How to Determine if Your Projects are Really Profitable
Have you ever wondered: “We are at capacity, we are constantly adding more projects, so why aren’t we making money at the end of the year?” This is when you should be looking more closely at project profitability and not just how much was billed to your client. As this is only one metric, it may turn out that your costs are significantly higher than you thought, or you may have had to write off a portion of the hours billed.
Why this discrepancy?
In order to calculate profitability accurately, you need to manage and calculate your costs correctly. To do this, you need to look deeper than just your direct costs: your hourly labour rates, material and other expenses that contribute to your project. You should also be looking at including your employee benefits into the calculation, since this will let you see your true labour costs. Employee benefits are at least 25% over and above your employee’s salary, which can have an important effect on your project’s bottom line if you didn’t have very high margins to begin with.
Another issue may arise if your employees had to work overtime or if a senior had to do the work of a junior due to availability. This too may have an effect on your profitability levels. With a good project accounting solution, these costs can be localized, and this particular activity or phase of the project can be analyzed separately due to circumstances.
What other costs need to be calculated?
You should also be taking into account other indirect costs to your projects, such as G&A expenses. These costs may not be directly reflected in all of your projects, but definitely impact your bottom line. When looking at implementing a good project practice within your organization, you need to start by changing your overall mentality on how you view projects across your organization. Ideally, everything becomes a project and every expense will be categorized to a project. By doing so, it becomes easier to ventilate these costs across all of your other client-facing projects.
How can you keep track of all these various costs?
With a good project accounting solution, you will be able to easily calculate these costs into your projects to obtain their true profitability. Although you may not be able to adjust rates for projects currently in progress, you will still enjoy greater visibility, allowing for more appropriate decisions for future projects and clients.
You can then take this analysis even further by looking at profitability by industry or business unit (if you offer services in more than one). By crossing this information together, you can see if some industries or services are more profitable than others. This can help your bidding process and facilitate tough decisions as to whether or not you should turn down a particular deal.
Calculating the true profitability of your projects will give you the insight you need to have a better understanding of your overall operations. This will also allow you to drilldown to phases, sub-phases and even to the activity to have a better appreciation for which activities are the most profitable within your organization.
Note from the author
This blog was based on a previously written blog, How to use Job Cost Accounting Software to Determine Which Projects Are Really Profitable, first published back in 2010. What has changed in 10 years? The sophistication and detail of the data you can extract from your system. When we originally wrote this blog, we were only able to look at it from the angle of a project accounting solution. Now, the accuracy of the information allows for much more than that. The solution now fully integrates to every aspect of the cycle, from the proposal with the use of a CRM, to the resource tracking during the project so that you can be looking forward rather than just back at your numbers. The other important revolution is the reporting, which has undergone huge technological advancements in the flexibility and ability to share information. All these technological advancements have allowed for greater communication across the organization and an even better understanding of your project activities.