Running consistently profitable projects starts with understanding how to calculate ROI for a project. We'll show you how to calculate this essential metric.
Calculating your project ROI is the key to hitting your revenue goals and understanding project cash flows better.
Fortunately, calculating it isn’t rocket science.
Using the basic ROI formula we share below you can quickly and effectively calculate your project profits — both when starting a project and after having completed it. We’ve also covered the importance of calculating project return.
Project ROI is the return on your investment in a particular project. It’s the profit a project generates after you exclude all the project costs that go into completing it.
Essentially, calculating project financials is not as straightforward as looking at the amount you make from a project. Instead, there’s a significant chunk that goes into working on the project (think: payment for people who help complete the work).
There’s also a sum that you separate out in taxes and overhead costs from each project. Not to mention, you’ve to factor in the money that goes into the tools used to complete the work.
Project ROI is the money that you’re left with after a detailed cost analysis of the expenses going into project planning, management, and completion.
That said, there are four types of ROI to be mindful of:
The question now is, why bother calculating project ROI?
Because it helps you:
Not all projects deliver the same financial gain.
Some projects deliver an incredible ROI. Others might be a full waste of time, giving you negative project ROI.
But by calculating project ROI, you can better tell which projects are delivering the most profit. In turn, this helps you understand which types of projects to take on and which clients to focus on retaining.
When you’ve an expected ROI ready, you can start prioritizing projects that deliver the most value.
In doing so, you can make sure progress on high-value projects is on track throughout the project journey and your client is satisfied from the start to the end. This is also essential for retaining clients who are ideal for hitting your revenue targets.
It’s easy to determine the subjective value a project delivers. For example, it may be a good client logo to add to your company. Or the client may be great for your business reputation.
Knowing your project ROI, however, gives you the numbers to show stakeholders and leadership the results you’re driving. This solid data is also helpful for planning pivots and informing your customer acquisition strategy.
Say, for example, you want to target more construction businesses than your current target audience of luxury resorts. You can refer to your project ROI numbers to back the decision.
Now that the fundamentals are out of the way, let’s look at how you calculate ROI. Follow these steps:
Begin with reviewing the work that goes into a particular project, the expenses the work would incur, and the percentage tax applicable on it.
Note that there’s a lot to account for when it comes to project expenses. These include:
Service costs are further broken down into the time needed to complete work and the number of people (plus their charges) working on the project.
To this end, calculate your expenses using this formula:
Total expenses = software costs + operating costs + additional costs + service costs (hours to complete work x number of people completing work x hourly wages)
After your cost assessment is complete, apply this basic ROI calculation formula:
ROI = (Net profit/cost of investment) x 100
ROI = ([Financial Value - Project Cost] / Project Cost) x 100
If you’re sticking with the first formula (both are the same with the latter having broken down net profit), net profit or the actual profit is the sum that’ll be left with you after deducting cost expenses.
Calculate it using the following formula:
Net profit = expected revenue - total expenses
This will give you an anticipated project ROI value to keep in mind as you start working on the project.
And to make sure you make as much actual ROI as the number you expect, keep track of your project data as it proceeds.
Using a project management software such as Runn that helps track your project financials makes this part easy. Runn helps you track the actual data against expected data.
For instance, if you’ve planned for XX hours for a project, Runn will show you the number of hours completed at any given point in the project’s lifecycle. Similarly, it shows you how much money has been spent as compared with the budget for the tasks at hand.
All this information helps you see how well you are on track to achieving your expected project ROI.
You can also use this information to catch scope creep and subsequent revenue leakage in time so that it doesn’t eat at your profits. for example, you can note there’s more time going into a project than planned due to a client’s requests on the project not included in the original project plan. Use this information to communicate a revised budget with your client to save your ROI.
Once a project closes, calculate your actual ROI using the same formula shared above. This time, however, instead of adding estimates, add the actual values to the formula.
This will give you the correct number of the profit a project generated — improving your project accounting. And while you are at it, compare both your actual project ROI and anticipated ROI. This is crucial for understanding how you can increase your project revenue.
Before we wrap this up, let’s show you how this simple ROI analysis works with an example.
In this example, let’s assume a client’s budget is $5,000. This is your expected revenue.
After you break down the project into tasks to determine the work that’ll go into it and decide on who’s working on it, and their charges, calculate the total expenses.
For a rough example, let’s say:
Now, add all of these expenses ($200 + $500 + $2500 = $3,200) to get your cost of investment.
Finally, apply the formula:
ROI = (Net profit) / (cost of investment) x 100
Meaning: 1800/5000 x 100 = 36% where 36% is the project return.
With this basic ROI calculation, you can stay on top of your profits — even drive more of it as you learn which projects are the most profitable.
By tracking your project financials throughout a project’s cycle, you can also identify scope creep in time and communicate a fresh budget with your client.
Remember though, you need to use this ROI formula both before a project starts and once it ends. This’ll give you a better, more complete picture of the profit projects drive and also help you decide which projects are worth pursuing to begin with.
Here’s to better profit profitability 🥂
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