What to do if your projects aren't profitable

Discovering that your projects aren't making you enough money can be a daunting and disheartening realisation. However, now that you’re furnished with this vital information, you have the opportunity to take proactive steps to identify and address the underlying issues.

Here’s a step-by-step guide on what to do if you find yourself in this situation.

 

1.    Root cause analysis

a.      Project scope and budget

Often, projects run over budget due to scope creep, which is when the project expands beyond its initial objectives.

Did your projects have well-defined scopes and budgets that were strictly adhered to? If not, identify the ways in which you could have more tightly defined the scope of work. Could you have limited the rounds of amends or been specific about your assumptions? It’s not easy to cover off every eventually in your scope of work documents but in general, the more specific you are, the more opportunity you give yourself for discussing scope creep with the client.

How was the scope creep and budget monitored? Scope creep does have a habit of creeping up on you! It’s usually easy to spot the cataclysmic changes of scope. But when you’re in the midst of a project, the small incremental changes of scope can easily go unnoticed. I call it the ‘can you just…?’ effect. Each little additional request can cause a ripple effect to the project scope. The only way this effect is usually spotted is by monitoring the budget regularly. It’s only then that you can start to see the project costs diverging from the budget. Is regular budget monitoring part of your project management process? If not, look at ways you can build in a regular review of a key metric, like 'proportion of budget spent versus proportion of the project completed'.

b.      Operational efficiency

Inefficiencies, such as duplication of tasks, time delays or suboptimal use of resources, can significantly eat into profits.

Do you have a well-defined project workflow? Is it efficient? Is it followed? It’s worth looking at your unprofitable projects and assessing whether your workflow was followed. If not, why not? If it was, was this part of the problem? Processes need to be regularly reviewed and continually improved, so consider opportunities to automate or simplify your workflow.

It’s a fact that time delays, especially at the last minute when resource is ready and waiting, and protracted timescales, make for unprofitable projects. Do you and your clients usually stick to an agreed timeline? If not, what can you do to change this? Having a timeline that all parties try to work to means you can plan resource to ensure the right resource is available at the right time. If you’re flying by the seat of your pants all the time, not only will it feel frenetic, but you’ll also be wasting resource and budget, especially if you use freelancers.

Do you have the right resource? And by ‘right’, I mean suitably experienced and skilled for the task in hand. If you have senior staff carrying out junior tasks, this is not optimal use of your resources and will be eating into your profit margin. Also, if you’re using freelancers to fill any skills gaps, this will also have an impact. Trying to have the right mix of skills to meet your current and future project needs is a constant challenge. Looking at project profitability and team utilisation can really help inform future recruitment and team growth plans.

c.      Pricing strategy

Undercharging can lead to projects being inherently unprofitable, while overpricing can deter clients.

Are your prices competitive while still ensuring that you cover your costs and a reasonable profit margin? If you’re not sure, it’s worth taking the time to work it out. If you’d like to know how to work out the right day rates for your agency, download my ‘rates and profit margins’ guide for a detailed explanation and handy tips.

Of course, time-based pricing isn’t the only pricing strategy available to you. You can price based on value added, which can lead to higher profitability. You still need an awareness of your underlying costs to ensure this though.

 

2.    Review your approach

a.      Project management as a separate discipline

Effective project management is crucial to running profitable projects, but its value is often overlooked. It requires a separate skillset to that required for project delivery and in the Prince2 methodology, the roles are distinct. However, in reality, both are often the responsibility of one person. It’s not something you will have the luxury of doing while your agency is small but with growth, dedicating separate resource to project management will pay dividends.

b.      Cost control measures

In simple terms, there are only two things we can do to improve profitability. That’s charge more or spend less. So, it’s worth looking regularly at what you can do to reduce essential costs and eliminate unnecessary costs. Examples include shopping around for the best prices, reducing waste and optimising your resource allocation.

c.      Change control measures

No-one wants to be the sort of supplier that charges extra for every little client request. However, having a simple but effective change control process will bring consistency to your processes and reduce the risk of losing money on projects. Clients also appreciate timely communication about changes to the budget. Presenting an increased invoice at the end is never well-received!

Change control is not just a re-costing exercise though. It should also look at whether the increased scope introduces any additional risk. For instance, is the deadline still achievable or could the quality of the product be compromised? These are just as important considerations as the impact on the budget.

d.      Embrace technology

If you don’t already, you could look at using tools like Gantt charts, project management software (e.g. Trello, Monday.com) and workflow management software (e.g. Productive, Synergist) to streamline your agency operations and reduce costs. Automation, artificial intelligence and advanced data analytics could also significantly improve your efficiency and decision-making.

e.      Innovation and continuous improvement

Those working in project delivery and who know your processes inside out, are the ones best placed to identify opportunities for improvement. Encourage your team to think creatively and come up with innovative solutions to improve profitability. Create an environment where ideas are welcomed and rewarded and a culture of continuous improvement.

 

3.    Evaluate client relationships

a.      Client profitability analysis

You may conclude that projects aren’t unprofitable across the board, they’re just unprofitable for certain clients. And sometimes, a few unprofitable clients can drag down overall profitability.

If this is the case, conduct a client profitability analysis to identify which clients are profitable and which ones are not. I’ll be covering ‘client profitability’ in a future blog, so watch this space. 

b.      Renegotiate a client contract

If you discover a pricing issue and there are no inefficiencies or cost savings to address, your next step is to renegotiate the contract with the client. Be transparent about the need for adjustments to reflect the true cost of the services provided and provide a clear justification for the changes.

c.      Focus on high-value clients

Without putting all your eggs in the one basket, focus your efforts on high-value clients who bring in the most profit. Provide them with exceptional service to ensure their loyalty and potential for future business.

If you can’t renegotiate the contract, it might be necessary to part ways with a client who consistently results in losses. Politely and professionally communicate your decision, and if possible, refer them to another provider who might be better suited to their needs.

 

4.    Implementation and monitoring

a.      Seek professional advice

Engage an agency operations specialist, like Snowdrops Consulting, for a fresh perspective, to identify blind spots and provide tailored solutions.

Leverage networking opportunities to connect with industry peers, join professional associations and participate in business forums to gain insights and advice from fellow agency professionals. 

b.      Create and execute an action plan

Develop a detailed action plan based on the insights and strategies identified. Then, to ensure successful implementation, assign responsibilities, set timelines and establish measurable goals.

Regularly monitor the implementation of your action plan. Use Key Performance Indicators (KPIs) to track progress and adjust as needed.

c.      Create a feedback loop

Establish a feedback loop to continuously gather input from your team, clients and other stakeholders. Use this feedback to refine your strategies and ensure they are effective.

 

Conclusion

Discovering that your projects aren't profitable is a significant challenge, but it also presents an opportunity for growth and improvement. By systematically identifying the root causes, adjusting your approach, evaluating client relationships and diligently implementing and monitoring changes, you can turn your situation around and steer your business towards sustainable profitability. Remember, the key to success lies in proactive management, continuous improvement and a willingness to adapt to changing circumstances.

If you haven’t looked at how profitable your projects are and you would like to know how, use my downloadable ‘project profitability’ guide for a detailed explanation.

If you want or need a helping hand to ensure your projects are profitable, just email me at jane@snowdropsconsulting.co.uk or arrange a no-obligation chat.

 

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