How to use recovery rate to maximize project profitability

Recovery rate is an incredibly useful metric to help you maximize your profitability

Interestingly, some of the company leaders we work with have either never heard of recovery rate or, if they have, they aren’t quite sure how to calculate it or how use it to drive better performance.

I talk about recovery rate a lot as I find it a great metric to drive profitability, so allow me to explain why this could be an incredibly powerful metric for you to utilize in your business.

What is recovery rate?

Recovery rate is straightforward to understand, but perhaps best explained through an example:

Let’s say a project is going to take 50 days to complete at a cost of £1,000 a day, so we’ve agreed a fixed fee of £50,000 with the client. If we go ahead and deliver the project in the agreed 50 days and with £50,000 of chargeable time booked, our recovery rate is 100%. In other words, we’ve been paid for all the time we’ve spent on it.

However, let’s say we actually take 100 days instead of the budgeted 50 days—we’ve essentially provided 50 days of work for free. This means our recovery rate is down at 50%, as we’ve only been paid for half of the time we spent on delivery.

Needless to say, you want to aiming to be paid for all of your time, so you should be targeting a recovery rate of 100% across all your projects.

How do you calculate recovery rate?

It’s actually quite simple. You divide the project fee value by the value of time spent and multiply that by 100. Here’s the formula:

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  Project Fee Value  

---------------------    x 100 = Recovery Rate %

   Actual Time Value

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To use our example project above, the calculation would be:

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 50,000

---------      x 100 = 50.00%

100,000

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As you can see, if we divide the £50,000 fee by the £100,000 of time spent (£1,000 per day x 100 days) we get a—disappointing!—recovery rate of 50.00%.

It's a simple metric that’s easily understood and, importantly for many, it keeps raw profit values private.

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How to predict recovery rate

Calculating your recovery rate at the end of a project is definitely useful. But the real trick is to spot potential problems early—ideally as close to real-time as possible—to give yourself a chance to make adjustments before it's too late to act.

To do that, you need to calculate your “Projected Recovery Rate” based on your current “burn rate” i.e. the rate at which you’re burning through your budgeted time.

In CMap, we have a feature called the “Story So Far” which automatically calculates the Projected Recovery Rate in real-time, but you can of course figure it out manually.

You’ll need your project value, the value of the time you’ve spent to date thus and a third element … how far through the project you are—what we call your “percentage complete”.

The reason this is important is there’s no point comparing what you’ve spent so far with the entire budget if you’re only halfway through. In this instance, you should be comparing what you’ve spent with half of the budget.

Here’s the formula:

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  (Project Fee x Percentage Complete)  

----------------------------------------    = Projected Recovery Rate

               Actual Time Value So Far  

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Let’s say we’re 50% through a £100,000 project and we’ve spent £75,000 worth of time so far, the calculation would be:

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  (100,000 x 50%)

-------------------   = 66.67%

            75,000

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So, we’re heading for a recovery rate of sub-100% BUT we still have 50% of the project to go, so perhaps we can make some changes—e.g., putting cheaper resource onto the project—to bring the costs down for the second half of the project and raise our recovery rate. If we’re spending longer than we should be doing, we can also make sure we start pushing back on the client.

Regularly checking your projected recovery rate gives you the early warning you need to make corrective changes and protect profit margins.

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Tips: How to use recovery rate to maximize your profitability

Once you’ve calculated your recovery rate, you can use that knowledge to keep your projects running as smoothly as possible. Here’s how…

On individual projects

On any given project, if your projected recovery rate drops below 100% ask yourself these questions:

1. Can you put cheaper resources on the project to get things back on track?
2. Conversely, do you need to throw a more experienced staff member on who can get through the work in less time?
3. Has the client moved the goalposts and gone outside of the scope? If so, can you go back to the client and agree more fees for the extra work?

Remember: All is not lost just because the projected recovery rate has dipped below 100%. The key is being alert to when it does. That way you can make some moves to steer the project back on track before it’s too late.

Across multiple projects

OK, so you’re checking your final recovery rates at the end of your projects and finding that they’re regularly coming in under 100%. The good news is that with a bit of investigation you should be able to figure out what’s going on and use that knowledge to make strategic decisions.

For example, you could analyze your projects by sector. You may find projects in a challenging area like retail have a consistently poor recovery rate. On the other hand, you may find you’re making a handsome profit in the pharmaceutical sector.

If the nature of your business dictates that you faithfully serve a single sector, you might analyze your projects by project type instead. For example, they may find that consultancy projects are really profitable, while design projects hemorrhage money.

Once you have those insights, you can decide what to do.

For example, you might choose to steer your business development efforts towards more profitable sectors.

If that’s not an option, you might try to double-down on being super-clear on the scope of design projects to see if you can turn them into a profitable service.

Sometimes, it can be a bit more nuanced. For example, back in our J-Media days—a professional services company we founded, scaled and ultimately sold—we found that doing website design projects for smaller businesses were a disaster.

Almost every project went massively over budget, as they’d negotiate hard to get the price down … and then demand that we do all of the stuff that had been cut to reduce the price, despite us providing a clearly defined scope along with our quote.

However, exactly the same types of projects went swimmingly when the client was bigger and more experienced, because that experience meant they knew and accepted that if they expanded beyond the scope, they’d have to pay for it.

So, after a period of trying—and failing—to make it work with smaller clients, we took the decision to stop doing websites for smaller companies and instead focused all our efforts on the larger client projects we knew would be easier to deliver and profitable.

If nothing else, there’s one thing you REALLY should do, and that’s analyze your recovery rate by client. Why?

Because one thing I’ve seen time and again is companies doing lots of work for a huge client but—when you analyze the profitability of the account—it’s barely worth having. In fact, in some cases they’d be more profitable if the client went somewhere else!

How about you? I’m sure you can tell me who your biggest client is, but can you tell me how profitable that account actually is?

I strongly recommend that, at least once a year, you go through each client and calculate the recovery rate of every project you’ve done for them. From that, you can then easily calculate the average recovery rate for the account.

Don’t be surprised if you find that some of the clients you thought were your “best” accounts aren’t as lucrative as you thought!

On the flip side, you’ll often find a few gems that you didn’t even realize you had.

Our advice? Try to correct the less-than-perfect accounts, reducing the volume of business you do with them, if necessary, while trying to win more work from the good, profitable ones!

How profitable are your project managers?

Another great thing to do with recovery rates is to calculate them for your project managers as part of performance managing.

While you want everyone on a project team to be focused on delivering projects on budget, ultimately, it’s the project manager’s responsibility.

Regularly reviewing the average recovery rate of your project managers will help you to identify who's consistently keeping their projects on track and who might benefit from additional support or training.

Do this at least once a year—but ideally every quarter—and you’ll be surprised at the impact it can have on the company's overall profitability.

Summary

Recovery rate is one of the most important metrics in your business. It can focus you on winning profitable work, keep individual projects on track and on budget, and ensure your staff are firing on all cylinders.

Whether you’re calculating the figure manually from spreadsheets or getting the figure automatically from CMap, arming yourself with recovery rates will put you in a much stronger position to build a highly profitable company.