How profitable are your projects? What’s your average project profit margin?
Doing a project profitability analysis can answer these questions and more.
In any business, you’ve got to know your margins. But in the professional services industry, revenue does not come from products being bought and sold in the traditional sense; it’s service packages, entire homes that require months of work, consultations, website development, you get the idea.
After you add up all those billable hours, all your applicable expenses, etc, how much money are you actually making?
If you want to improve your profitability, knowing your margins is half the battle.
A project profitability analysis can help you excel at that first challenge. You’ll have accurate information to help managers, owners, and team members make positive, financially sound decisions going forward.
We’ll explain the project profitability analysis and how to calculate project profit margins. Find out everything you need to perform a project profitability analysis, how to do it, and how to track project profitability over time.
Project profitability reflects the amount of profit the business earns on a project. To express project profitability, you follow the basic model of revenue minus expenses. Profitability in this case refers to how much your business is making on the project.
You can talk about project profitability in terms of a few figures that can be metrics for both individual and multiple projects. Here are the ways you can express project profitability:
How much profit did the individual project make?
This is the total amount earned by the project, after expenses undertaken by your business.
If you’re paid $5k total for a client project and you spent $2500 to execute the deliverables, your total project profit would be $2500.
Project Revenue - Project Costs = Total Project Profit
What is the margin on the project?
The project profit margin reflects how much revenue was generated in relation to how much it cost your business to execute the project. Project Profit Margin is reflected as a percentage, dividing project costs by revenue.
If your project costs were $2500 and you were paid $5k, your project profit margin would be 50% or 2500/5000 x 100%. In professional services like consulting firms, 30% is considered a good project profit margin; so in this example, 50% would be considered above-and-beyond excellent.
Project Costs / Project Revenue x 100% = Project Profit Margin
How much profit, on average, are the projects earning for your business?
Now that we have discussed measuring the profitability of individual projects, we want to look at a metric that reflects the profitability of multiple projects. The average project profit takes the average net profit earned by more than one project. You can find out the average project profit for a specific period of time (i.e. last quarter, this year, etc), for a specific client, for all your projects cumulatively, etc.
For example, if you want to figure out the average project profit for your last 4 projects, Projects A - D, first subtract costs from revenue for each individual project to find out the total project profit for each. Then, add up these values for a total; in the below chart that total is $7900. This is all the total project profits added together.
Example I Project Profitability Analysis Table
|
Project Name |
Revenue |
Project Costs |
Total Project Profit |
|
A |
$5,000 |
$2,500 |
$2,500 |
|
B |
$3,600 |
$2,400 |
$1,200 |
|
C |
$9,000 |
$6,300 |
$2,700 |
|
D |
$6,000 |
$4,500 |
$1,500 |
Next, we’ll take the total profits from all the projects ($7900) and divide by 4, since there are 4 projects total. Therefore, the average project profit is $1,975.
Total Project Profits / # of Projects = Average Project Profit
What’s the margin, on average, for your projects?
Perhaps you want to figure out your average project profit margin for a specific customer. Undoubtedly, it’s a good idea to keep up to date with this metric for your projects on the whole (more about tracking project profitability later). The average project profit margin shows you the approximate percentage you’re earning on each profit.
For example, let’s stick with the numbers from projects A-D. To figure out the average project profit margin, we’ll first calculate the profit margin for each project. So, we will divide costs by revenue for each and multiply by 100% to get the project profit margin.
II Example Project Profitability Analysis Table
|
Project Name |
Revenue |
Project Costs |
Project Profit Margin |
|
A |
$5,000 |
$2,500 |
50% |
|
B |
$3,600 |
$2,400 |
66.7% |
|
C |
$9,000 |
$6,300 |
70% |
|
D |
$6,000 |
$4,500 |
75% |
To get the average project profit margin, we will add up all the project profit margins and divide by 4, since there are 4 projects: 50+66.7+70+75= 261.7; 261.7/4=65.425
In this example, the average project profit margin is 65.425%.
Figuring out the profitability of your projects is an exercise in visibility. These calculations will be able to show you, down to the penny, how profitable your service business really is. Once you see the real numbers for yourself, you can get better insights into where time and money is spent and where there might be some wriggle room or even big opportunities for more earnings.
Your calculations for the project profitability all hinge on two numbers: the total revenue for the project and the project’s total cost.
To find the total revenue (aka how much your clients paid you for the project), you need to locate your contract data or invoice history. Your contract will show you how much the client agreed to pay. On the flip side, you can go into your invoice management to find payments made by the client.
If you’re using project management software for contracts and invoicing, there’s no need to check both. However, if you’re using siloed solutions or spreadsheets, it’s a good idea to cross-check the two to make sure what was in the contract reflects what was paid in the invoices.
To find the total cost of your project(s), you’ll need to pull up all the time & expense data that corresponds to that project. From there, you can look at the above section with all the profitability calculations to get down to brass.
Now that you have all the data points you need, it’s time to ‘add it all up’ and get to work. Using your numbers for the total revenue and total cost of your projects, you can now calculate all the applicable expressions of project profitability. You can easily calculate project profit margins, average project profit, and more using a spreadsheet or calculator. Alternatively, many project management tools/PSA solutions have these analytics built-in. These will automatically pull in your time & expense data, contract data, and invoicing data.
In the previous examples, we saw project profit margins of 50% or higher. This isn’t exactly realistic for most small professional services businesses. However, needless to say, the higher the project profit margin, the better. Without compromising the customer experience, of course.
Sometimes, small businesses especially can get wooed easily by big contracts with the promise of more net revenue. A project profitability analysis will help you understand how much money you’re making with contracts like these in terms of margin.
Not all clients and projects are worth the investment they require. By analyzing the profitability of your projects, you can see where perhaps certain people and certain situations negatively affect your margins.
Is your team overservicing clients? You should be able to see from time & expense data required for the profitability analysis if your team is spending too much time serving the client. If the profit margin is low, you could be in danger of overservicing and burnout.
Doing this exercise can help you identify opportunities to make your processes more efficient and maximize your profitability. For example, you may be able to put automation into play to shave off a few hours put into every project.
Whether it’s a sweeping change or little adjustments, a project profitability analysis can arm you with the information you need to get your project management where it should be.
If knowing your project profitability is half the battle, tracking it has to be up there in importance, too. It’s one thing to know how profitable your projects are today; it’s another to be able to analyze it over time.
Tracking the profitability of your projects will help keep managers and consultants on their toes, as it’s always plainly clear where profits stand. When different situations negatively impact profitability, real-time analytics mean you can find a good resolution sooner.
Finally, when you track profitability accurately, you can forecast more accurately. For growing businesses that need to continue to find new investment, profitability metrics can serve as data points for presentations and predicting future outcomes.
Project profitability includes a series of metrics that express how profitable your projects are. A project profitability analysis can help you determine how much money your business is making on a per-project basis. Figuring out your project profit margins is important, as you want to prevent burnout and overservicing. Margins of 30% or higher in professional services are considered good, while lower than that is largely undesirable.
To do your own project profitability analysis, you’ll need time & expense data as well as invoicing or contract data to reflect the amount your business was paid. From there, the calculations are very easy and can be done on a simple spreadsheet.
If you’re using project management software or a PSA tool that deals with your time & expense and contracts, project profitability analysis is essentially built-in. Just a couple clicks can give you the analytics you need.
Doing a project profitability analysis is a great way to find opportunities for more revenue, as well as any operational chinks in the armor. However, this analysis should continue over time in order to stay on top of productivity. Tracking project profitability is key to earning more and boosting your margins, as you can stay on top of issues and leverage more accurate forecasting.