A couple of notes:
- The following tips apply mostly to fixed fee design or web/app development projects. However, aspects of these levers can apply to any kind of services business.
- Achieving profitability on your projects doesn’t necessarily mean your business will be profitable. Other factors like overall team utilization, sales & general admin expenses, and non-billable staff can determine whether or not your agency is profitable. Profitability on projects is a good measure for how efficiently you’re able to deliver on work. Being profitable on most or all of your projects is definitely something to strive towards.
What does it mean to achieve profitability on a project?
Put simply, it’s what you charge for a project minus the total cost it takes to deliver on the project. The number you have left is the project’s profit. The larger the number in relation to what you charged for it, the great the profit margin / profitability.
What is considered a good profit margin?
It really depends on your business model, the scale of your projects, and the type of work you’re doing for your clients. At Barrel, it’s not unusual to have different sets of expectations depending on the type of client, project, and project size. For example, we have one client whose project sizes vary from $5,000 to $15,000. The work is largely production design work, and we often see 80-90% profit margins on them. For another client, we have a monthly retainer that pays $50,000+ per month and requires a fully dedicated team of project manager, tech lead, a couple developers, and a designer. Margins are around 35% but the profits are predictable and recurring. We also have one-off website projects ranging from $50,000 to $350,000 and we’ll target profit margins ranging from 35%-55% depending on the complexity and team size.
We try to have a general rule of aiming for 40%+ on most projects, but the reality is that every project’s projected profitability needs to be examined on a case-by-case basis. Some agencies have higher project profitability goals and others have less.
Striving for Profitability on Projects
Doing projects profitably is a good marker of a healthy agency. It reflects solid processes, expertise, and strong personnel.
I’ve been on both sides of profitability. I’ve had many projects go sideways and into the negative (the costs go beyond what you’re charging for the project), putting pressure on the business while also stressing and burning out team members left and right, not to mention frustrated clients. I’ve also seen projects go incredibly smoothly with fat profit margins right along side satisfied clients.
From these experiences, I’ve teased out a handful of levers that can impact project profitability. There’s no clear cut way to achieve profitability, but playing around with these levers can help you find a path.
Lever 1: Pricing
I list this lever first because it’s often the most obvious lever. When you’re able to charge more for a project, you have a better shot of generating greater profits–more buffer for expenses, more buffer for delays, more buffer for mistakes.
Of course, if you’ve been in the agency business long enough, you also know how challenging it can be to command higher prices. It’s often not, as many employees over the years have suggested to me, simply a matter of “asking the client to pay more” but a number of other factors: the general market & competitive environment, our firm’s own positioning/standing in the client’s mind, the client’s willingness and urgency to invest in order to get desired results, etc.
As difficult as having high prices may be, it’s still a worthwhile lever to explore. It’s sometimes easier to have relatively higher prices on smaller pieces of work that can generate fatter margins. For example, you can have a small 20-hour project be priced at $5,000 because the client is insensitive to such amounts and also see value in such work being done quickly. Such a project, if completed by a relatively junior team member, can net big profits. On the flipside, you might be locked in a competitive bid for a $150,000 project and be asked by the client to come down in price, potentially sacrificing some margin, in order to be awarded the work.
Further reading: For some pricing tactics, check out my blog post on lessons I took away from Pricing Creativity by Blair Enns.
Lever 2: Staffing
How you staff your project will often be the most actionable lever to achieve profitability. It can also be the most challenging.
From a purely financial perspective, it’s helpful to model out how different staffing configurations can impact potential profitability. Of course, just because it looks good on paper doesn’t mean you’ll automatically achieve profits. You need to understand the capabilities of each person staffed to the project and their likely effort based on the demands of the project.
Further reading: I wrote about this extensively and also share a spreadsheet model in my blog post about calculating project profits.
Below are some ways you can staff your project and considerations when staffing them. At Barrel, we often find our projects to be a mix of different types of resources. Depending on the work, it might lean heavier one way or another.
For high stakes or extra complex projects, we’ve often relied on having more experienced superstars staffed to a project. The challenge here is that these are full-time resources with much higher costs.
Hopefully, the projects they are staffed on will have budgets (pricing) high enough to support their higher burn. However, we’ve had instances where we’ve sacrificed profit margin in order to ensure we didn’t mess up on delivery for a very important client engagement.
Besides mitigating execution risk, experienced superstars come in handy when you can leverage them for high velocity projects. These are fast-turnaround opportunities that require a lot of know-how and confidence in doing the right things right away. When done right, the use of experienced superstars in these time-boxed situations (e.g. 3 weeks to launch a website) can be both profitable and satisfying for those involved.
Where you want to avoid using experienced superstars is on lower skill and often repetitive work that someone much more inexperienced or at lower cost levels can handle.
Some contractors are willing to charge a fixed fee to work on a project. As long as deliverables are clearly defined and the contractor feels they are adequately compensated, it’s possible to make a nice margin with such an arrangement.
For example, if you have a $50,000 website project with a $20,000 design budget and then can find a designer to do the work for $10,000, then that’s potentially $10,000 in profits. Of course, this assumes you can find a quality designer to do the work and deliver in a timely manner. The $10,000 you are earning is not just pure arbitrage but compensation for taking on the risk of the client relationship (i.e. it’s on you if anything goes wrong and the contractor bails), putting in the work to find a trusted contractor, and managing the contractor’s work.
We also use hourly contractors from time to time, especially when they’re in a role that’s hard to predict duration and hours (e.g. project management). In these cases, they end up being similar in cost to an internal full-time resource.
These are generalizations, but I’ve found that for roles in design and development, those who are comfortable with fixed-fee are typically more skilled and experienced, betting on their ability to problem-solve and deliver quality work with speed. Those who demand hourly engagements may also be skilled and experienced, but they may have been burned one too many times by agreeing to murky scopes or scope creep that hourly fees provide a level of protection. The same could be said about agencies, by the way.
The benefits of leveraging offshore or nearshore resources are fairly clear – they can bring down expenses significantly and help agencies achieve strong margins.
The underrated part of having offshore/nearshore resources is the initial investment and oversight that’s required to make such resources fully productive.
Just because a resource costs less doesn’t mean project profitability is guaranteed. Poor communications or lack of training/understanding about established processes can lead to delays and re-work. We’ve experienced instances where a $15/hour resource in Asia might take 10 hours to do something that someone in the States could do in 30 minutes, mostly because instructions were poorly communicated and no clarifying questions were asked.
What we’ve found is that using offshore/nearshore resources requires staffing them with someone more experienced and preferably full-time on our end. For web development, this might be a tech lead who is based in the States. This adds overhead cost to a project but it also ensures we get the most out of our lower-cost staff.
Lever 3: Project Approach & Timeline
How you go about delivering on the project, especially the velocity, communications, and overall duration, can impact project profitability. This is where the approach and the timeline, expressed as a schedule, can be important factors to consider.
Below are a few questions that can help spur ideas to experiment with this lever:
- What’s the shortest version of the project schedule we can create? What would eliminate delays and unnecessary meetings as much as possible?
- How much of the work can be done asynchronously versus requiring hands-on meetings with multiple team members and stakeholders? Any written check-ins or quick 15-min 1-on-1s between project managers on both sides that can suffice for 90% of meetings?
- What are the absolute minimum number of deliverables that need to be created in order to satisfy the project requirements? Are there deliverables that are high effort but low impact that can be combined or eliminated altogether?
- Who on the client side absolutely needs to weigh in and how can communications be streamlined so that there’s a single point of contact on their end and on our end?
- How much work can be done on the client side? Is it clear that they will be responsible for such work? (e.g. content population, admin configuration, etc.)
Lever 4: Scope Management & Change Orders
Projects often see profits eroded because of unclear scope or poor scope management. There is a sense of “scope creep” – the feeling that there’s more work that’s expected than initially agreed to.
Effective scope management often starts at the business development stage, when statement of work documents are written. Being specific about the deliverables, the rounds of revisions, the user acceptance testing phase, etc. can help your team push back on requests that fall beyond what’s documented.
Guarding against out-of-scope requests is a key behavior in protecting project margins. However, it’s important to balance scope management with keeping the client satisfied that you have their best interests at heart. We try to make it a point to provide alternatives to out-of-scope requests that could achieve the client’s request. In cases where this is not possible, the effort to look into an alternative is a good-faith gesture and can ease in conversations about change orders to add more budget to accomplish an out-of-scope request.
In our experience, change orders are a sign that a project is being managed tightly and that clients are agreeing to pay for out-of-scope requests. However, it’s important to not overdo it. Clients who get hit up with one too many change orders often feel that they’ve been given an inaccurate quote upfront and forced to spend more than they budgeted, leaving a bad taste in their mouths. A good change order is one in which the client is clear that they are asking for something that they didn’t mention during the business development phase and are happy to pay for it.
Strong scope management requires continued alignment with the client on what the project requirements are and how the team is progressing through the work. It also requires everyone on the project team to understand what they are working on and to understand the difference between what’s in-scope and out-of-scope. An in-depth project team on-boarding at the start of the project, continued check-ins, and access to SOW documentation will go a long way in helping to keep the team on track.
Further reading: in my blog post “8 Ways Client Projects Get Delayed and How to Avoid Them”, I go into depth about scope management and its role in moving projects along.
Lever 5: Reusable Work Components
Leveraging reusable work components is especially applicable to agencies that specialize in delivering a certain type of project to similar clients.
In our case at Barrel, it’s Shopify e-commerce websites for brands selling online. There are many pieces to our projects that can be reused from project to project. It can be as simple as making a copy of a kickoff deck and updating copy for a new client or repurposing certain scripts and modules from a previous project.
A team can get very sophisticated about building up its arsenal of reusable work components. The time savings can be significant. You might also find a secondary benefit of being able to use lower cost resources to fulfill the work because large swaths of the work have been documented and scaffolded, requiring team members to just follow the instructions and customize slightly for the next client.
Reusable work components can be a gateway to offering productized services, highly repeatable deliverables with very minor customizations that have big profit margins baked in (if done right).
After dozens of reps, we got our Barrel e-commerce website audits to be highly repeatable with robust templates and process documentation. As a result, we’ve been able to lower pricing while still maintaining strong margins.
Lever 6: Automations / AI
This last lever is one that I’m hoping to have more experience with in the coming months and years. It’s the use of software to save time and speed up collaboration.
At a basic level, automations can be simple recipes that link different software together to perform admin tasks. For example, a signed DocuSign contract marks your deal in HubSpot as signed, which then triggers Bill.com to send out an invoice and also spins up a Google Drive folder loaded with project templates, creates a project in Harvest and Asana, and schedules a kickoff meeting for the team and the client. This sounds great because it can save an account manager 20-30 minutes.
More advanced levels of this can be software leveraged to:
- speed up both design and development tasks (there are AI tools that have started to emerge showing lots of promise)
- do automated quality assurance testing and generate tickets for the team to address (perhaps even addressing certain tasks automatically)
- populate initial copy on websites with AI-generated content that is 80% there
- automatically generating project schedules and updating resourcing needs and calendar dates as needed
There are a lot more capabilities that are beyond my imagination at the moment but I’m sure will become more common in the next 12-24 months.
Of course, just because something automates or uses AI doesn’t mean it will lead to bigger profits. In fact, the use of these tools can just transfer attention and time from a previous task to a new one. The key is to find leverage where the use of such software will actually reduce time spent and introduce true efficiencies. That will still require human thinking, at least for now.
Keep Trying, Pull A Bit of Everything
Recapping the levers to achieving project profitability, here they are:
- Project Approach & Timeline
- Scope Management & Change Orders
- Reusable Work Components
- Automations / AI
I’d argue that you can go a very far way in achieving profitability by focusing purely on pricing and staffing, but they are also very challenging levers to navigate and full of nuances and complexities.
As you go about overseeing projects at your agency, it may be worthwhile to keep your eyes peeled for all six levers and see if you can systematically experiment with a few of these each quarter. If possible, divvy up exploring these levers with your leadership team. Continued experimentation, tweaking, and learning will help you get a better understanding of how your agency’s different projects can achieve profitability.