Is a backlog right for your service contracting business?

Want to forecast the growth and profitability of your business? A good place to start is by looking at your backlog.

A backlog can be the key to success for your business: it’s related to everything from hiring and scaling to bank financing and market valuation.

But what does backlog mean in business? What are the upsides and pitfalls? And how should you manage a backlog? Let’s dive into everything you need to know.

What does backlog mean?

First, let’s define backlog vs pipeline: A backlog is a list of planned, confirmed projects for a service contracting business. Contracts are signed, but the work hasn’t begun. Sometimes, people use “pipeline” interchangeably with “backlog” to refer to any work that hasn’t been started, but more often than not, pipeline refers to your sales pipeline. And projects in your sales pipeline are far less predictable than those in the backlog — those sales might not go through.

If you’re wondering how to calculate backlog, usually, backlogs are measured in time and/or financial metrics: How far out are these projects scheduled, and how much money will they bring in?

The pros of having a backlog

Having a backlog can be a boon for a business because it means you’re not just staying afloat by jumping at any opportunity for work — you’re planning ahead, you’ve got a healthy stream of work, and you can put yourself in a better economic position by making it easier to predict cash flow.

This last piece is particularly important if you’re looking for loans or lines of credit. You’ll have to present solid documentation about your cash flow and demonstrate that your business has long-term profitability. And when you have predictable cash flow, you can be more selective about the new projects you sign — never accepting less-than-ideal projects just to keep the lights on. Having no backlog, meanwhile, is a red flag to potential customers; they’ll question your credibility if you have nothing going on and can immediately jump into every new project (most customers expect a bit of a wait when it comes to contract work).

A backlog is also a useful tool for identifying areas where you might need to increase resources or capacity based on what you’ve got lined up and how complex each project is.

The potential cons of having a backlog

When it comes to a backlog, it’s all about balance. While it’s a great thing to have a backlog, one big downside is that if that backlog is too big — and you don’t scale up before those projects start — you could be left without adequate resources to handle them.

This kind of poor planning will likely lead to pushed deadlines and last-minute change orders, which means unhappy customers, stressed-out team members, and the potential of losing future business. 

A huge backlog can also result in increased costs: The value of material and labor can change significantly over the course of months or a year, and if your backlog is lengthy, the proposed costs may no longer be accurate when you actually begin work. Sometimes, you can include a clause about this in your contract, but if you don’t, you’ll be on the hook for any increased costs — so you might not end up profiting from the project at all.

Additionally, your backlog can affect your sales pipeline; some customers in your pipeline may walk away if they want to get started sooner than you can offer services. Not everyone can wait 10 months to have their driveway repaired, for example.

How to manage a backlog

Again, when it comes to a backlog, balance is the name of the game — as well as knowing the limits of your business. The right backlog size depends on your specific trade, the size of your business, whether it’s the slow or busy season, plans you have to scale, and more. 

But no matter what you decide is the perfect backlog for your company, there are a few crucial tips for anyone managing a backlog.

1. Measure, track, and make adjustments. Project management software will help you calculate your backlog and keep track of current projects. Consistently review timelines for active projects to make sure there aren’t any setbacks that could impact your backlog. If you do spot any trouble on the horizon, you can always put a temporary pause on adding more projects until you’re feeling steady again.
2. Understand the limits of your workforce. Don’t make the mistake of accepting every prospective client to grow your backlog. Keep the needs of your labor force in mind and don’t add unnecessary burden on them; don’t just hope (or expect!) that your workforce will adjust and become more efficient. If you have a lot of projects in your backlog, carefully consider whether you will need more people to complete them, then plan ahead to make arrangements before the work begins. Recruiting and hiring take time, and bringing on new people is an important decision you don’t want to rush.
3. Prioritize getting paid on time. Maintaining a healthy cash flow is vital for ensuring you have the resources you need for new projects, which means you need to get paid on time. With software like Estimate Rocket, you can instantly create and send invoices with automated follow-ups, as well as allow your clients the option to pay online — helping reduce the time between invoice and payment.

Find your perfect backlog balance with Estimate Rocket

Maintaining a backlog can make or break the growth and longevity of your business. And depending on its size, there are both pros and cons. The right backlog for your company depends on a few different factors, but it should be proportional to what your business can reasonably handle. When it comes to managing your backlog, it’s important to keep track of it, do frequent reviews, be mindful of your workforce, and speed up the payment process.

Estimate Rocket can help. Our estimating and invoicing software, project management software, CRM and more are one single source of truth for your business, offering an all-in-one solution for contractors across a wide range of trades.

Want more tips for managing a growing business? Check out The Ultimate Guide to Growing Your Service Contracting Business.