Best Practices
Implementing the Profit Plan

by Steve L. Wintner, AIA, and Michael Tardif, Assoc. AIA, Hon. SDA

Summary: In a very real sense, your firm’s annual budget and profit plan, once agreed upon and approved by all appropriate parties, become your “marching orders” as the firm principals for the coming year. Having completed the profit plan, you now have a very reliable forecast for net operating revenue (NOR) and profit. You need to bring in enough work in the budget year to generate the forecasted NOR so that your firm can generate that profit.

The first step is to review your firm’s backlog of work under contract but not yet completed and estimate what portion of that backlog can be billed in the coming year. You then need to determine the scope of the marketing effort that will be needed to fill the gap, if any, between your backlog and your budgeted net operating revenue. We call this our “three-bucket” theory of marketing. The three buckets are proposals outstanding, contracts, and project backlog. Think of these three items as buckets arranged so that as you “pour out” the contents of the first, you fill the next bucket in sequence until what you have left over is the contents of the last bucket: project backlog.

The three buckets are proposals outstanding, contracts, and project backlog

As you send out proposals, and while they remain outstanding, you can assess the likelihood that your firm will be awarded the project and the value of the prospective contract in terms of fees billed. For example, if you have proposals outstanding with an estimated value of $2.1 million in potential fees billed, and you estimate that your have an average chance of one in three of being awarded the contracts for those proposals, then the estimated value of current proposals outstanding to your firm is $693,000 (2,100,000 x 0.33). Note that you may need to estimate the odds of being awarded the contract on a proposal-by-proposal basis, as the odds of winning some proposals may be considerably higher than others.

As you are awarded contracts, your proposal bucket is diminished by the value you pour into the contracts bucket. Your contracts bucket, in turn, is diminished by that portion of the value of your contracts that becomes your project backlog bucket.

To achieve the goals of your annual budget and profit plan, you should continually maintain the level of each bucket at a value equal to your proposed net operating revenue. Otherwise, your goal for net operating revenue will be very difficult to sustain over any significant period. So if your anticipated net operating revenue is $1.4 million, and the estimated odds of being awarded contracts for outstanding proposals is one in three, then the total value of your firm’s outstanding proposals should be nearly $4.25 million, the value of current contracts should be $1.4 million, and the value of your backlog should be $1.4 million.

If things are going well for the firm, the contents of one bucket are constantly being poured into the next one

If things are going well for the firm, the contents of one bucket are constantly being poured into the next one. This simple metaphor illustrates how important it is to have a clear and developed marketing plan that constantly generates proposals, which turn into contracts, which build your backlog. The long-term viability of your firm is directly related to the value of your firm’s backlog, and the only way to build and maintain it is through effective marketing.

Copyright 2007 Steve L. Wintner and Michael Tardif
Reprinted with permission.