Measuring Project Profitability & Customer Profitability with Software

Accurate project profitability can be measured easily with software. However, many may not understand how exactly software makes that happen. Below you’ll see sequential steps in the project lifecycle and how all-in-one software manages that information at each progression. 

You’ll see how software that moves with you through this entire process will keep all your data together, making calculating project profitability way easier, both before and after the project is complete.

Step 1: Agreement with clients + define job and role rates

If you want to know your exact project profitability, it all begins at the contract level. The agreement with your clients will help you define the overall scope of work, along with hours and rates. 

The entire project lifecycle hinges on what’s in the contract; so keep your contract management on point with secure documents that can connect with your project management solution. 

Make sure you have the right version of your agreement, and that it’s easily accessible in a secure environment. You can choose a contract management solution or project management with contracts built-in to accomplish this. Now, everytime you want to measure the profit margin of your projects, you can get right to the parameters of the contract in just a couple clicks.

Project Profitability Accuracy: For one, project management software that includes contract management will keep the contract itself and its data secure and easily accessible. Simply click on the contract information within the project screen.

Second, if your software integrates with your CRM, you don’t have to worry about the sales-to-project handoff getting messy. Both the CRM and project management solution share data securely, so sales will know what’s happening on the project side in their feed and vice versa. Later down the line when you are measuring your project profit margin, you’ll be able to see exactly how long the sales team spent on the client and how much the project team spent, without gray inaccuracies popping up because of a shoddy handoff.

Step 2: Create the project (with or without template)

With the contract executed and the sales-project handoff complete, you’re now ready to create your project. Here you’ll outline the structure of the project and give the appropriate stakeholders access. 

To prevent errors in profitability calculations in the future, you obviously need to make sure you’re using the right data. While this may seem like a little thing, major inaccuracies can occur if this small step is not adhered to.

With intelligent software, you don’t have to worry about using the wrong data when you create a new project. Instead, an all-in-one project management platform can automatically pull data from your contract to create the project.

Top-rated project management software gives you the option to create your project from scratch or use a template. More robust solutions will let you pull up the previous, similar project. This can prove a big advantage to project planning; perhaps the execution of the project will be similar or maybe it’s a repeat client. 

If you are able to accurately measure the profitability of each of your projects, you’ll be able to see what your margins looked like in the past and apply what you learn to future projects. This is a key piece where project management software with this functionality really comes in handy. For calculating profitability before the project begins, you can reference past projects and customers for past profit margin(s).

Step 3: Define & assign the team

The project is created and the correct data is in your project management software. Now it’s time to set up the team. At this stage, you figure out who is available and who has the right skill set. Do you already have resources with these skills? Or will you need to outsource? What are the rates?

Software will help you set up all your resources and rates. With resource management built-in, inclusive project management software will allow you to do this, even allowing for different rates for different roles. So for example, your designer who also does some editing work can get paid accordingly for those two roles within the same project.

To get your profitability on your project where you want it to be, pay close attention to your team’s roles and rates. Someone with a higher rate but completes work faster might make more sense than someone with a lower rate that takes longer to deliver. If you keep your profits and the quality of your deliverables in mind simultaneously, you’ll be setting yourself up for success at project completion.

Step 4: Enter internal budget and agreed-upon amount

Next up is the budgeting process. How is the project budget calculated? This depends on the type of contract, whether it’s time-and-materials or fixed price. Based on all the roles and rates you’ve outlined, you now have actual numbers to generate your internal budget. You’ll also calculate the price of materials or any investment you’ll need to make outside of time and skill to complete the project. 

Your internal budget will initially be created based on what is agreed upon in the contract, so making sure your project management software has contract management is again, an asset in this point of the process. You can easily retrieve the contract with just a couple clicks and view it with your roles and rates. 

Now, here’s where you can already get into the numbers of project profitability. At this point, you need to double-check you will be making money on the project, so that you know you quoted the correct amount. To do that, follow along below:

Calculating Project Profitability Before the Project Starts

Profit Total = Agreed-Upon Amount - [(Rates x Time Needed Per Role) + Materials/ Costs]

To see what the project profit will look at during the planning stage, plug in your info into the easy equation above. For example, let’s say there’s a project with an agreed-upon amount of $3000. It requires the following roles, rates, and materials:

Role A $50/hour for 20 hours = $1000 

Role B $25/hour for 10 hours = $250

Role C $30/hour for 40 hours = $1200

$150 on materials

If we add the total cost of work for all roles with materials, we get a $2600 Total Project Cost. Since the client pays $3000, that is a total profit of $400. 

The project profit margin in this case is roughly 15.38%: $400/$2600= 0.15384 or 15.38%

Project Profit Margin = (Profit Amount / Total Project Budget) x 100

Enter your internal budget information into your project management solution that should automatically connect it to the contract. Your software will also keep your budget information secure and accessible to those who need it. 

Step 5: Inform the team

Now it’s time to explain everything to your team. Everyone needs to know exactly what’s expected, when they can get started, and when they can begin tracking time. It’s also important that you keep in mind whether or not everyone already knows what has been discussed with the client up to this point.

Once you’ve got it together and come up with the appropriate resources, roles, and rates, it’s time to inform the team. Let them know the scope and time frame, so that you can be made aware of any planned holidays or other absences beforehand.

How you inform the team is up to you, though it’s recommended to have everyone stick with a clear communication stream. If you want, you can keep all communications surrounding the project within your project management solution/CRM (these two should be integrated). This helps better with the management of information essential to accurately measuring your project profit margins over time.

Step 6: Staff tracks time

Accurate time tracking can be a challenge for all sorts of teams. To get as exact as possible on your project profitability, cohesive time tracking is non-negotiable. How will team members track time? Do they know exactly when they worked on the project? When do they track time? How are they supposed to track non-billable time?

Whatever your time tracking solution, pick a path and stay on it. Also note that the easier it is for your people to track time, the more they will do it. Look for time tracking options with a mobile app and desktop extension, so that everyone can easily log hours no matter where they are working.

There are lots of time tracking tools out there, but to be able to get the info you need to measure profitability, it’s best that it comes built-in with your project management. That way the hours spent are always on your radar. It’s also easier for team members to track time within the project environment itself versus using a siloed app.

Step 7: Compare budget with time entries

One of the most crucial steps to figuring out how profitable a project is involves comparing your budget with your team’s time entries. However, this is a place where many managers get stuck and guesstimate, leading to inaccuracies. 

It’s understandable; there’s a lot of data to pull together, and if it’s spread out across different platforms, it’s a headache.

But these numbers are going to answer a lot of questions for you: Did you go over budget? Did everyone track time on the correct project? Does anything look fishy that might require an inquiry or even action?

The information you need is all at your fingertips with all-in-one project management. Time tracking data is linked to your contract, your budget, and your invoicing. The result is consistent visibility into the things that affect your project profits. 

Your project hours are automatically compared to what’s in the contract, and you can even set up alerts at certain thresholds to intervene if needed. This data can be viewed in real-time and be organized into reports that will clearly show you where you stand from a profitability standpoint. It's one of the best ways software can help you prevent projects from going off-rail.

Step 8: Review project profitability

We are at the end of the project lifecycle now. Deliverables are in, and you’ve been paid. Now it’s time to get granular about what that amount of money really means. To get the most accurate figure of how you’ve profited from the project, you’ll use the data that already lives in your project management solution regarding the contract and the time and expenses spent.

If you use all-in-one project management software from Step 1, finding out your project profitability is easy! That’s because you already have all the data you need living in your project’s digital environment, anyway. Say goodbye to the spreadsheet, please. 

Adept project management tools will have the following built-in, helping you easily pull the info you need to calculate profitability of projects and customers:

• Contract Management- What does the contract say? 
• Budget Tracking- Did your internal budget reflect the final total? How much were you over or under?
• Task Management & Time Tracking- How much time was spent on the project total? How much time was spent on each task?
• Resource management- How much was billed to the project by each resource? How profitable is each resource?
• CRM integration- How profitable was time spent on service? How much was covered in the contract?
• Invoicing- Have all invoices been paid for approved milestones? Has the final invoice been sent to the client? What is the invoice status?
• Financial backend integration- How much did you get paid? Does it match up with what’s in the contract?

Because of these data troves within your digital project management environment, you can leverage automation on most fronts. This can be a big boon to not only measuring your profitability, but improving it. 

You can get notified instantly about invoice status, for example, so you’ll know when a milestone invoice has been sent. You can also set certain thresholds to guard your profit margins. This will enable you to get a notification when time and expense hits a certain amount related to your contract provisions. 

Another pivotal feature offered by the better project management solutions is what’s called predictive analysis. Predictive analysis aggregates data and uses self-learning to help anticipate future outcomes. On the profitability front, it’s invaluable because the software can actually pinpoint when a project is in danger of going off-rail, based on time tracking data and what’s in your contract.

Calculating project profitability in your project management solution 

To calculate the profitability of your project, you need to subtract the total costs associated with the project, i.e. time, materials, etc, from the total payment from the client.

Total Payment - Total Project Cost = Project Profit Amount

To get these numbers, you’ll need:

• Time tracking data
• Rates of all team members
• Contract data
• Expense data
• Financial data (from your accounting solution)

To calculate your Project Profit Margin, you will divide the Project Profit Amount by the Total Project Cost and multiply by 100:

(Project Profit Amount / Total Project Cost) x 100 = Project Profit Margin

For example, let’s say you made $2000 total profit from your last project. The total costs you incurred to complete the project were $5000: 2000 / 5000 = 0.4 or 40%

In this case, the Project Profit Margin is very good at 40%.

The big secret here is that an all-in-one project management solution can do this almost entirely for you. It can pull all the data from time and expense and compare it to your contract data. You can even do this with your project budget data, so you can see how well you budgeted at the outset. 

Additionally, you can configure the profitability of each resource with this data for the project at hand as well as cumulatively. 

How to calculate customer profitability and customer profit margin

Figuring out the profitability of your project and the profitability of your customer is basically the same thing. That is, if you’re analyzing a one-time client. 

To measure customer profitability of a repeat client, you’ll simply combine the profitability of each project you’ve completed for them. From this data, you can see how profitable each of the client’s projects are and what the average is. Like project profitability, this is represented by two numbers that detail one, the total profit per client, and two, the client’s profit margin.

Customer Profitability = Cumulative and Average Project Profitability by Customer

For example, let’s say Client A has hired you for 4 projects. Here are the Project Profit Amounts from each:

Project 1 - $1000 Profit

Project 2 - $2000 Profit

Project 3 - $5000 Profit

Project 4 - $1000 Profit

The cumulative profitability of Client A is $9000. If we take an average of these numbers, the average Profit Total is $2,250. So on average, Client A makes you $2,250 for every project. 

However, simply calculating the average amount you make from each client doesn’t give you the whole picture. You may make less profit on projects requiring more time. Or maybe you make exponentially more when certain stakeholders are involved, etc. 

To get a more accurate profitability measurement for your customers, also calculate the customer profit margins. Here’s how the customer profit margins look as an example in the same scenario:

Customer Profit Margins

Project 1 - $1000 Profit; 15% Profit Margin

Project 2 - $2000 Profit; 12% Profit Margin

Project 3 - $5000 Profit; 10% Profit Margin

Project 4 - $1000 Profit; 17% Profit Margin

Now, we have a clearer picture into what’s happening with profitability and this particular client. As you can see, it looks like the Project Profit Margin is higher with the client when less actual money is being made. This may suggest that the client in the example is more profitable with projects of less scope and budget.

You can also do an average of the client’s Project Profit Margins to get an Average Customer Profit Margin. In the above example, the average of 15%, 12%, 10%, and 17% is 0.135 or 13.5%. So we can say that this customer will bring in about 13.5% profit on average when we do a project for them.