Getting to Grips with Client (Un)profitability

What are the right steps to tackle the growing problem of client unprofitability in the construction industry?  Here I offer some straightforward pointers from my recent interview with ABC&D magazine which will keep your business on the right track during tough times.

The construction industry has been one of the sectors hit hardest by the recession.  In their attempt to maintain business viability, and keep staff employed, some construction firms have been tempted to take on projects with narrow profit margins and over-deliver to retain the client’s business in an aggressively competitive marketplace.

Although this is an understandable course of action, it’s not a sustainable way of doing business, especially given that construction work is affected by so many outside factors. Healthy cashflow is crucial and companies need to ensure that their work is as profitable as it can be.  

There are some straightforward steps that companies can take to ensure that profitability remains priority.

Scrutinise your current client base

Getting to grips with client profitability starts with reviewing your current client base which can lead to tough and radical decisions. As difficult as this is, your business will never thrive if you work on unprofitable projects. We have all experienced ‘mission creep’ with long-standing clients, when the original terms of the partnership have not kept pace with rising costs. When these relationships become closer over time, it’s understandable that you are reluctant to set different expectations or boundaries. It doesn’t matter how much business is available, turning work away is never easy to do but it does free up expensive resources to focus on where they can bring the best return.

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Model what your ideal client looks like

To build a sustainable business, you need to focus on the sectors, projects and clients that are most profitable, rather than trying to be all things to all clients. It’s worth stepping back, analysing each project your business works on and then modelling ‘a perfect client’. By doing this exercise you will be able to divide your clients into three categories – those who are already profitable, those who could become profitable and clients who are unlikely to ever become profitable. By gaining a better understanding of what each client is worth to your business, you can decide where to invest resources for optimum return, both in retaining clients and pursuing new business.

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The customer is not always right

Traditional thinking says that because customers hold the purse strings, they are always right. While customer satisfaction is vital to your business, honesty and transparency are the firmest building blocks for maintaining a working customer relationship. Clients will not only respect you if you highlight potential flaws, but by doing so you will also give them time to find and implement solutions to deal with the problem. Don’t forget, the reputation of your business is impacted by every delayed project, so don’t be afraid to raise a red flag if you think that a client’s expectations are not possible to fulfil. 

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Reporting, reporting, reporting

None of the above will be possible without efficient reporting, so as tedious as it sounds, make sure you get your house in order. Being able to prepare and present a wealth of reports with confidence will give you solid ground to stand on when discussing budgets with your customers and is crucial for your managers to keep projects within deadlines and budgets. The right software should reduce the length of time you spend on reporting  while also enabling you to present a project’s progress or results as easy-to-understand ‘management dashboards’. By presenting information this way, companies can share detailed, financial or technical data to clients in a format they can easily understand and act on. 

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Analyse where internal processes are undermining your profitability

As well as identifying which clients are affecting your profitability, you need to consider how your internal processes could be streamlined to improve efficiency and reduce costs. Are you deploying your resources to the best effect? Can you spot instantly where actual costs are getting disproportionate with the budget?  It’s a real challenge to strike the right balance between under-utilising sources and over-committing them. Drawing on a database of information from previous projects of similar complexity will speed up this process and increase the accuracy of your decisions.

Dealing with unprofitable clients is challenging and can be emotional especially if you have developed a relationship on a personal level. However, it will not only boost your profits but also staff morale so it is definitely worth the effort in the long term.

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Article originally published in ABC&D magazine published November 2011.