project managers. Often, they are seen merely as ‘task pushers’ who are responsible for checking off to-do items and updating an outdated project plan. This perception dilutes their authority and diminishes their capability to effectively manage and control the project with all it’s nuances.
In reality, the PMs should be empowered to make the crucial calls and manage the team effectively. They are critical in proactively managing the projects to ensure they stay on track and maintain profitability.
If the project teams don’t respect the role of the PMs, that perspective is coming from somewhere. So, what signals are you giving about your PM teams role in project success?
What can be Done?
In a recent Project Management study, project challenges like “inconsistent approaches to projects” was listed in the top 5. Major contributing factor was a lack of clear roles and responsibilities in the project team.
So what can you do:
- Create clear roles within the project team and leverage your project management team’s knowledge and insights.
- Elevate the PM’s contribution so they can roll out the plan with leadership backing. They will also keep it going project after project.
- Reduce the stress inducing ambiguity by memorializing your decisions and process in writing.
This type of clarity prevents tasks falling through the cracks, multiple team members working on the same thing without coordination, and no one taking ownership when things went wrong.
Organizational clarity isn’t just about defining processes; it’s about making sure everyone knows their roles and is empowered to execute them.
In the world of creative services, turning a profit is not just a business aim, but critical for survival. So, profitable projects start with a well-thought-out game plan. Gone are the days of calculating profit by simply subtracting costs from revenue. For an agency to truly thrive, it needs to dissect the various aspects of its operations, specifically the sales process, project process, and organizational clarity.
In essence, maintaining profitability in creative services demands astute strategy in sales, accurate project processes, and fostering organizational clarity. Finding and addressing the intersection between tangible data and the intangible dynamics in your operations is crucial. Mastering these elements can mean the difference between flourishing or floundering in this competitive industry.