A founder I sat with last year ran a forty-person consultancy. Three years of revenue growth, profit going the wrong way. He was sure the issue was utilisation. We picked one recently-delivered project and walked through it together. The proposal had taken eight hours of director time, no-one had logged it. The scope had grown by about fifteen percent over the project, no-one had charged for it. The original quote had been discounted ten percent against a competitor he’d never seen pricing from. The all-in margin came out negative. He’d been doing this for eighteen months without knowing.
That’s the pattern in services businesses. Revenue up, profit flat, founder working harder, no-one able to point at where the margin went.
Why is the maths hiding?
Most service businesses quote based on labour times a markup, then ignore the work that surrounds delivery. The visible cost on a project is a fraction of the true cost. Pre-sale work, scope creep, senior people doing junior work, and concession discounting all eat margin invisibly. None of them appear on a project P&L. Each one feels small. Together they often flip the project sign without anyone noticing for a year.
Pre-sale work is usually the largest hidden cost. The free consultation that runs an hour. The proposal that takes a director three days. The four meetings before contract. With a typical close rate of one in three, two thirds of that time is unpaid. Anthem Strategists put it cleanly: “Quick consultation calls that last an hour, multiple meetings before signing a contract, detailed proposals that take days to create, with a close rate of 1 in 3, make 2 out of 3 completely unpaid work.”
Scope creep is the second. Industry research on agency operations puts the cost of scope drift at ten to twenty percent of project deliverables, work done with no associated revenue. The team produces it because the client expectation drifted, the original scope wasn’t engineered tightly enough, and saying no felt riskier than absorbing it.
The third is senior-level work done at junior-level rates. The director jumps in to rescue an account. Their time is billed at the project’s blended rate. The economics of the project assumed it would be done by a mid-level. The cost-to-deliver quietly inflates without the revenue moving.
The fourth is discount-to-win. The conversation goes “if I can hit X, can we close this”. The founder says yes because the alternative is losing the deal. The discount comes off rate, not scope. The margin compresses on the entire project.
What does an honest project margin actually show?
An honest project margin is project revenue minus project costs, where costs include the four hidden categories. Anthem Strategists’ walked-through example: a service charged out at 150 dollars an hour, but with sales overhead, scope drift, senior intervention, and concession discount allocated, the true margin came out at minus 66 dollars an hour. That’s structural unprofitability dressed up as a busy year.
That swing from plus 150 to minus 66 is just what happens when you stop pretending the unbilled work doesn’t cost anything. Once you measure it on one project, the impulse is to do it across the book. That’s the right impulse, but the moment to act on the data is after the second project, not the twentieth. Two data points usually tell you the pattern.
Project margin as a percentage is the formula to use. Project Profit equals Project Revenue minus Project Costs. Project Margin equals Project Profit over Project Revenue, multiplied by a hundred. The maths is intentionally basic. The discipline is that the costs side has to be honest about pre-sale, scope drift, seniority mix, and discounts.
When founders run this for the first time, the projects break into three buckets. A small group of high-margin projects funding everything else. A middle band of break-even or slightly profitable projects that look healthy at first glance. And a tail of negative-margin projects that the firm is paying to deliver. The proportions vary. The shape of the distribution is consistent.
Why are your best clients your least profitable?
Long-standing clients almost always sit on rates that haven’t moved while costs have. Anthem Strategists’ phrasing on this is sharp: “Your costs have increased 15 to 20 percent, but your best clients are now your least profitable.” The pattern is universal. Loyalty rewarded with stagnant pricing means the most-loved clients quietly become the most subsidised. The book ends up cross-funded by new clients on current rates.
This is the most uncomfortable part of the conversation, and the one founders most often defer. Raising prices on a long-standing client feels disloyal. The relationship is real. The trust took years to build. Asking for more money in exchange for the same service feels like a betrayal of the implicit deal. So the conversation gets pushed to next quarter, every quarter.
The honest reframe is that holding a client on legacy rates indefinitely is a charity decision. There’s nothing wrong with making a charity decision, but it should be conscious. If the firm decides to subsidise a particular client at thirty percent below current rates because the relationship has long-term value, that’s a defensible call. If the subsidy exists because the conversation hasn’t happened, that’s a different thing.
The version of the conversation that works is an open re-anchor. New clients quoted at current rates from now on. Long-standing clients moved up over an agreed period, in conversation, with the reasons stated. Most clients on legacy rates know they’re under-priced. The conversation is less surprising than founders expect.
Where do you start without overhauling everything?
The starting move is small and concrete. Pick one recently-delivered project. Walk through it with actual numbers. Calculate what came in. Calculate what went out, including pre-sale time, scope drift, senior work that wasn’t billed at senior rates, and any discount applied. Subtract. Run the percentage. Then do the same for one more project, ideally one that felt different. Two projects usually reveal the pattern.
The first time founders do this exercise, the result is almost always uncomfortable. The “good” project margin is lower than the gut said. The “bad” project is worse than expected. The pattern shows that the problem is systemic mispricing that’s been compounding quietly. The vague feeling that something is off becomes a specific number you can act on.
The second move is to update pricing for new clients first. Whatever the analysis says is the cost-recovery price plus a target margin, that becomes the new floor for new contracts from this week. The rates already in market may have been built when costs were different. Now they reflect actual cost.
The third move is the legacy-client conversation, on a sequenced timeline. Group A this quarter. Group B next quarter. Group C the quarter after, with the conversations open about why and over what period the rates will adjust.
The fourth move is structural: build the cost-tracking habit so this doesn’t drift back. A quick post-project margin review, even a thirty-minute session, is enough to keep the picture honest. The work doesn’t need a software product. A recurring slot on the calendar is enough.
What this gives back is decision-making clarity. Which clients are actually growing the business. Which projects to take and which to walk away from. Which services to invest in and which to retire. Without the data, those calls are guesswork. With it, the strategic decisions become small, frequent, and honest. The business becomes intentionally selective.
If revenue is up, profit is flat, and you can’t quite point at why, book a conversation. The first project margin walk-through usually takes an hour and tells you most of what you need to know.
