How do you know if your project is going to be profitable? Learn to answer the tough questions in our step-by-step guide to analyzing project profitability.
.avif)
Project profitability is a measure of your financial gain from a project after having accounted for all costs that went into completing it.
And in many project environments (service businesses especially), it's going to be your most important number. It lets you know much money you are actually making from the work that you are selling.
But without a strong grip on the profitability metrics to track, you leave too much up to chance – leaving money on the table through silly mistakes or small variables that would be easy to tweak or fix.
The better you understand how to work out and analyze your project profitability, the more you will be able to see where revenue leakage is happening or inefficiencies are compounding. And these are the insights you will need if you want to run more profitable projects.
As you estimate profitability, you’ll want to be mindful of the following terms:
Track these metrics to determine profitability – we’re also including the formulas you’ll need to measure them in a handy cheat sheet that you can easily reference time and again:
Ideally, track project budget and profit as the project progresses. This lets you course correct and turn in more profit than you’d when you look back at a completed project.
To this end, the foundational work starts off in the project planning phase – allowing you to keep tabs on expenditures from the allotted budget.
Here’s how the step-by-step process looks like:
First things first, determine the allotted project budget and tally it against client expectations, project scope, and deliverables.
This is an essential part of project planning as it helps you identify any gap in the client expectations, project scope, and budget. In case there’s a lack of alignment, the project lead can negotiate it before the project kick-off.
Later on, as the project progresses, this also helps ensure the project stays within the defined budget.
Using the information you have on the project deliverables, note all direct costs involved. This includes employee salaries and contractor fees (resource costs), software expenses, and any materials tied directly to the project.
Next, factor in indirect costs – often fixed – such as HR support, administrative expenses, and office space. All of these contribute to project execution, therefore, need to be included in your expense estimates.
Since indirect costs tend to be fixed, you can make a checklist of costs to use for all projects as you plan them. If you offer standardized services, you can also make a checklist of direct project costs to save yourself time.
Of the project costs you factored in, the most variable cost tends to be the cost of human resources.
For instance, hourly rates for senior employees differ from those of mid-level or junior employees.
At the same time, the employee utilization rate makes another variable cost factor. Essentially, the utilization rate is a percentage measure of an employee’s available working hours spent on billable or project-related tasks.
If an employee spends more time on a specific task on the project than estimated, the utilization rate increases.
Tracking your employee utilization rates is crucial for making accurate or close to accurate project resource costs.
With all the homework done, sum all direct and indirect costs to understand the full financial investment of the project. Compare the sum with the project costs – at the start of the project, mid-way through it, and at the end – to determine your gross profit.
You can also establish a clear success criteria or measurable profitability goals for the project at the start. For instance, define specific profit margin and break-even point. Then, use the benchmarked metrics to keep tabs on the project profit throughout its lifetime.
When the project reaches the finish line, you can also estimate your profit margin.
Lastly, to improve project profit down the line, identify areas for optimizing costs.
One way to do this is to evaluate the costs of alternative tasks or project methodologies to see how the cost of resources could vary if you took alternative routes to completing it.
Learn more: Achieving Better Profitability with Cost Control ➡️
Track revenue, profit margins, and costs/expenses at regular intervals such as every quarter.
Determine how profit margins are looking over time – present margin compared to the previous quarter, and compared to the same quarter last year.
Also, review your actual versus projected financials. If the gap is too wide (which it can be until you master project financials, resource allocation, and budget management), study how they vary and dig out factors contributing to the gap.
You can also spot trends in operational efficiency and cost overruns here. In short, use your historical data to identify ways to improve project profit and refine future project estimates.
Further reading: How to Calculate ROI for a Project ➡️
Small businesses with an average project flow can easily calculate project profitability manually using spreadsheets.
The only catch: spreadsheets are prone to human error and breaking as your project flow and business size grow. They also don’t track project financials and profitability over time like a dedicated tool can.
Not to mention, tracking profitability manually can also quickly become an additional task on your already full plate. It’s why we recommend using the following tools:
Tools like Harvest, Toggl, and Clockify help you track time that goes into completing specific tasks — allowing you to determine accurate utilization rates.
Employees can turn their timers on as they work on particular tasks. The tool then feeds the data into your project management tool (if they’re integrated), or you can review timesheets toward the end to determine how long it takes on average to complete specific tasks.
A robust tool like Runn assists in tracking time, project financials, and resources all in one place. This allows you to track project expenses against project budget in real time — reviewing incoming profit, spotting opportunities to optimize project operations, and saving projects from going off-budget before it’s too late.
Since you can also manage resources in the same platform, you can also easily determine employee utilization rate in the same place.
The best part? In Runn, you can also create project profitability reports. You can start off with a Preset report and add columns as needed. Or make custom reports from scratch.
Accounting tools like FreshBooks, Xero, and QuickBooks help you monitor expenses, profit margins, and revenue.
Like time-tracking tools, you can integrate them with your project management tool to determine the income and profit each project is bringing in.
It’s only when you have visibility into project expenses that you can save on them. So the first step to increasing your profit (and with it, business revenue) is to start tracking project profitability.
To this end, be sure to plan the project scope, budget, expenses, and profit margins in a central place. Keep tabs on how long it takes to complete specific tasks and employee productivity levels as well to make better expense estimates and improve profit down the line.
Now, of course, you could manage all this in a spreadsheet if your projects aren't that complicated. But as we discussed above, Excel is prone to errors as project and data complexity grows.
So whenever you’re ready, give our robust project resource management tool a shot. It’s free to try and helps over 10,000 global users like the Royal Bank of Canada and TPG Telecom plan, manage, and report on their project resource management.
