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What is project profitability?
How much money are you left with at the end of a project? That is the basic project profitability definition. Numerous factors can affect how profitable a project will be and numerous metrics to track these factors.
The goal of this blog is to clearly explain the most important project profitability metrics to help you with your project profitability management, including the formulas you need to work each one out.
Got your math cap on? 👲
Let’s go!
Project profitability best practices
Before we jump into how to calculate project profitability, we’ll outline some general best practices:
- Learn from past experiences: If you’re trying to decide whether or not to take on a project and you’ve done a similar project in the past, look back on the profitability of that project to help you judge the viability of the new one.
Also, learn from previous mistakes; if a certain employee has a track record of being slow with certain tasks, avoid giving him those jobs in a project. If a certain team structure has led to bad project profit outcomes in the past, figure out a different team structure. - Stay on top of data: Once you’ve decided that a project is viable profitability-wise, don’t just leave things to run their course. A potentially profitable project can quickly become unprofitable for an endless slew of reasons, so it’s important to continue to track project profitability.
- Use project management software: Following on directly from the previous point, having good project profitability software is the answer to half the issues involved with project profitability. We’ll go into detail about how project management software can help you run profitable projects at the end of the blog.
- Avoid scope creep: Having a robust scope management policy is essential to ensure that projects stay profitable throughout their lifetime. Scope creep is when additional deliverables or services that were not agreed upon at the start of a project, pile up. Obviously, this can negatively affect project profitability if handled unskillfully.
How to measure project profitability
- Gross profit margin: The total amount of profit generated by a project can be calculated using the following formula:
Gross Profit / Revenue x 100 = Gross Profit Margin
Example: A company is looking to run a website-building project. It costs them $4000 to produce the website and the revenue will be $10000. Their gross profit will therefore be $6000. To calculate this as a percentage, i.e the gross profit margin, they use the following formula:
$6000/$10000 x 100 = 60%
- Net profit margin: This calculates the profit margin remaining after all company costs are subtracted from the equation.
Going back to the example above, if building the website involves operating costs that amount to $500, the way to calculate the net profit margin would be as follows:
What is considered a good net project margin?
While this really depends on the industry, in general, a 10% net project margin is considered average, 20% is good, and 5% is poor.
This metric is another way of doing a project profitability analysis. It measures how much profit a project could have generated versus how much it actually generated. The best way to do a rate realization analysis is with project management software that tells you how well your resources are being implemented during a project. If it turns out that there was an ineffective use of resources, a great way to improve project profitability on your next project would be by remedying those problems.
Project profitability index
The profitability index is the amount of money earned against every dollar invested.
Project profitability index formula:
Present value of future cash flow divided by initial investment = profitability index
An index of less than 1 means that a company will lose money on a project.
An index equal to 1 means that a company will break even. It will be up to an individual company to decide if it would be worth taking on a project that will only break even. For a company that is just striking out, for example, it may be worth taking on projects for their portfolio value alone.
An index of more than 1 tells you that the project will produce profit and is probably worth taking on.
Time tracking
Once you’ve decided to take on a project, various techniques must be employed to ensure that the project stays profitable.
One such technique is time tracking for the following reasons:
- You can only bill your clients for the hours your employees worked. It’s therefore imperative that employees have an easy way to track time and that they do it consistently.
- When you know how much time is being spent on each individual task, you can keep a project on track by ensuring that not too much or too little time is spent on any particular task.
- Using your time tracking tool, you can see which employees are using their time best. Moreover, you can see which employees are quicker at particular tasks. For example, if James takes twice as long as Laura to write one landing page, you’ll know to assign Laura more landing pages for your next web project and give James tasks that he is more efficient at.
- Tracking time also tells you if the number of days or hours you set aside for a project was accurate. If at the end of a project, you see that the amount of hours spent on a project was way out of your estimate, you can use that data when setting an end date for your next project. This will help you decide whether a project is profitable or not as the amount of time you need to spend on a project correlates directly to its profitability.
Utilization rate
Once you know how much time is being spent on what, you can use this data to calculate the utilization rate of employees.
Utilization rate is an important metric to consider when working out a project’s profitability. As opposed to just looking at employees' office hours, which doesn’t tell you how much of their time corresponds directly to a project’s profitability, you look at how much of that time is added to your bottom line.
Utilization rate is used to calculate what percentage of an employee’s ‘office time’ is spent on billable work. Whilst 100% would be ideal, it’s not actually possible due to a range of limiting factors, like tasks that are necessary but not billable, lunch breaks, and holidays.
Employee utilization rate formula:
Billable hours divided by available hours = utilization rate
Resource profitability
Another useful way of figuring out a project’s profitability is by measuring the revenue a project will generate against the total cost of resources.
Formula: Project revenue - cost of resources = resource profitability
For example, if your revenue is $5000 and the cost of paying your employees (which includes benefits like healthcare) is $2000, your resource profitability will be $3000.
You then need to decide if the investment of each resource is justified and if they are unavoidable, is it worth taking on the project altogether?
How can Workamajig help you run more profitable projects?
As we mentioned above, the one best, easiest, and most foolproof way of staying on top of project profitability is with project management software.
As the only project management software designed for creative teams, Workamajig is unique in its ability to increase your project profitability.
Time tracking tools→Show you exactly how and when time is being spent so you can see where you’re spending your money.
Resource management tools→Help you plan projects in the most budget-efficient way and see where inefficiencies lie.
Project management tools→Save you a tremendous amount of time and money by helping you communicate, store data, and work in the most efficient way possible.