Many Engineering businesses feel pleased to have contracts in place for a monthly fee for a specific amount of work. It’s great isn’t it? You get regular monthly cashflow, and the client gets work done on-site, or on a project for a fixed fee. This should be a win-win situation.
Many small Engineering firm’s welcome clients who will pay monthly for an agreed contract or service. Some even place staff on the clients site to deliver this service.
So, how can this potentially happy arrangement make one party in the contract feel they are losing out? Or if you suspect you are not making a profit in this kind of partnership, how do you know for sure?
How to work out if you are make a profit on a retainer job
The simple answer – put a workflow system in place.
Some Engineering clients have complex excel spreadsheets for calculating Work In Progress, and overhead absorption rates – but they still don’t know if they make a profit on a Retainer job.
So, get a cloud based workflow system – we use WorkflowMax – set up the job and allocate the budgeted hours and resources to the job. Assign the hours to a staff member who records their hours on the WorkflowMax phone app, or online. Generally, these kind of contracts allow Engineers to recharge any parts or materials on the monthly invoice, or the contracted company pays direct for parts. Either way, you can’t measure what you don’t record, so you will need to know the hours spent each month on the contract.
Overrunning on billable hours means you are making a loss on the contract. This will show in your accounting P&L bottom line, because, unless you are making huge profits on other jobs this situation is not sustainable long term.
The impact of Scope Creep
In our experience, Retainer Clients are already given discounted prices, often you supply your best staff for their job, to cement the relationship, but you priced the contract based on cheaper staff or average hourly rates. Did you budget for meeting times with senior Engineers? Did you budget for any extra demands the client develops – as relationships develop it’s easy to be over helpful and scope creep soon becomes a feature of a Retainer Clients job. So record it, and get some clarity about how much the contract really costs you.
WorkflowMax for Retainer jobs
WorkflowMax has proved to be a workflow system that all staff can use and update jobs accordingly. When you integrate it with your Xero Accounting system, you get a very powerful, profit focused system for businesses.
A big feature of a cloud based system is that the job costs and progress can be monitored in real time, so you can see the problem of using too many hours that you can’t charge onto the client – as the problem develops.
This gives the opportunity for discussion and negotiation – if a client knows what they get for the monthly fee, and they want to exceed this you can agree to bill the additional hours.
Also the staff responsible for the Retainer Contract know the hours allocated within the job and act accordingly. Recording time worked, on client jobs, soon highlights over delivery and scope creep which cause losses.
With a powerful workflow system in place small Engineering firms can manage their business data and measure profitability on Retained Clients with ease. This allows you to see loss makers, manage up the fee or decide if there is a future in the contract. You will also start to examine your pricing and quoting structure so that only money-making jobs become the norm.
To find out how your Engineering firm can benefit from WorkflowMax, and how to improve profit on Retained Clients, contact Nigel.
Nigel has a Degree in Engineering, a Master’s degree in Business studies and is Fellow of the Chartered Institute of Management Accountants. He is a WorkflowMax Adviser in the East of England and a Xero Certified Accountant.