Optimising profit margins in service projects

Published Wednesday 17 September 2025

Table of contents

• From cost tracking to profit optimisation
• Identifying margin improvement opportunities
• Pricing strategies for maximum profitability
• Resource optimisation and efficiency gains
• Performance monitoring and continuous improvement
• FAQs on optimising profit margins in service projects

Key takeaways

• Strategic job costing provides insights that can improve both profit margins and service delivery.
• Regular profitability analyses reveal which project types deliver strong returns and which require improvement.
• Lowering unnecessary costs through automation and streamlined workflows can improve margins without increasing revenue.
• Several service project pricing strategies can maximise profitability while creating predictable, healthy cash flow.
• Resource optimisation is essential, and allocating human resources strategically is an effective way to keep service jobs profitable.
• Tools like Xero simplify financial management for service-based jobs by automating project invoicing and tracking expenses, providing excellent performance visibility.
• Continuous improvement requires key performance metrics that assess efficiency, pricing, and support consistent profit growth.

From cost tracking to profit optimisation

Job costing in service-based industries often only takes into account billable hours, subcontractor expenses, and allocated overhead. While this provides transparency, it does not optimise profitability.

There is a greater opportunity to go beyond cost tracking and use the data as a foundation for strategic decision-making. With accurate service cost modeling and regular analyses, you can compare estimates to actual outcomes and make improvements to support greater profit margins.

Identifying margin improvement opportunities

Even with accurate service cost modeling, the best way to optimise your profit margins is by continuously looking for ways to improve. You can identify inefficiencies, refine processes, develop stronger marketing strategies, and find opportunities to increase service-based profitability. Here are some effective ways to identify margin improvement opportunities.

Analyse project type profitability

Run regular profitability analyses and compare project types to determine which have the highest profit margins. A quarterly or semi-annual schedule gives the business enough time to gather useful data.

Use the analysis to identify your most profitable service projects and direct sales and marketing efforts towards acquiring more of these contracts. You can also streamline processes to optimise profit margins further. If some project types consistently under-deliver, consider re-pricing, redefining the scope, or pivoting to prioritise more profitable projects.

Consider where you can reduce costs

Increasing revenue isn’t the only way to improve profitability; you can also lower unnecessary expenses. For example, delegating routine project tasks to junior staff can help you reduce high-cost senior staff hours. You can also employ automation tools to streamline workflows and reduce redundant, time-consuming administrative tasks. Even small changes to your service business financial management can make significant improvements.

Develop strong sales and marketing strategies

Identify the company’s highest-margin services and build marketing campaigns around the projects you know will deliver the highest profit margins. A consistent pipeline of revenue from well-organised, profitable projects can support growth. It’s also essential to focus on client retention and long-term relationship management.

If you’d like to read more, here’s a guide on how to grow your business.

Avoid scope creep

Scope creep is one of the most common issues that harms service-based profitability. When forecasting margins, consider the timeline and other factors like whether the project requires special expertise or intensive client management. Be sure to set clear expectations upfront and draft detailed contracts to define the scope.

Formalise change requests and adjust the price as necessary. Ensure the project team stays vigilant and aware of service project costs that may start to creep beyond the original scope so you can find solutions and protect profit margins.

Identify efficiency bottlenecks

Improved efficiency has a direct, measurable impact on optimising profit margins. Look for recurring roadblocks that slow progress or drive costs up. Run retrospectives after every project and ask the team for feedback on where delays or inefficiencies arose, then tighten processes or adjust workflows as necessary. Evaluate your client onboarding process as well to reduce questions and wait times during service project delivery.

Invest in training and development

Well-trained and supported staff are more likely to deliver projects on-time and within budget, optimising margins and providing value for clients. Provide upskill opportunities to team members to improve internal capabilities and reduce the need for subcontracting. A skilled, confident team can also work more efficiently and deliver better results without costly mistakes.

Pricing strategies for maximum profitability

Your pricing strategies are a vital part of optimising profit margins. No matter which strategies you employ, your pricing models require regular review. Client needs, market trends, rising costs, and other influences can influence how you price a job, so you should make adjustments as needed. Reviewing your pricing strategies at least once annually is usually enough to keep the business running profitable service projects. You can build scheduled review periods into contracts to maintain transparency with clients and prepare them for a potential increase. Here are some pricing strategies that can help you maximise profit margins.

Cost-plus pricing

This strategy is simple and ensures you cover all service project costs with a standard profit markup. This protects you from underpricing and virtually guarantees you can cover your expenses, but it doesn’t always reflect the value of the service you provide. To use cost-plus pricing for optimising profit margins, use it as a baseline and adjust markups based on factors like market conditions, perceived value, and complexity.

Value-based pricing

This pricing strategy focuses on what the client perceives as valuable about the service. Unlike the natural limit due to the set markups with cost-plus pricing, the value-based model has no limit and provides more opportunity for profit maximisation. For example, if your service helps a client generate significant revenue, your fee should reflect that outcome.

Package pricing

Bundle services together for a pricing strategy that features predictable service offerings and clear prices for clients while maximising service-based profitability. Offer tiered pricing to provide clients with options from basic to premium. Lower tiers typically bring in more business while premium tiers have higher margins. Aim to make the mid-tier the most profitable, as it’s often the most popular choice for package pricing. It’s a mutually beneficial strategy where clients appreciate the cost predictability and you benefit from simpler cash flow forecasting.

Resource optimisation and efficiency gains

Optimising how you allocate resources is essential for service-based profitability. Here are some effective strategies for optimising profit margins through resource allocation and improved efficiency:

Subcontract as needed

Bring in specialist expertise on a project-by-project basis to avoid adding permanent overhead costs. Subcontracting allows you to take on a wider range of niche projects and strengthens your ability to provide value while protecting margins. However, if you find a specific project type particularly popular and profitable, you might consider hiring full-time staff for reliable in-house access to that unique skill set. For example, a digital marketing agency might find a freelance videographer to bring on board for projects that require dynamic media.

Maximise the expertise of senior staff

Strategic delegation is an easy way to increase service-based profitability. Project managers should assign routine tasks to junior staff and reserve high-value tasks for senior team members to reduce labour costs. For example, a law practice might assign senior barristers to complex tasks like litigation, complex clause interpretation, and advising clients of legal risks. Meanwhile, junior solicitors can handle research and case file organisation so highly paid staff aren’t billing for administrative tasks.

Track billable utilisation rates

Professional service projects should aim for 70-80%, balancing client delivery with essential internal tasks like training, planning, and business development. Non-billable activities are inevitable, but keeping them under control can improve project profit margins. For example, an environmental consulting firm can replace long internal meetings with status updates and a project dashboard to maintain momentum. This allows consultants to focus on billable fieldwork and reporting, boosting the utilisation rate.

Leverage professional software tools

Using tools like Xero lets you automate billing and expense tracking, reconcile bank transactions, and streamline project invoicing. The improved efficiency gives the project manager real-time insights into financial performance to support decision-making. You can also sync it with other tools to optimise communication and administrative tasks. For example, an architecture firm might adopt Xero to improve cash flow forecasting. Access to up-to-date financial information allows the project manager to identify overruns early and develop solutions.

Performance monitoring and continuous improvement

The continuous improvement cycle involves measuring, adapting, and implementing changes to ensure project delivery methods remain dynamic. Profitability in service businesses requires ongoing evaluation and refinement, and is a cornerstone of profitable service projects.

FAQs on optimising profit margins in service projects

Here are answers to a few frequently asked questions on optimising profit margins in service projects:

What is project profitability in a service-based business?

It measures how much profit each project contributes after accounting for revenue, labour, and direct costs.

Which metrics should I track to measure project profitability?

Focus on gross profit margin, billable utilisation rate, budget variance, realisation rate, and client acquisition cost.

How can accounting software help with profitability tracking?

Tools like Xero Projects integrate financials, time, and project data, giving real-time insights.

What are common causes of low project profitability?

Scope creep, underutilised staff, inaccurate pricing, and delayed billing are common challenges.

How often should I review project profitability?

Weekly or fortnightly check-ins with dashboards and reports help you identify problems early and take corrective action.