How do you calculate project profitability?
At its simplest, project profitability is the revenue earned from a project minus the cost of delivering it. This project margin calculator uses gross profit and gross margin because they are practical operating measures for agencies, consultancies and professional services firms.
Project gross profit = project revenue − project delivery cost
Project gross margin = project gross profit ÷ project revenue × 100
For professional services firms, delivery cost will often include the internal cost of the people working on the project together with contractors and other directly attributable costs. The project profitability calculation becomes more useful when the original plan is compared with actual delivery and the latest forecast.
Planned vs actual vs forecast project profitability
Planned profitability
The margin expected when the project was originally priced and resourced.
Actual profitability to date
Revenue and delivery cost recorded so far. On fixed price projects, revenue recognition may not directly follow delivery hours.
Forecast profitability
The margin expected when the project finishes, based on what has happened so far and the latest estimate of remaining work.
Forecast profitability is usually the most useful operational measure for a project manager because it provides an opportunity to respond before the work is complete.
How to calculate profitability on a fixed price project
Fixed price projects have a simple commercial constraint: additional delivery effort does not automatically create additional revenue.
If a project is sold for £100,000 with £60,000 of expected delivery cost, the original gross margin is 40%. If forecast delivery cost later rises to £75,000 while the project value remains £100,000, forecast gross profit falls to £25,000 and forecast gross margin falls to 25%.
This is why remaining effort, cost rate changes, scope changes and forecasting matter for fixed price project profitability and fixed fee project profitability. Not every scope change is automatically recoverable.
How project profitability works for time and materials projects
Time and materials projects behave differently because additional billable work can generate additional revenue. Profitability depends on the relationship between the billable rate and the internal cost of delivering each hour, together with how much recorded time is actually billable.
Team mix, billable rates, cost rates, non-billable time, discounts and write-offs can all affect final margin.
How does a project overrun affect gross margin?
An overrun occurs when a project consumes more time or cost than originally planned. On fixed price work, every additional delivery hour usually increases cost without increasing contracted revenue. This reduces gross profit directly.
On time and materials work, additional time may create additional revenue if it remains billable and within the commercial agreement.
For example, in the worked scenario below the project budget overrun moves forecast margin from 45.0% to 39.6%. That is a change of -5.4 percentage points, not a 5% fall.
What is project cost variance?
Project cost variance compares the amount a project was expected to cost with the amount it is now expected to cost.
A £10,000 adverse cost variance does not necessarily mean a £10,000 project loss. It means the project is currently expected to cost £10,000 more than originally planned. The effect on profit depends on the project's revenue and commercial model.
Project margin and markup are not the same thing
A project costing £70,000 and sold for £100,000 has a £30,000 gross profit and a 30% gross margin. The markup on cost is approximately 42.9%.
Margin = profit ÷ revenue
Markup = profit ÷ cost
For rate pricing guidance, use the Billable Rate Calculator.
Example: forecast profitability on a fixed price project
Project value £100,000, 1,000 original planned hours at £50/hour, 600 actual hours so far, £32,000 actual cost, 450 forecast remaining hours at £52/hour, £5,000 other direct costs, 35% target margin and 20% minimum acceptable margin.
- Original planned margin
- 45.0%
- Forecast margin
- 39.6%
- Cost variance
- £5,400
- Additional revenue required
- £0
- Hours before minimum margin
- 377 hours
- Hours before break-even
- 762 hours
Why does project profitability change during delivery?
More work than planned
Extra delivery hours increase project cost, particularly on fixed price work.
Changes in team mix
Replacing planned delivery with more expensive resources can increase cost even if total hours stay the same.
Unrecorded or unapproved additional scope
Teams can end up delivering work that was not accounted for in the original commercial assumptions.
Lower billable value
Discounts, write-offs or changes in billable rates can reduce project revenue.
Incorrect original assumptions
The project may have been priced or estimated using assumptions that did not match the work eventually required.
How can professional services firms protect project margin?
- Set realistic cost and rate assumptions
- Review remaining effort regularly
- Compare planned and actual delivery
- Keep project rate cards current
- Record timesheets promptly
- Review scope changes before absorbing additional work
- Reforecast projects when assumptions change
- Give PMs visibility of the financial impact while the project is active
If your rate assumptions need reviewing across multiple roles, use the Rate Card Builder.