Learn if the waterfall approach to project management is right for your firm, including how to follow its planning, implementing, and testing phases.
Project Profitability: Understanding the Correct Metrics to Track
It’s important to track the right project profitability metrics so you gain control of your project and make the right financial decisions.
When it comes to your company’s projects, there’s always a struggle: finishing projects on time, within budget, tracking extra work and costs, while also making sure they remain profitable. Even with a great project manager and a powerful team working together on each task and deadline, there are always going to be obstacles. That’s why getting a jump start and knowing what to prepare for before, during, and leading up to your next project is important. When working to ensure your project runs smoothly and you reach your goals, you want to track the right project profitability metrics, so you always stay ahead of the game and in control of your project’s performance.
How to Improve Project Profitability
Project profitability describes a project’s ability to yield financial gain for a company. However, project management can be a challenge, since each project varies in size and complexity and comes with a lot of moving parts.
To finish your projects on time and within budget not only requires successful project management of what you already are familiar with, but also the ability to change and adapt to the unknown.
When it comes to improving your project’s management and overall profitability, there are five KPI metrics you want to focus on first:
- Billable utilization
- Project overrun
- Project margin
- Annual revenue per billable consultant
- Annual revenue per employee
Billable utilization is the total available time employees spend on project-related activities. To determine the best rate, a percentage scale is typically set from 0-100% with the ideal billable utilization rate set at 80%. This allows room for necessities such as training, internal meetings, and other non-billable activities so your employees do not go into overtime.
Companies often use billable hours to invoice clients accordingly, thus company-wide billable utilization can be a good indicator of how operationally efficient and profitable your business is.
Billable utilization is a major indicator of opportunity and workload balance as well as a signal to expand your project or bring in more workforce.
Project overrun is the percentage above budgeted cost or time compared to actual cost or time of your project.
Project overruns are typically expressed in actual time versus plan or actual cost versus plan, or in some cases, both. Monitoring and tracking project overrun is an important aspect because any time a project goes over budget, whether through time or cost, it cuts directly into the project’s profitability.
As the scope of work changes, many managers and teams do not adequately plan for the change, which leads to confusion, cost, and dissatisfaction for both the client and the team working on the project. This can lead to having to increase a discount on your project or services which further reduces your profit.
Project margin is the percentage of revenue which remains after paying for the direct costs of delivering a project.
It’s important to always focus on your project margin. This is the core driver of profitability so it’s a necessary metric to monitor.
When a project is completed, your company must evaluate budget vs. actual margin attained. So, to ensure you have the right numbers, continue to monitor beforehand while the project is in process. Firms that sell and deliver their projects at higher margins grow much faster and have much better financial results than those completing work at low project margins. Part of this higher growth is due to increased profits to invest in the future.
Annual Revenue per Billable Consultant
Annual revenue per billable consultant measures your firm’s total revenue divided by the number of billable consultants. It’s important to understand how much revenue each consultant is producing as this is a key indicator of your firm’s financial success, however, it must be assessed in relation to labor costs.
Ideally, you want your revenue per billable consultant to equal one to two times the actual labor costs of employing every consultant.
Firms with high annual revenue per billable consultant, such as engineering and architecture firms, tend to be more profitable because higher rates indicate better consultant productivity with larger projects, more backlogged revenue, as well as more projects completed on time and on budget.
Annual Revenue per Employee
Annual revenue per employee is measured by dividing total revenue by the total number of both billable and non-billable employees. Just like with annual revenue per billable consultant, the higher your annual revenue per employee, the stronger your profitability and efficiency.
When you track and measure how much revenue each employee brings in relative to how much they cost, you can determine the overall financial health and profit of your firm.
Not every team member provides billable services, however, you want to be aware of the risks of too many overhead costs in relation to revenue per employee. If your firm’s annual revenue per employee is significantly lower than its annual revenue per billable consultant, this can mean that you’re employing too many non-billable staff and might need to identify ways in which they can work more efficiently, for example with technology that automates some of the manual tasks. Or there can be ways your employees can bill for their time- some of their non-billable time can be attributed to certain client projects.
If you find that the annual revenue per billable employee and annual revenue per employee figures are too close together while utilization rates are low, it might make more sense to bring on non-billable staff to offload some of the non-billable work that the billable staff is doing. This in turn increases utilization rates and improves annual revenue per billable employee.
Improve Project Profitability with BQE CORE
Tracking the above metrics doesn’t have to be difficult when you have the right project management tools and software on your side. Gain real-time visibility and insight into every aspect of your project from beginning to end.
BQE CORE helps by allowing you to manage your projects all in one place. Gain access to customizable dashboards, time and expense tracking, complete project management, real-time visibility, full billing, and accounting access, and more.
With CORE, we’ve made improving and managing your projects simple. Never deal with spreadsheets or lose track of how your project is doing again. Take back control of your projects with CORE by receiving all the access you need, in real-time, so you can save time and make your projects more profitable.
To see just how easy project management can be, request a free demo today.