Do you find yourself chasing teams and timelines to help your project stay on budget? Or are budget overruns giving you sleepless nights?
If you’re too frequently chasing success on a budget, it’s time to delve into the nitty-gritty of how to increase project profitability for your business.
You invariably spend significant time, effort, and resources on a project. The ultimate aim is the completion of a project within the set budget. Also, you have not one but multiple projects to deliver. For this, you need to prioritize them to achieve the ones that promise significant profit margins.
Understanding the ins and outs of project profitability helps make accurate bids in the future, optimize billable utilization, and enables you to make the right long-term investment decisions.
Clearly, there’s a lot to unpack when it comes to improving project profitability.
In this blog, we will walk you through what project profitability is, how you can measure it, and how to improve project profitability with ease.
What Is Project Profitability?
Do you think a higher project revenue implies higher profitability? Not really.
To analyze the profitability of a project, you also need to factor in the resource costs of working on a project and the time it took to complete the project.
Undeniably, project profitability is what makes us pursue project success. It is one of the key financial metrics for a business’ sustainability and growth. Why? Because high profitability means greater business revenue and considerable funds to invest in future projects.
So, the ultimate aim of running a business is profitability. It gets the whole organization going and succeeding in the long term.
Thus, project profitability refers to understanding the various dynamics of revenue generated on a project. It involves understanding which types of projects are the most profitable, which ones help generate revenue easily, and which ones can be avoided owing to the low-profit margins.
Let’s understand this better.
Project Profitability Is Not How Soon You Accomplish a Project
Yes. It is vital to deliver a project on time. But, it may also be that your team faced burnout while delivering the project within the defined timeline. Is that desirable? Definitely not. On the contrary, this may end up reducing your project margin!
Project Profitability Is Not Taking up Every Project That Comes Your Way
Your goal is to make profit. For this, you need projects that result in greater returns. Taking up projects with a low-profit margin will only end up wasting your time, effort, and resources when all of these could have been utilized to deliver high-profit margin projects.
Project Profitability Is the Ability to Generate a Profit
Picture this. You take up a project. The billing amount is decided. Let’s take this as $100. Now, you go on to allocate resources, set the timeline and dependencies, prioritize tasks , and start work head-on.
By the end of the project’s completion, you realize that you incurred a total cost of $70 on running the project right from the start.
Here, $30 is your profit margin. This is what matters to your business. This is the profitability your project has generated and will support you in investing in future projects for your business.
Thus, these are some aspects of project profitability that you must consider while examining profitability for your next project.
How to Calculate Project Profitability?
If a company wants to enhance the profitability, it must first know how to measure it. And measuring profitability is easier than you think!
You can go ahead with this project profitability formula:
Total project cost-total expenses/total project cost✕100
While this formula will lead you to your answer, there are some key points that you must consider while evaluating profitability for your projects:
1. Evaluate Your Project’s Profit Margin
Once you deliver your project, you might get down to analyzing the resources it needed throughout, whether it was delivered within the defined timeline, and whether it was completed within the pre-set budget. However, you miss the most essential in analyzing a project’s success – its profit margin. This margin is the difference between the budget you defined for the project and the cost you incurred while running the project.
Your business runs on profit. It cannot sustain simply by attaining the break-even point. You need higher profit margins to keep your business running effectively in the long term. So, once you have delivered a project, get set to analyze its profit margin to evaluate its success.
2. Ascertain the Potential Profitability of Your Project
What is the first thing you do before you say ‘Yes’ to a project? You analyze the revenue and profit it will help generate for your business. You set a target for your business, such as you must not direct your efforts on a project that produces profit below a certain amount. This will help you focus on more critical projects that have the potential to generate the desired profit easily.
3. Budget for Profitability
How do you create a project? Analyze how many resources you’ll need, specify their cost of work, and move on to create a budget? Not really. Apart from determining the expenses of these resources, you also need to consider the profit margin you wish to achieve on the project. So, you add this margin to the estimated project costs and then develop a budget that fulfills the criteria to attain optimal profit margin.
Keep in mind that the ultimate goal of your business is to increase profitability to keep the business up and running. So, every step and every strategy must be in line to help you get close to achieving this easily.
How to Increase Project Profitability: 10 Practical Ways
Increasing project profitability is no shot in the dark. You can attain this simply by adopting the best practices that will lead to enhanced team efficiency while keeping track of the key metrics to be achieved.
So, let’s dive right in and walk through the steps to increase project profitability for your business.
1. Create a Data-Driven Culture
To propel success, you need to make well-informed, strategic decisions right at the onset. But how do you make these decisions that result in desired outcomes? Yes. With reliable data!
Data-derived facts help make decisions that are backed with reliable insight into the progress your project has made, the hours put in by an employee, the revenue your project has generated, and so on. A robust data-driven culture lets you build better project processes that help achieve proven company objectives effortlessly.
2. Track the Right Metrics
To track project productivity, there are some key metrics that you must monitor closely. These metrics are unique to your business and must be referred to while analyzing profitability. Some of the most common metrics for project profitability analysis across various industries include:
- Billable utilization: This metric refers to the billable time that resources give to complete project tasks and activities.
To understand this better, take a scenario wherein you must train employees for a particular project. You cannot account for this training under billable hours. So, for efficient billable utilization, you need to ensure that training is carried out, the workload is balanced, and projects do not get delayed while staying within budget.
You can apply similar logic to internal team meetings to discuss and review work done on the project. This, too, must be considered while calculating non-billable hours and setting the project timeline and budget.
- Project overrun: Project overrun is when your actual project cost exceeds your estimated project cost. Thus, it’s the budgeted cost above the actual cost incurred.
What causes a project overrun?
A project might exceed its budget due to an unpredictable risk, scope changes, lack of resources to get work done on time, or inaccurate project planning for project expenses.
Whatever the reason, the increased costs mean reduced profit margin and reduced project profitability. Thus, you must make efforts to tackle project overruns and complete projects within the defined budget.
- Project margin: Project margin refers to the net profit received on a project. This is the difference between the project budget and the actual expenses of executing the project. This difference is the margin of profit you have made on a project, impacting the project’s overall profitability.
Analyzing the profit margin helps understand which types of projects result in a higher profit margin and which produce a lower profit margin. This further helps in understanding which project types and clients to focus on more so that you can achieve higher profits consistently. Consistently higher profit margin leads to financial stability and helps you generate more funds for investing in more significant projects.
- Annual revenue per billable consultant: This metric refers to your firm’s total revenue divided by the number of billable consultants at work. It gives insight into their efficiency and helps strategize their utilization better.
The ideal revenue should be at least twice the cost of the consultants. If this is attained, it implies that consultants are providing value to your business and must continue to be employed within the organization. Also, this metric is one of the crucial indicators of your firm’s good financial health.
- Annual revenue per employee: Annual revenue per employee is calculated by dividing the firm’s total revenue by the number of billable and non-billable employees.
Calculating and being aware of this metric is important as it lends insight into employee productivity. It also helps analyze whether there are any unnecessary administrative or operational tasks in motion that can be done away with for optimal efficiency across the organization.
3. Analyze Collated Data
Once you have collated the required data, you must attribute sufficient time to draw out meaningful trends and insights.
Sit with your team, other project managers, and industry experts if need be. Discuss what can be improved and what is working well for the team.
This analysis can be anything from reviewing the break-even analysis to prioritizing specific projects owing to their higher profit margins. Only when you get into the nitty-gritty of data will you be able to make profitable business decisions.
4. Analyze the Pricing Structure for Your Fixed-Fee Projects
As a project manager, you may decide to price your projects on a fixed-fee basis. This means you have set their pricing per the service rendered; employees needed to work on the project, etc.
To increase profitability, you need to create comprehensive profit and loss reports. These project profitability reports lend you actionable insights into how you can optimize employee workload or set deadlines. This analysis will help you gain the maximum benefit from the profit achieved.
5. Ensure Project Feasibility Throughout
When you sit down to build your project’s budget, keep an adequate amount as the profit margin that you expect to derive from the project.
Once this is done, your role does not stop there. It keeps track of how your project is progressing regarding expenses incurred. This means you have to control your workflows, processes, and costs in real-time to stay within the pre-set budget and ensure project profitability.
6. Prepare Accurate Estimates for Clients
Realizing that you have exceeded the project’s budget midway through project execution? Thinking of going to a client asking for more funds to complete the project? It is neither ideal nor impressive.
The best way to avoid such scenarios is to prepare accurate client estimates after detailed analysis.
What are the project deliverables?
Do I need extra funding to train my employees for this project?
How much workload can my resources handle for a day?
You must reflect on these questions before preparing an estimate for your clients. Here, data-driven forecasting comes into the picture.
7. Reforecast Budget in Real Time
One of the crucial tips to maximize project profitability is forecasting your budget to the best of your ability. But, how do you reforecast?
You might have created a budget forecast that you believe has taken all the possible costs into account, thus giving you the best estimate for the project budget. However, projects have a cycle of their own. Tasks may get delayed, or assigned resources may not be able to perform as you thought they would.
Thus, it becomes integral to forecast your expenses routinely. This is just to ensure that you are still in line to accomplish your project within the defined budget. If not, you might have to re-think the best strategies to mold your workflows and complete projects within budget. Also, if your project goes way beyond the set budget, you might also face a scenario where you might have to terminate your project.
8. Leverage the Power of a Software
As a project manager, things are bound to slip through the cracks when you’re in charge of multiple projects, resources, workflows, and timelines.
What can make things easier is adopting a robust tool that offers the crucial features of project profitability software. A reliable tool such as ProProfs Project can help you:
- Visualize whether your project is adhering to the set baseline
- Support your team collaboration strategies by coordinating team communication via task comments and file sharing
- Track where your team members are spending their time at work with time tracking
- Balance and optimize team workload, ensuring projects are completed without any burnouts and last-minute scrambles
Most importantly, since we’re discussing profitability, you can enable add-ons for Invoices, Estimates, and Expenses.
We’ll take the example of ProProfs Project here.
Using the tool, you can easily enable add-ons and monitor expenses accurately.
You can even put in the billable amount for work done, and the tool will generate professionally-built invoices instantly.
Also, you can use the Advanced settings to leverage more settings for creating invoices.
The tool lets you create time sheets and log time entries. This allows you to monitor team productivity and create better estimates for project timelines and consequent budgets in the future. Also, it lets you monitor total and estimated time for each project, further improving estimate analysis for similar projects in the future.
Thus, a tool is an excellent solution to simplify profitability estimation for multiple projects.
9. Monitor & Control Project Scope
Merely creating a detailed project budget is not the end of your responsibilities. As a project manager, you also need to monitor the project’s scope such that it does not end up consuming significant resources and crossing the deadline.
Monitoring project scope means keeping track of how your project is moving forward and whether its outcomes are adhering to the pre-set scope of the project.
But what is ‘project scope’?
Project scope refers to the limitations and parameters that your project must fall within i.e., your project must be accomplished within the defined timeline and budget. It must adhere to the project baseline and not stretch beyond what was decided initially.
So, if your project’s scope is affected at any stage, you need to act immediately and take suitable action to return to your pre-decided scope at the earliest opportunity.
10. Learn from Mistakes
Lastly, takeaway learnings from each project. Each project differs from another. Each project demands different strategies for its successful execution.
While running your projects, you come across various challenges and risks which you learn to overcome along the way. Do you need to take steps to improve team collaboration for better-performing projects? Do you need a more efficient way to track project expenses? Or do you need a system that enables enhanced progress reporting? Analyze and strategize your future projects accordingly.
Learning and adopting the best strategies for project execution is a definite step toward better project performance and profitability.
These are ten proven ways to increase project profitability. Integrate them into your project’s best practices and see your profits hit a new high!
Drive Project Profitability for Your Business
By now, you may have a fair idea of how to increase project profitability for your business. Remember, no size fits all. What may work for one project may not work for another. The best way to move forward is to make strategies, learn from insightful takeaways, adapt new methodologies, and run projects successfully.
Each step will enable you to develop better processes and optimize workflows, leading to maximum project profitability.
Do you want a free Project Management Software?
We have the #1 Online Project Management Software for effective project management.