No one who owns or operates a business wants to be in the position of asking themselves: Where did the money go? This sobering reality is often linked to the fact that profits can fall victim to hours of unbilled labor. In the design and building trades, particularly architecture, this problem is often exacerbated by the tremendous amount of upfront work necessary to bring in new business.
Deciding whether to invest time and energy in pursuit of new work requires a hardcore pragmatism and a consistent approach to evaluating the realities of each and every potential project. The key to protecting your profit margins down the road is to play good defense up front.
RULES OF THUMB
- Dig beyond the preliminary information provided by the client with an eye for anything that may have a bearing on the project.
- Identify the dominant and recessive forces that will impact the project. Weigh each according to its degree of importance.
- Assess the impact of the project’s projected cash flow on your business.
- Assess the resources necessary to put into winning the bid.
- Analyze whether the job is a good fit for your company.
- Assess the strategic reasons to compete for the work.
- Apply brutal honesty to the go/no-go decision.
ASSESSING CLIENTS
Interview prospective clients as they interview you. Is the client open-minded? or rigid with no room for deviation? The expectation of a new project is always appealing. But inflexibility on the part of a client reveals the potential for dispute when problems inevitably arise.
If you’ve done business with the client in the past, question the people who worked the project for their experience to identify any problems and pinpoint why they happened. (Ideally, this information should already have been gathered in a post-project review.)
If the client is new, learn as much as you can about the principals and who you will be working with. What is their reputation in the industry? Contact people who have worked with them to find out their experience with the client. Weigh the question of how the new association can benefit your firm?
CONTRACT ALTERNATIVES
- DEVELOPMENT BUDGETING. Include a “development” provision in the contract specifying payment for certain tasks necessary to complete the bid that add value to the finished project.
- RETAINER. Firm bills for a portfolio of work or agrees to work on a monthly retainer.
- VALUE-BASED BILLING. Some service providers, including law and architectural firms, are moving away from billable hours and toward flat project fees in which the client agrees on the higher value a particular firm provides based on its experience and record of wins. In essence, a firm enters negotiations arguing “You demand value, and this is a value price.”
ADVANTAGES
- Shares the risk of under- and over-budgeting.
- Greater alignment between the client’s and the firm’s interests.
- Ensures clients understand and agree to what the firm will be billing them upfront.
- Absorbs the cost and consequence of overages and “scope creep.”
- Simplifies billing and expedites A/R payments; clients know ahead of time the amount they owe and are more likely to pay when the bill comes due.
- Acts as a clear disincentive for the provider to pad its fees.
CHALLENGES AND SAFEGUARDS
- Raises challenges for service providers in that projects must be extremely well planned.
- Must spell out who absorbs which categories of change, and which are an “assumed risk.”
- Obtaining written approval from clients is absolutely imperative before work commences.
TRACKING UNBILLED HOURS
Whatever billing method is used, tracking unbilled hours is essential across the board for understanding how to avoid them in the future. Tracking also helps ensure your firm has a better idea of what to charge on the next project.
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