Profitable projects are the lifeblood of many service businesses. You’re supposed to take on new projects to grow, but why are they stalling your growth?
We all know the feeling…
You find a new business opportunity and take on a new project. Excitement’s in the air 🥳.
Then the work starts…
Scope creep enters the picture, and that profit margin that was supposed to fuel your future growth disappears little by little.
In this guide, you will learn how to increase the profits of your projects and get your growth back on track.
- What is project profitability
- How to accurately calculate project profitability
- 6 Tips to increase project profitability
What is Project Profitability?
Project profitability is a metric that calculates how much money a project makes (or how much it loses).
It is measured by taking the revenue generated from a project and subtracting the costs involved in completing it.
But to grow, some agencies risk lowering project profits as they habitually:
- slash project quotes to win projects at all costs
- take on as many projects as possible to stay afloat
But guess what happens?
You end up running in circles without making any progress (profit) at all.
How do you break this cycle?
Let’s get into it!
How to accurately calculate project profitability
Before we get into how you increase your project profits, let’s look at how you can accurately calculate project profitability.
Note: For the sake of simplicity, the costs involved in running the project are the total billable hours spent on the project as a whole.
A basic formula looks like this:
Project profit = revenue generated – costs involved to run the project.
Profit margin formula:
Project profit margin = (revenue generated – costs involved to run the project) / revenue generated x 100
For example, let’s say you estimated the cost of a project to be $5000, taking a total of 20 hours.
To calculate the project profits, you need to track your team’s time (labor cost) against the estimated/budgeted hours.
But how do you calculate how much it costs you in labor? Let’s break this down using hourly billing.
First, you will need to figure out how much your team costs per hour.
If you’re working with freelancers, it’s whatever their hourly rate is. But it’s a little different for your full-time employees.
The first step is to determine each employee’s gross capacity (the total number of hours you get from them as a full-time employee).
Generally, this is 40 hours per week multiplied by 52 weeks in a year which comes out to around 2080 hours. Now you can work out their labor cost per hour:
Employee labor cost per hour = employee salary / 2080
So if you’re paying an employee $30,000 per year, their labor cost per hour will be $30,000 divided by 2080. Which is roughly $14.
Once you have the labor cost per team member, you can start tracking their time against the set project budget to figure out how much it costs to run the project. Allowing you to calculate the project profit.
This can be done using timesheets per project. Where employees (ideally) will fill out their project timesheets on a day-to-day basis. Giving you the total billable hours from that employee for each project.
Many teams stick with this approach, but it can get messy. And it’s not the most accurate.
Plus, you’ll probably end up nose-deep in spreadsheets when figuring out if the project is on track to make any profit.
Note: It’s important to remember that a timesheet’s main objective is to see your team’s utilization rates (more on that soon), not micromanaging their time.
But let’s say you’re using Toggl Track. Your team will have two different modes of tracking time:
- Timer Mode – where your employees can start and stop tracking time in seconds.
- Manual Mode – where you or they can manually enter time tracking data.
Both are incredibly easy to use. And it means the time your team tracks against your projects are super accurate.
Once your team accurately tracks their time, you can use the Project Dashboard to track the project’s progress against its budget.
If you charge per hour for projects, you can track the total amount earned from a project inside the Insights dashboard.
The dashboard lets you filter by each project and quickly see the total earnings over a selected period. You will also see a breakdown of total hours spent on a project, billable hours, labor costs, and earnings.
How is it doing this? Remember the labor costs we worked out earlier?
You can add them for each team member inside your Toggl Track workspace. It can also be done per project if you’re working with freelancers for only a handful of projects.
6 tips to increase project profitability
I’ll be honest with you here. There’s no “quick fix.” to increasing your project profits. A lot of the tips below are easier said than done. But I’ll give you the necessary information needed to carry them out.
1. Nail your project estimates
Creating accurate project estimates is the first step in your profitability plan.
Not only will it help you track progress, but it’ll also help you when you’re negotiating a project’s budget.
Here’s a five-step process to follow:
- Collect the information needed for the project
- Outline project phases and tasks
- Calculate the cost and length of time for each task
- Calculate the total cost of the project
- Identify if you have enough resources to complete the project
Starting with a project that has a tight profit margin will doom your project before it ever starts.
2. Define your project success
Every project should have a scope document which should include the following:
- Scope – what are you doing and why?
- Time – how long will it take?
- Cost – what is the budget?
- Quality – what is expected?
The ‘quality’ of a project is subjective and will vary depending on your project and/or industry. But it more or less boils down to defining what needs to be done. For example, this can be the number of features on a website, the quality of a video, or the number of social posts per month.
Make sure you have every client sign a Statement of Work before starting a project. This should contain the project scope, but it is a binding contract you can use as your safety net if the project starts to go a little off course.
3. Watch out for sneaky client requests
I spoke with Mitchell Harrison of Wriggle Marketing recently about how he manages client projects, and he said that sneaky client requests are challenging to avoid.
No matter how well you communicate the project plan to a client. They will always throw in a few additional requests.
“Can you just add this in? It won’t take that long!”
You want to keep your clients happy. So it’s pretty easy to get into the habit of accepting additional requests that fall out of scope. But this will quickly lead to your project profits vanishing into thin air.
Further reading: Reaching Your Limit: How to Manage Design Change Requests
Watch out for sneaky client requests. They’ll kill your project’s profits!Mitchell Harrison – Managing Director at Wriggle Marketing
4. Have regular check-ins with your team
Running profitable projects is not a solo gig. Checking in with your team regularly to get an update on their progress will help better safeguard your profits.
How often should you have check-ins?
This will depend on your time and the complexity of each project, but here’s a rough guide:
- One a week with your whole team
- 2-5 a week with each individual within the team
The goal of your weekly team meeting:
- Get global updates and the status of the entire project status.
- Set weekly goals and follow up on task assignments where appropriate.
- It gives your team a chance to raise concerns about hitting deadlines.
The goal of your weekly individual meetings:
- Checking in with the progress of tasks.
- Giving feedback.
- Flagging any issues that might make you miss a deadline.
- Course correct them if needed.
Regular check-ins with your team should help to safeguard the project’s profit from taking a hit.
5. Have regular check-ins with your client
The agency landscape is a battlefield. Many agencies offer identical services. So it can be hard to stand out.
What can set you apart from the competition?
Making sure your customer service is second to none.
It doesn’t matter how many new projects or clients you can win. Your business will suffer long-term if you don’t know how to handle your current crop.
Here are four ways to improve your client service:
|Send weekly or monthly project reports||Project reports are a good way to give a detailed breakdown of the project. Reports can include timelines and milestones, changes and scope shifts, team performance, etc.|
|Have regular work-in-progress check-ins||This doesn’t have to take up too much of your time. Send them a quick email with a high-level summary. A client deserves a weekly email if they are paying you $$$$.|
|Flag any issues||Do issues keep coming up? Don’t have a perfect solution to a problem? Don’t be scared to speak with your client. This may not be ideal for you in the short term, but your client will appreciate it down the road. Transparency and honesty are key.|
|Raise questions on decisions||Got a big decision to make on a particular item or phase in a project? Don’t wait until you finish or launch the item. Get your client involved before it’s too late.|
6. Better understand your team’s utilization rate
Remember I mentioned team utilization rate earlier? Figuring this out will help to give you a better idea of where you can maximize your team’s billable hours.
What is an employee utilization rate? A utilization rate measures the difference between what your team records as time and what percentage of that time is paid by the client (billable).
For example, if you record seven hours on a client project, but only four are billable, the utilization rate would be 57% (4 / 7 x 100).
Working this out across your entire team will give you a good idea of your “billability.”
You can do this by looking at your team’s timesheets and calculating them manually. But if you’re using Toggl Track, you can view this within your reports dashboard for quick access to it without a need for additional calculations.
Even if you don’t bill by the hour, you probably create many of your estimates based on how many hours a task/phase will take.
So understanding how many of those hours are spent on billable tasks is critical. And for most agencies, the gold standard is that 75% of your total available hours should be spent on billable tasks.
Increasing utilization rates won’t necessarily increase project profits. But it may help you uncover other issues that could indirectly affect your projects.
For example, a low utilization rate can occur because junior employees tend to be less efficient, so fewer hours are billed. Knowing this may lead you to give that team member some much-needed extra support.
A low utilization rate could also mean a misunderstanding of the project’s scope. Your team members could be going back and forth on billable and non-billable project tasks due to overall confusion with the project.
The Secret to Project Profitability
Strong project management and accurate time tracking is the key to unlocking project profitability and continuous growth.
Hopefully, this blog has helped you get a handle on the fundamentals of project profitability. So get out there and track your way to success!
Keen to learn more about billable hours? Then don’t miss our guide on How To Track Billable Hours & Increase Profits by 20%.
Sean is a Content Marketing Manager at Toggl and has been involved in the digital marketing space since 2017. Sean is on a mission to travel the world and fund it using his SEO and Content Marketing skills.