Here’s something radical. You don’t need to take projects on just because they land in your lap. If you run a digital agency around the 5–12 employee mark and are bragging that your referral rate is over 70%, you’ll need to be more intentional. When you vet projects for organizational alignment and project fit and function, your digital agency can grow and evolve without surprise project blowouts that will slow you down or gut your project profitability. Remember that every project is a mirror of the health of your overall business. If you bleed over on every project, your company will bleed out in real time. You want to be picky about your projects and form strategic relationships with your clients. Let us show you what we mean.
First, to avoid major challenges, your whole company needs to be clear on which project and potential clients fit your direction. Of course, this starts with having a clearly defined and communicated mission, values, and brand identity, but take it one step further. It also means that every single person in your company knows exactly the type of clients and projects you should take on and how they’ll support your goals as a business (not just during the sales process, but how they treat you during the project lifecycle). If you’re curious about what this process looks like, and want to build more strategic relationships, check out this exercise on client alignment. You can vet your clients and projects based on size, specialization, alignment, industry, complexity, ease of the relationship, and so many other factors. The alternative is incredibly dangerous: if you keep taking on poor fit projects and clients, you’ll jeopardize your project profitability and create a reinforcing loop of painful cashflow dips. But when you get in front of your client alignment, it’s magic. Now, you can avoid the pain caused by revenue bleed and team turnover.
Effective communication with the client will make or break you. It's a major challenge. We’ve seen companies who pride themselves on great delivery go belly up because their delivery teams don’t know how to have hard conversations or handle client temper tantrums. Your agency needs to be clear on your onboarding and offboarding process for clients, both inside and outside your project management tools. You have to sell your project scope in a way that does not promise definitive deliverables when you don’t know what you’re building yet (aka focus on a more agile project scope with a clear discovery SOW and service level agreement to start and then flesh each feature out as you go while sharing budget info). That, or sell cookie-cutter type work on a monthly recurring revenue model, so you have smoother cashflow forecasts. You should set clear expectations right from your sales to project management handover and make sure your client’s business goals align with their project goals. Keep an eye on things like:
How willing and able they are to use your project management software
If they can accept and adhere to your project management practices
If their stakeholders are aligned on project goals
If everyone is on the same page about the agreed-upon schedule
If you see additional risks and red flags like hidden stakeholder voices, disagreements on company priorities, or an inability to verbalize client needs, these should send you packing. A good project manager can easily catch these, so be sure to involve them in the entire project lifecycle. When client communication is shoddy or demands unrealistic, you will struggle to keep your future projects in the black, no matter how talented you are. Better pass.
Will this little project turn into a bigger one? Whenever you decide to say yes to a future project, zoom out and consider your agency relationship needs and broader client profile. How mature are they? How saturated is the market? Are there other valuable things you could get them excited about doing as your first project comes to a finish? Consider the potential for this small project to turn into a retainer agreement or monthly recurring revenue opportunity (over project-based pricing) with the client, and let this guide your decisions. There’s always risk involved in any project, but if you work toward a more strategic relationship, it could lead to ongoing work or referrals without causing any major team or profitability issues, it might be worth taking on anyway. Long-term strategic relationships are always more valuable than single projects, so being intentional about who you bring into the fold is critical. If you can be their preferred service provider for an extended period of time, you'll be laughing.
Expertise and Skill Set
Do you have what it takes to do the work? Honestly? In order to know whether or not a project is a fit, you need to know whether or not your team actually has the requisite skills, capabilities, and experience. To do this, it’s a great idea to build a simple database of skills and competencies that each of your teammates and partners brings to the table to avoid quality issues. Keep a detailed list of partner and contractor skills and availability, too. They are also a part of your strategic relationship portfolio. Note when past projects failed and why. It’s so tempting to think you can learn on the fly, especially in a niche where you are always defining the digital components of your next project and basically paving the way for new tech. But it’s dangerous to take on projects if your internal team (or a vetted partner or independent contractor to do the work) lacks them, or you're unfamiliar with that type of project lifecycle. We’ve seen it a bunch: your client finds out fairly early into the process that you don’t have the capability and loses faith in the project, project progress stalls, and the rest of it bleeds out due to effort creep. You take on additional risk and end up with a super pissed-off client, quality issues, and zero follow-up work to boot. Not worth it. It only makes sense to try new things if you can embrace shared risk with your client, like a discount in exchange for a white-label product you can reuse with future clients. Choose these carefully on a per-project basis, though. They can tank your business.
Project and Functional Fit
Pricing and Profitability
How do you know if you’re charging enough for your projects? Regardless of the pricing model, there’s a pretty straightforward way to calculate it. For agencies in the size range of 5–12 (with average agency margins of around 17%), you want to aim for at least $180–225K revenue per full-time employee (the amount of revenue your billable staff generate for the company) to cover delivery labor, operating expenses, cost of goods, benefits, and vacation. At the same time, you want to limit the number of clients you serve so you aren’t taking on any elephant or mouse-sized projects or clients to hit that target. As you grow, your client value should, too, so you’re not creating a pipeline trainwreck due to the faster project speed required for delivering more small projects. We recommend you not take on not more than 20 active clients, with a goal of 10–15. Any more, and your internal team will start negatively impacting quality because of distractions and reactive behaviors (you lose 20% alone to task switching). Coordinate with your sales team and project managers about your agency's ideal client load.
On the low side, for a 5-person shop with 10–20 clients, you should be charging between $45–90K/client over a year. A 12-person shop with 10–20 clients should charge no less than $108K–216K/client over the year (although you may have a few that fall below this). To price your project, consider whether this is the first of many projects and charge for the proportion of work that project scope entails.
Now, to aim for optimal project profitability, you need those margins. If you can’t aim for a 60–70% delivery margin (that is, only 30–40% of your project budget is spent on labor internally, and the rest can be distributed to overhead and profit), you probably shouldn’t take on that project. For example, a $100K project should only require $30–40K worth of labor from the team, or any overages will steal your project profitability. You need to keep delivery costs tight if you want to turn that project profit into 20% net company profit at the end of the year. Again, you need to get alignment with the sales team on setting up a pricing model that works.
It sounds obvious, but you can’t take on a new project if you don’t have time. When you’re thoughtful about how you book and deliver your projects (and know the patterns of the period of time your project lifecycle typically takes), you can perfect the duration of your work in a way that helps you schedule and grow sustainably. For example, you can use time blocking and buffers to be more systematic about when your project manager books project starts and launches. Work them into your project management tool. You need to give the team a rest before starting them on the very next large project, and having a heads-down focus for projects of different sizes or types helps increase their efficiency. You can also have dedicated project starts that match the cycle of your months or quarters so you can be more predictive about your revenue forecast. For example, project progress tends to slow down in the summer and go up in the fall depending on your vertical, so plan your project starts so they create flow around relevant holidays and anticipated sick time. Don’t make timing an afterthought.
These tips will also help you avoid timeline issues:
Avoid launching multiple projects on the same day or week
Avoid Friday launches (nobody should be working weekends for bug fixes)
Avoid long kickoffs right before staff holidays (or people will forget action items)
Pay attention to your project lifecycle and stagger your project starts and deliveries by 10–20% so you can maximize focus and availability
Remember to consider your retainer agreements and how they impact your capacity
Anticipate breaks and riskier points in time by tracking them in your project management software
Your people are everything. You need the right people on the job at the right times. So, when trying to figure out which projects to take on, you need to be super clear about your staff’s workload, capacity and your team's project lifecycle. When a new project comes in, first review your agency's current workload and commitments in your project management software. You shouldn’t book people more than 5–6 hrs/day on billable projects. Don’t burn them out. They need a buffer and a high enough hourly rate to account for surprises and non-billable work and allocation of risk. Next, make sure you always have more work booked than you have the capacity to deliver by at least 10%—because projects are constantly changing, pausing, and evolving, you want to have the option to start something up fairly quickly if another project goes away. If possible, you want to aim for an average of 70% utilization (billable hours to total hours worked). However, while utilization is a useful metric for hiring and profitability, it has a very sordid past. It’s also not accurate if you’re tracking time since most people don’t log or track time effectively. It’s important to decouple people’s time and labor whenever possible to prevent a carrot-and-stick approach that penalizes workers for being slower or tracks their time as value created. Pushing your staff too hard will lead to additional risks of burnout, poor quality work, dissatisfaction, and a higher turnover rate (the average is 15% in our industry). Your project management practices are going to save you and help increase those success rates.This resourcing guide is full of tips on how to do better, more humane resourcing. You should read it.
In A Nutshell
Well, that’s it. Projects. You need ‘em. But not all of them. As a digital agency, you should only take on new projects when they align with your agency's capabilities, capacity, and growth strategy. You should also consider things like resource availability, client fit, strategic relationships, budget, timeline, and risks when you’re letting a project sneak inside. While it’s tempting to say yes to everything that comes in the door, you need to strike a balance between keeping the lights on with project work versus keeping your team (because they actually keep the lights on). This is the sweet spot for any small digital agency looking to thrive. Projects ARE your business.