Profit Margins from Customer Projects

Oliver F. Lehmann
February 5, 2025

Many organizations generate revenue by doing customer projects as contractors. The business they are involved with is Project Business, and a major concern in these projects is profitability. Claire’s story shows what specific challenges these projects bring for project managers and what organizations can do to make it easier for individuals to grow into this role.

Claire’s Story

It all began when Claire, a seasoned project manager, was asked to change roles. Having worked on internal projects with great success, she was now assigned to customer projects.

For years, Claire had excelled at overseeing projects that benefit the company’s operations without direct revenue goals. Internal projects are typically cost centers, with success measured by their contribution to operational efficiency, manageability, and effectiveness—not profitability. Her focus had been on timelines, budgets, and resource utilization to achieve these goals.

Claire’s shift to customer projects, each operating as a profit center, brought a seismic shift in her priorities. These projects weren’t just supporting the business—they were the business, driving revenue.

Claire’s work was now directly tied to the company’s bottom line. Beyond project risks, she had to manage commercial and legal risks, with each decision impacting profit margins, customer satisfaction, and overall financial health.  A steep learning curve awaited her.

Claire had to navigate new terrain, balancing commercial foresight, meticulous planning of expenses and revenues, and effective communications across corporate borders. In prior internal projects, the worst thing was having conflicts escalated to management. Now, project disputes could lead to legal action, threatening the organization’s income and reputation. Like many project managers facing the challenges of customer projects, Claire had to navigate the situation on her own

Figure 1: Internal projects and customer projects have fundamentally different goals.

Understanding Margins and Indirect Costs in Customer Projects
Claire felt lucky in her first customer project. It was handed to her after the customer signed the contract, and the terms seemed well negotiated, apparently making it easy to run it with a positive margin.

However, she soon learned that her employer was not fully happy with these margins. She was told that it was not enough for the project not to come in with a loss. The margins from the organization’s projects would have to cover indirect costs that could not be assigned to the projects individually: costs to run the organization and costs to win new business.

Figure 2 shows the approach in marginal costing: The individual margins are calculated by deducting the project’s direct costs from their revenues. These margins are then totaled; after deduction of costs to run the company and win new project business, both often quite expensive, what remains is the organization’s profit.

Figure 2: How profit margins and indirect costs influence the profit of a portfolio of customer projects.

Claire had to find ways to increase the margins from her project without damaging the relationship with the customer.

Communicating Across Corporate Borders

Claire had to refine her communications with target stakeholders. A key challenge was transitioning from project management to project business, which required aligning with the needs of stakeholders outside her organization. These stakeholders belonged to a different organization, and when their requirements conflicted with the project contractor’s capacity, capabilities, or business interests, conflicts—and potentially legal disputes—became likely.

Figure 3: In customer projects, the project manager and the team work for target stakeholders in another organization.

This challenged Claire’s communication skills. Now, it was no longer enough to show professionalism, empathy, and understanding; she also had to take care that everything she said and wrote may become evidence in a legal dispute and, in the worst case, could weaken the position of the company.

Managing Documentation

Like many project managers, Claire viewed documentation as a mind-numbing task.  While she was enthusiastic about developing software, improving products and systems, and enhancing organizational efficiency and effectiveness, and many other outcomes that were rightly expected of her. However, she felt that documentation was rarely a productive and value-adding factor contribute to meet these goals felt like a waste of precious time.

In customer projects, documentation is essential:

• Documentation serves as the basis for invoicing. Delayed documentation leads to delayed payments, jeopardizing the contractor’s liquidity. If documentation is incomplete, so will the invoices, impacting revenues and reducing profit margins.
• Documentation is also key to developing a strong position in disputes. Whether in negotiations, alternative dispute resolution, or litigation, the party with better documentation holds a clear advantage.

Managing Relationships

Managing cross-corporate relationships was a significant challenge for Claire. Conflicting  business interests between the organizations were a continuous cause of conflict. She also struggled with different company cultures and clashing egos. While he had a positive, constructive rapport with the customer’s project manager, conflicts became unavoidable when their managers joined the discussions.

The bar was even raised higher as her employer was not the only contractor in the project. The customer had a few contractors over various tiers who were expected to team up for the success of the project. However, more potential for conflicts occurred at the interfaces between these organizations, making the project even harder to manage. Figure 4 shows an example of a cross-corporate project and how it differs from the simpler world of cross-functional projects.

Figure 4: Cross-functional v. cross-corporate project management.

Learning by Trial and Error

Left alone with the new challenges, Claire had to learn the challenges and solutions of as a contractor by trial and error. However, trial in is expensive and error even more. Claire often had sleepless nights pondering about the commercial and legal problems she did not have in her former position.

Her first project struggled, ending with an unhappy customer and low profit margin. During the project, to  by the customer, caused by late invoices and withheld payments over dissatisfaction. These issues strained the company’s credit line, and she faced internal blame her for the poor cash flow.

Over time, Claire learned to understand the new challenges and found ways to effectively meet them. She often wondered if proper professional education from the start could have helped her and the organization avoid failures when she was still a rookie managing customer and business projects.

Summary
To succeed in customer projects, project managers and their managers must recognize the unique challenges these endeavors bring, from navigating cross-corporate relationships to managing legal and financial risks. Investing in professional education, understanding stakeholder needs, and building strong documentation practices are critical steps to being better prepared. By proactively developing these skills, you can minimize risks, build stronger client relationships, and drive project success.

Learn more about IIL’s Project Management Courses here!