Understanding how profitable your projects are is key for businesses, especially in professional services. Improving the profitability of existing projects and taking on the most promising ones is not just about revenue figures. It’s also about longer-term goals any company is aiming at: professional development, stability, reputation, and competitiveness.
Projects in any field – IT, advertising, consulting etc. – are individual and hardly predictable. However, it is still possible to reveal important trends in their development, analyze performance, and forecast the outcome. All of this is necessary for understanding how profitable current projects are, what can be done to improve monetary results of project work, and what types of projects are preferable in the future.
Measuring project profitability includes various metrics. Choosing the right ones is essential for getting the full picture of the project course and possible outcomes. Let’s take a closer look at the five key parameters to track, analyze, and compare between different projects and periods.
Utilization rate
What is the proportion between your billable and non-billable time? That’s one of the most important questions to answer: while non-billable activities are indispensable for proper operation, their share should not exceed a certain limit.
Utilization rate is the parameter that provides insights on this proportion. It is calculated as total billable hours divided by total available hours. The key point here is having exact data on both work time categories: where just billable hours are logged, utilization rate achieves the unrealistic figure of 100%.
Project overrun
They say if you’re managing a project and everything goes as planned, it’s probably in your dream. Project deadlines and budgets get overrun due to various unpredictable events, risks, and scope creep. The uncertainty is inevitable, but knowing its scale is a must: this helps achieve sufficient predictability of project outcome in both financial and organizational terms.
Project overrun is a metric that represents a percentage of the resulting project cost compared to its planned cost. Its percentage value shows how reliable your planning is and what unexpected costs tend to incur in your project work. Accurately measuring time spent on each assignment within a project, calculating resulting operational costs and comparing them with estimates helps managers increase the predictability of project works, improve their estimation technique, and make additional costs more manageable.
Project margin
Basically, this parameter shows the net profit received upon delivering the project. This is the direct measure of a project’s profitability. It is measured upon completion and shows the end result of project works. This metric, calculated and compared between different projects, provides a basis for making decisions on working with a specific customer or taking on projects of specific types.
Maintaining high project margins is key for the overall success of a professional services organization. They drive the profitability of the entire company, make it possible to invest in future growth, and create a safety net for the company and its employees. Keeping track of this metric is essential for understanding current opportunities and planning for future business development.
Annual revenue per billable employee
This metric is the measure of total revenue divided by the number of employees producing billable work: consultants, attorneys, etc. It shows the average productivity of a billable employee. Compared to the average labor costs of consultants, it provides insights into the company’s financial health and average profitability of billable work assignments performed by employees.
Annual revenue per employee
A similar metric that shows the average profitability of an employee’s labor: it represents total revenue divided by the number of both billable and non-billable employees. The higher the figure, the better the work efficiency in monetary terms. Keeping records of this metric is necessary for being aware of risks related to high administrative and operational costs.
Summary
Projects are individual, and so is their profitability. Even typical projects can be influenced by different events, interests, and visions, but their outcome is never unpredictable. Analyzing project performance and revealing key trends allows managers to optimize the work process for existing projects and find ways to increase their profitability.
Comparing the data between different projects and time periods is indispensable for making right decisions: how to optimize business processes, how to configure workflows, what types of projects to take on in the future, and much more. Collect crucial project data, automate its analysis, and benefit from having the big picture at hand.
