Revenue leakage in project businesses

Revenue leakage in project businesses is the difference between what a project should have earned under the contract and the work actually done, and what is eventually invoiced and collected. It arises mainly in four places: work outside the agreed scope that is not recorded as a change, hours and costs that are not recorded or not recharged, work in progress that is written off instead of invoiced, and contract rights such as indexation and stage payments that go unused. Because every project is different, the leak does not show up as a pattern. It looks like a string of projects that each earned a little less than budgeted.

This article covers revenue leakage for every business that earns its revenue through projects: contractors and installers, advisory and engineering firms, IT service providers and implementation partners, communications and design agencies. The mechanisms are the same in all of these sectors. What differs is where the emphasis lies. For the general concepts, independent of sector, start with what is revenue leakage.

What makes a project business different?

A business that sells subscriptions or products has a fairly straight line from sale to invoice. There is a price, a quantity, a customer. A project business does not have that. Between quote and final account there is a period in which the assignment changes, in which dozens of people log hours, in which costs are incurred that are partly rechargeable and partly not, and in which the client makes decisions along the way that shift the scope.

Three characteristics make project businesses structurally prone to leakage.

The price is not fixed at the moment of sale. On a fixed price, revenue is fixed but scope is not. On time and materials, scope is not fixed, and so neither is revenue. Either way, the final invoice is the outcome of a process, not of a price list.

The information sits with delivery, not with finance. What actually happened is known by the project manager, the consultant, the site manager or the engineer. Finance only sees what they record. Anything not recorded does not exist as far as invoicing is concerned.

Settlement comes late. Many projects are only settled in full after handover. By then the team is working on something else, memories have faded and the client is inclined to negotiate every line.

Where does a project leak, from quote to payment?

The most useful way to understand leakage in projects is to follow the project from quote to payment. That is also the idea behind contract-to-cash: the chain from agreement to money received, with every handover a possible leak.

Phase 1: estimate and quote

The first leak appears before the project starts. An estimate that comes out too low as a rule is, strictly speaking, not leakage but a pricing problem. It still belongs here, for two reasons. First, because the estimate is the yardstick you measure against later: if you do not know what you estimated, you cannot see what leaked away. Second, because the quote contains the agreements that are worth money later: what falls within scope, what is an assumption, what is charged separately.

Common mistakes in this phase:

• Assumptions that are never written down. If the quote does not say that you assume two rounds of feedback, three workshops or an existing foundation, you cannot show later that the fourth round, the fifth workshop or the new foundation fell outside the scope.
• Rates without an indexation clause. On projects that run longer than a year, or on framework agreements, a fixed rate without indexation means you get cheaper in real terms every year.
• Discounts that are not recognisable as discounts. A discount built into the hourly rate instead of shown as a separate line often becomes the new standard on the next assignment.

Phase 2: delivery and scope

During delivery the scope shifts. That is normal and often unavoidable. It becomes a leak when the shift is not recorded as a change.

In construction this is called a variation, in consultancy and IT scope creep or change requests, in agencies extra rounds or additional requests. The mechanism is always the same: the client asks for something, the team does it because it wants to help or because it seems small, and nobody writes it down. One such request is negligible. Twenty per project are not.

A second leak in this phase is work that does fall within scope but costs more than estimated. That is not leakage but an overrun, and it matters to keep the two apart. You fix an overrun with better estimating or better delivery. You fix leakage with better recording and invoicing. If you lump them together, you learn from neither.

Phase 3: recording hours and costs

On time and materials projects, the time record is the invoice. What is not recorded is not invoiced. It sounds obvious, but in practice three stubborn patterns appear.

• Hours that are not logged. A consultant who reconstructs their week on Friday forgets Tuesday's phone call and Wednesday evening's email. An engineer leaves travel time off the job sheet because that is how it is usually done.
• Hours logged to the wrong project. Hours booked to an internal project, a general code or a fixed-price project, when they belonged on a time and materials project.
• Costs that are not recharged. Travel expenses, material from your own stock, external purchases, licences, printing, plant hire. The contract allows recharging, but the costs come in through a different route and are never linked to the project.

Phase 4: work in progress and write-offs

Work in progress is work that has been done and recorded but not yet invoiced. In a healthy project business that is a temporary position. In a leaking project business it becomes a reservoir into which work disappears.

The mechanism works like this. Before each invoice, the project manager or partner decides which share of the recorded hours to charge. Hours they consider too high for what the client expects, or that they cannot easily explain, get written off. Sometimes that is justified: a junior who took three times as long as expected on something does not belong on the invoice. But often it is a reflex. Writing off feels safer than a difficult conversation with the client.

The result is a gap between recorded value and invoiced value that many project businesses do not measure, or only measure in total. Measure it per project, per client and per project manager and patterns appear: certain clients where there is always a write-off, certain project managers who do it more often, certain kinds of work that are never invoiced in full. This pattern is described in detail for advisory firms in revenue leakage in consultancy firms.

Phase 5: invoicing and stage payments

On a fixed price, invoices are tied to stages or milestones. The leak here is not in the amount but in the timing. A milestone that has been reached but not invoiced pushes money back. That costs interest and working capital, and it increases the amount that is open to dispute at the end of the project.

On time and materials, the risk is that invoices go out too rarely. A project invoiced once a quarter always has three months of work outstanding. The larger the amount on an invoice, the greater the chance the client disputes lines on it.

A third leak is the gap between contract value and invoiced value at completion. A EUR 200,000 project on which EUR 188,000 was eventually invoiced, with no agreement on reduced scope, has left EUR 12,000 somewhere. That comparison is simple and rarely made. How to make it routine is covered in how do you check contract value against realised revenue.

Phase 6: handover, final account and payment

The final account is the moment when all earlier leaks become permanent. Whatever is not included here, in practice, never comes back. Common patterns:

• The final account is postponed. The project has been handed over, the team has moved on, and the final account sits for months. The longer it waits, the weaker your position.
• Open items hold up payment. A last stage or a retention is only paid once snagging items, an acceptance test or a final document have been completed. If nobody owns that last item, the amount stays outstanding.
• Changes are settled for less. Items that were not resolved during the project come up at the final account and are partly conceded under time pressure.

Phase 7: aftercare and follow-on work

After the project there is often aftercare: warranty work, support, small adjustments. The line between warranty (not billable) and new work (billable) is blurred in practice. If you do not draw that line actively, you deliver months of free work under the heading of aftercare.

Which metrics matter most?

To monitor leakage in projects you need a small number of figures. The point is not to have them all perfect, but to be able to compare them per project and over time.

A low change ratio is, in many project businesses, the most telling signal. If your team says projects change all the time, but hardly any changes are invoiced per project, you know where the money went.

There are no reliable industry averages for these figures that you can simply adopt. A realisation of 90 percent can be normal in one sector and worrying in another. The value lies in your own trend and in the spread between projects, clients and project managers.

Worked example

Worked example: suppose a project business with EUR 6 million in revenue has forty staff doing billable work. The business works partly on fixed price and partly on time and materials. An analysis of the past year shows:

• Unlogged hours. Comparing calendars, email and the time records shows that billable staff leave an average of one and a half hours a week of client work unlogged. With forty people, 44 working weeks and an average rate of EUR 95, that is 1.5 x 40 x 44 x 95 = EUR 250,800 of recorded value that does not exist. On time and materials projects, say half, that is directly missed revenue: over EUR 125,000.
• Write-offs. 6 percent of recorded value on time and materials projects is written off. On EUR 3 million of time and materials revenue that is around EUR 180,000. Suppose a third of that is a justified correction and two thirds a reflex: that is around EUR 120,000.
• Changes on fixed-price projects. On fixed-price projects totalling EUR 3 million, 1 percent was invoiced as changes. Project managers estimate that the real volume of changes was at least three times as high. That difference is EUR 60,000.

Together that is over EUR 300,000, or around 5 percent of revenue. That sits at the top of the range of 1 to 5 percent commonly cited for B2B companies, which is not surprising: project businesses have more handovers and more manual recording than most other businesses.

The example is constructed. What it does show is that none of these three leaks is dramatic on its own. An hour and a half a week feels like nothing. Six percent written off feels normal. Letting a few changes go feels like good service. The total is none of those things.

Where is the emphasis, by type of project business?

Construction and installation

Here most of the leakage sits in variations, provisional sums, day works and price adjustment. Delivery takes place on site, far from the office, and decisions are made verbally. A full treatment is in revenue leakage in construction.

Consultancy, advisory and engineering firms

The emphasis is on hours: recording, billable ratio and realisation. Scope shifts through conversations and extra analyses the client needs but never explicitly ordered. Rates often lag the market because indexation is not applied to existing clients.

IT services and implementation

A mix of both worlds. Fixed-price implementations with change requests that are never invoiced, time and materials hours that are not logged, and alongside that recurring revenue for licences and managed services that is not adjusted to actual usage after the project.

Communications, design and marketing agencies

The classic leak is the extra round. The proposal mentions two rounds of amendments, the client gets five. On top of that, bought-in costs such as printing, photography and media budget are not always recharged with the agreed mark-up.

Why does the leak persist?

If it is this clear, why don't project businesses simply fix it? Three reasons keep coming back.

Nobody owns it. The project manager feels responsible for delivery, planning and client satisfaction. Finance feels responsible for correct invoices. But nobody is responsible for the gap between what could have been invoiced and what was. It falls exactly between the two roles.

The figures arrive too late. The post-project review comes after completion, when the project can no longer be saved. Monthly reports show revenue and margin, but not the cause. To manage leakage, you need to see it while the project is running.

The data is scattered. The quote in the CRM or in a folder, hours in a time registration tool, costs in the accounts, changes in email, planning in a project tool. Anyone who wants to put them side by side has to export and combine them in a spreadsheet. Someone does that once, and never again.

How do you tackle it, from baseline to monitoring?

A structural approach has four steps. You can do them without new software. Software only becomes worthwhile at the last step.

Step 1: a baseline on completed projects

Take the last ten to twenty completed projects. For each, set out side by side: estimated value, contract value, invoiced changes, recorded value, invoiced value and write-offs. Look at the projects with the largest gap and ask the project manager what happened. You will learn more about your leakage from a few conversations than from a year of reports.

Step 2: agreements at the front end

Based on the baseline, make a small number of agreements that tackle the biggest leaks:

1. Every quote contains explicit assumptions and a defined scope.
2. Every change is recorded before it is carried out, with an estimate of its value, even if you decide not to invoice it.
3. Hours are logged daily, not weekly.
4. Write-offs above a set amount are justified and seen by a second person.
5. Contracts longer than a year include an indexation clause.

Step 3: a monthly check on live projects

Every month, for each live project: work in progress and its age, changes recorded but not invoiced, milestones reached but not invoiced, and realisation to date. If you do this monthly, you find leaks while the project is still running and the client still remembers what was agreed.

Step 4: continuous monitoring

With a larger number of projects, the monthly check becomes a full-time job, or it gets skipped. Then it helps to automate the comparison between systems: time records against planning and calendars, contracts against invoicing, changes against invoices. The goal is not more reporting, but a short list of concrete differences with an owner for each.

That is also the basis for a better forecast. A project business that knows how much work in progress is outstanding and how quickly it is invoiced can predict far better what will come in over the coming months. How that works is covered in revenue forecasting for project businesses.

A checklist for the leadership team

Five questions you can put to your project managers and your finance team tomorrow. If the answer to any of them is "we don't know", you know where to start.

1. How much work in progress is outstanding right now, and how much of it is older than sixty days?
2. How much was written off over the past year, per project manager?
3. How much was invoiced in changes over the past year, as a percentage of contract value?
4. Which live contracts have an indexation clause, and has it been applied this year?
5. Which completed projects still have an open final account or last stage payment?

If you want an outsider to work this out once, without connecting any systems first, that is exactly what the Revenue Audit is for: eight areas, gone through personally, with a euro amount on every finding.

Frequently asked questions

Is an overrun on a fixed-price project leakage?

Not necessarily. If you did more work than estimated for the same scope, that is an estimating or delivery problem. If you did more work because the scope changed and you did not record it as a change, it is leakage. The distinction matters, because the fix is different.

Which metric should I start tracking first?

Realisation: invoiced value divided by recorded value, per project and per project manager. It is easy to calculate from systems you already have, and it shows straight away where work disappears.

How do I stop project managers from not logging hours?

Make it easy and make it visible. Daily logging instead of weekly, a time registration tool that works on a phone, and a monthly overview per person of recorded against available hours. No sanctions, but a conversation when the gaps are large.

Should every small change be invoiced to the client?

No. But every change should be recorded, with an estimated value. Then not invoicing becomes a deliberate choice you can measure, rather than something that happens unnoticed. Sometimes a free change is a good investment in the relationship. Then you do want to know how much you are investing.

How large is leakage in project businesses on average?

There is no reliable average. The commonly cited estimate for B2B companies is 1 to 5 percent of revenue. Because of the large number of manual handovers, project businesses often sit nearer the top than the bottom of that range, but only a measurement on your own projects tells you where you are.