Growing sales and a healthy bank balance can create the impression that a business is performing well, while hiding significant differences in the profitability of individual projects. In project-based businesses, highly profitable work can inadvertently subsidise poorly estimated or inefficient jobs—the classic "swings and roundabouts" effect.
Tracking profit or contribution margin at job level provides much greater visibility. By comparing estimated and actual costs, recording labour and purchasing against projects, monitoring work in progress and reviewing completed jobs, management can identify both problems and opportunities.
Better profitability data helps a business improve estimating, pricing and efficiency while focusing sales effort on the work that creates the greatest value.
For many growing businesses, one of the most reassuring measures of success is also one of the simplest: how much cash is in the bank?
If sales are increasing, the order book is healthy and the bank balance is moving in the right direction, it is natural to conclude that the business is performing well.
And it may be.
The problem is that the overall financial position can sometimes conceal what is happening underneath.
This is particularly true in businesses built around individual projects, contracts or jobs. Construction companies, bespoke software developers, engineering businesses, fabricators and short-batch manufacturers are obvious examples. Every job is slightly different. Each has its own price, labour requirement, materials, timescale and degree of uncertainty.
In these businesses, it is surprisingly easy to fall into what might be called the "swings and roundabouts" approach to profitability.
One project performs extremely well. Another performs badly. A third is somewhere in between.
Taken together, the company still makes money.
What you lose on the swings, you gain on the roundabouts.
The danger of averaging
At first sight, there may appear to be nothing wrong with this. Not every job will generate exactly the same margin and some variation is inevitable.
But substantial differences in profitability should raise questions.
Perhaps a £100,000 project generates £30,000 of profit, while another similarly sized project generates only £5,000. At company level, the combined result may still look respectable.
The danger is that the highly profitable project has effectively subsidised the poorly performing one.
That poor performance may have been caused by inaccurate estimating, excessive labour hours, material wastage, uncontrolled subcontractor costs, scope creep, rework, purchasing decisions or simply a price that was too low.
If these causes are not identified, they are likely to be repeated.
Worse still, the business may gradually change its mix of work. If several unusually profitable jobs have historically supported weaker ones, losing just one or two of those good contracts can suddenly expose problems that have been present for years.
The apparent success of the business was therefore partly accidental.
It was flying, but in some respects it was flying blind.
Cash is important, but cash is not the whole story
Cash remains one of the most important measures of business health. A profitable company can still fail if it runs out of cash.
But the reverse is also important.
Having cash does not necessarily mean that every part of the business is profitable.
In project businesses, cash can also be distorted by payment timing. Deposits, stage payments and upfront payments can make the bank balance look particularly healthy at certain points.
A £50,000 customer payment arriving today may feel like profit, but much of that money could already be committed to wages, materials, subcontractors and overheads needed to complete the project.
The bank account therefore tells you something about liquidity.
It does not necessarily tell you whether a particular job was a good piece of business.
Every job should have a profitability story
One of the most useful disciplines for this type of business is deceptively simple:
What percentage profit did we make on this job?
That figure might be expressed as gross margin, contribution margin or another internally agreed measure. The important point is not the terminology. It is consistency.
If a project generated £100,000 of revenue and £70,000 of directly attributable costs, then it produced a £30,000 contribution, or 30%.
That figure can then be compared with:
- what was expected when the job was quoted;
- the company's target margin;
- similar projects completed previously;
- different customers or sectors;
- different project managers, teams or locations.
Suddenly, profitability becomes something that can be understood rather than simply observed at year-end.
Why businesses often avoid doing this
The difficulty is usually not recognising that job profitability would be useful.
The difficulty is obtaining reliable information.
Labour may not be recorded against individual projects. Materials may be bought in bulk. Subcontractor invoices may arrive late. Managers may spend small amounts of time across multiple jobs. Vehicles, equipment and overhead costs may be difficult to allocate.
Because perfect information appears difficult to obtain, businesses sometimes settle for no information at all.
That is usually the wrong response.
An approximate but consistently calculated job margin can be considerably more useful than waiting for a theoretically perfect accounting system that never arrives.
The aim should be to improve the quality of the information over time.
Building visibility through simple controls
Several relatively straightforward internal controls can transform the understanding of profitability.
Start with an estimate.
Every significant project should begin with an expected revenue, expected cost and target margin. This creates a financial hypothesis against which actual performance can later be measured.
Record labour against jobs.
Where labour is a meaningful cost, employees should record time against project numbers or work orders. The system does not need to be burdensome, but without labour information many service and project businesses have little idea which jobs actually consume their resources.
Capture purchasing by project.
Purchase orders, materials and subcontractor costs should be associated with the relevant project wherever possible.
Monitor work in progress.
Managers should not wait until a project finishes before discovering it is losing money. Comparing budgeted cost, actual cost and estimated cost to complete can provide an early warning.
Introduce margin thresholds.
A business might establish, for example, that jobs below a particular expected margin require management approval before being accepted.
Carry out project close-out reviews.
Once a job is complete, compare estimate with actual performance. Where the margin was substantially better or worse than expected, ask why.
The purpose is not to allocate blame.
It is to learn.
The opportunity as well as the risk
Understanding job profitability is not simply about identifying bad projects.
It can reveal where the business is unusually good.
A particular type of customer may generate consistently higher margins. Certain products may be quicker to manufacture than expected. One team may deliver similar projects significantly more efficiently than another. Some supposedly attractive large contracts may actually be less profitable than smaller routine jobs.
This information can influence pricing, sales strategy, recruitment, investment and even the future direction of the business.
Instead of merely asking, "Can we win more work?", management can begin asking the much more valuable question:
"What kind of work should we be trying to win?"
That distinction becomes particularly important as a business grows.
Increasing turnover while maintaining poor visibility can simply make an existing problem larger. Increasing turnover while understanding precisely where profit is created provides a much stronger platform for sustainable growth.
The goal is not to eliminate swings and roundabouts. Variation between projects will always exist.
The goal is to understand them.
Because once management knows which jobs create value, which destroy it and why, profitability stops being something that simply happens at the end of the year.
It becomes something the business can actively manage.
