Can you define job profit?
Do you know whether your jobs are really profitable?
Take a look at the numbers commonly available for projects. Assuming a profit goal of 20%, did this project achieve it? Was it profitable?
The most common answer is Yes, it is profitable. Many firms deduct Project Payroll Costs from the Project Contract (after discounts and write-downs). In this example, that yields a profit of $11,750, a 23% profit margin.
There’s a problem: The true cost of a project is all the hours charged to it, not just direct payroll costs. The cost is really $38,675 ((440 + 15) x $85). You include all hours. Those non-billable hours represent lost revenue. You could have been billing another project.
To properly measure profitability of a project, use this formula (accrual or cash basis):
Money Paid by the Client – ((Total Hours x Bill Rate) + All Expenses)
$49,250 – ((455 x $85) + $2000)
$8,575
Your job profit is 27% lower than you first calculated. It is only $8,575. The profit margin is 17% – still good, but below your target.
Bottom Line
To measure profitability, all hours must be included. When measuring profitability, the Contract Amount must be Hours x Bill Rate + Expenses.
This post was extracted from the Maximize Your Revenue Potential – 10 BillQuick Profitability Tips, a webinar presented in December 2010.
This formula shows Profit = Money Paid by the Client – ((Total Hours x Bill Rate) + All Expenses)
shouldn’t there be Cost Rate in place of Bill Rate. i.e., Profit = Money Paid by the Client – ((Total Hours x Cost Rate) + All Expenses)