The Importance of Tracking Profitability on a Contract Level for Professional Services Firms
Professional services firms, particularly those with long-term retainer agreements—such as public affairs firms, marketing agencies, and consulting firms—often emphasize overall business profitability without assessing the performance of individual contracts. While an overarching view is important, understanding how each contract aligns with the company’s profitability goals is essential for strategic decision-making. However, many small businesses lack systems to regularly provide detailed contract-level insights, leaving leadership without critical data.
This blog explores the importance of tracking profitability on a contract-by-contract basis, the challenges involved, and how outsourced accounting services can help implement efficient and effective solutions.
Why Tracking Contract-Level Profitability Matters
- Identifying Underperforming Contracts
Comparing contracts on an apples-to-apples basis allows firms to pinpoint underperforming projects. These issues may stem from over-servicing, underpricing, or improper staffing. The first step is identifying these contracts to analyze underlying causes and create a path towards improved profitability. By improving the profitability on specific contracts, the firm’s overall profitability will improve. - Data for Renegotiation
A successful business deal must benefit all parties: the client should receive value equal to or greater than the price paid, and the service provider must deliver effectively while earning a reasonable profit. When a contract is underpriced, often due to scope creep—a profitability tracking system equips firms with data to address the issue with clients. This includes outlining the costs, labor hours, and staffing required to meet the client’s needs, enabling a collaborative discussion to adjust terms and ensure mutual benefit. - Resource Allocation
A professional firm’s most valuable asset is its labor force. To maximize contract profitability, tasks should be assigned to the most junior team member capable of completing them, minimizing the labor cost per hour. This approach not only reduces servicing costs but also provides junior staff with essential training and exposure while freeing senior staff for higher-level activities. A contract profitability system offers the insights needed to allocate resources effectively, ensuring optimal staffing and maximum profitability for each contract. - Hiring Decisions
Complementing resource allocation, a contract profitability system provides clarity on hiring decisions. For example, if senior staff are performing tasks that could be delegated to junior team members but there’s insufficient capacity at that junior level, it signals a need to expand junior staff levels. This adjustment improves individual contract profitability and allows senior staff to focus on higher-level activities, maximizing overall efficiency. - Informed Decision-Making
Contract profitability reports provide insights beyond staffing decisions, enabling scenario analysis such as determining whether to outsource specific activities or bring them in-house. These data-driven evaluations help optimize costs and improve overall profitability. - Client Profitability Analysis
Understanding contract profitability helps firms evaluate which types of clients and industries provide the most value, shaping future business development strategies and relationship management efforts. - Improved Budgeting and Forecasting
Analyzing revenue and costs by contract allows firms to make more accurate financial forecasts and budget adjustments, fostering better long-term planning. - Enhanced Reporting and Accountability
Detailed reporting at the contract level provides transparency for stakeholders and fosters accountability across teams, ensuring everyone is aligned with the firm’s profitability goals.
Overcoming Challenges in Tracking Contract Profitability
While the benefits of contract-level profitability tracking are clear, the process can be challenging. Professional services firms must develop systems that allocate costs accurately to each contract, including:
- Third-Party Expenditures: Out-of-pocket expenses directly associated with specific contracts must be tagged appropriately.
- Internal Labor Costs: Even for salaried employees, labor hours need to be assigned a cost and attributed to the individual contracts.
Achieving this requires an accounting system and information flow capable of tagging both external and internal expenses to specific contracts. The insights it provides far outweigh the effort required for its design and implementation.
How Outsourced Accounting Firms Can Help
Outsourced accounting firms like Blackledge Financial Services help professional services firms implement and maintain systems for accurate contract-level profitability tracking. With over 20 years of experience, including CFO roles for major public affairs firms, we bring industry expertise to help increase earnings, optimize internal controls, and streamline operations using cloud-based software solutions. Along with providing contract profitability reports at both aggregate and individual levels, we assist clients in other key areas, including:
- Profitability Metrics
A firm has only so many internal labor hours each year to generate the revenue needed to meet its profitability goals. That’s why we focus on key metrics that provide insights into both the firm’s overall financial health and the performance of individual contracts. These metrics—such as gross margins, labor multipliers, and labor utilization rates—allow for an apples-to-apples comparison of contracts. The goal is to evaluate whether the internal labor resources dedicated to servicing a contract are generating enough profit to keep that contract on track to support the firm’s profitability objectives.
- Pricing Tools
We develop custom pricing tools that help clients estimate the internal and external resources needed to service potential clients and generate retainers aligned with profitability goals. Using a cost-plus approach, these tools provide clarity on expected profitability, enabling firms to negotiate with a well-informed range of options. Combined with the firm’s expertise in assessing the market value of its services, this approach ensures accurate pricing decisions and supports long-term financial success. Additionally, the pricing tool serve as effective scenario analysis instruments for evaluating underperforming contracts, helping to identify strategies for improved profitability. - Training
We assist in training project managers and staff to understand and interpret the metrics generated by profitability reports. While some metrics are intuitive, others require guidance to ensure accurate analysis. This training equips teams to effectively read reports, understand key insights, and identify actionable steps to improve contract profitability.
Take Action
Tracking profitability on a contract-by-contract basis is crucial for professional services firms to enhance overall performance. This approach offers detailed insights to identify underperforming contracts, optimize resources, and align decisions with profitability goals.
Implementing such a system can be complex, but outsourced accounting services like Blackledge Financial Services simplify the process. Our experienced team develops efficient solutions that provide actionable insights, streamline operations, and drive sustainable success.
Contact Blackledge Financial Services today to learn how we can help your firm implement a cost-effective system for tracking contract-level profitability.