Project profitability: finding out where you really make money

Revenue is not enough

In services firms, growth is often measured in revenue, and the biggest projects are seen as the most important. But a project can generate plenty of revenue and little margin, or none at all, if it takes far more hours than planned or the price was cut in negotiation. Looking only at revenue ends up rewarding precisely the projects that consume the most resources.

Project profitability answers a simple question: how much is left once every cost the project has generated is subtracted? Answering it well takes a few choices of method, but the result often changes how people see which customers and which services are truly valuable.

The full cost of an hour

The main cost of a services project is people’s time. To value it you need an hourly cost by role or by person that includes not just salary but also payroll taxes, tools, training and a share of non-billable hours. An hourly cost based on salary alone makes projects look profitable when they are not.

Alongside hours come direct expenses: travel, licenses, third-party services. They should be attributed to the project that caused them, separating those billed back to the customer from those the company absorbs. Overheads such as rent and administration can be left out of project margin and considered at company level, as long as everyone understands that choice.

Absolute precision is not needed. What you need is a stable method, applied the same way to every project, because the value of the analysis lies above all in comparison.

1. 01 Recognized revenue
2. 02 Minus hours at full cost
3. 03 Minus direct expenses
4. 04 Project margin

Margin by customer and by type of service

The margin on a single project is useful, but the most important insights emerge when the data is aggregated. Grouping projects by customer reveals which relationships are truly sustainable and which consistently demand more work than they pay for. Grouping them by type of service shows where the company is most efficient.

These comparisons need careful reading. A low-margin customer may be strategic for other reasons, and a less profitable service may be the gateway to larger projects. The analysis does not decide on management’s behalf, but it makes the price of certain choices explicit.

Finally, it is worth following the trend over time rather than a single quarter’s snapshot. A margin slowly declining on a long-standing customer is a signal that deserves a conversation before it becomes a problem.

What erodes the margin

When a margin disappoints, the recurring causes are few. Non-billable hours, such as internal meetings, rework and informal support, pile up without anyone noticing. Discounts granted in negotiation cut revenue without cutting the work. Overruns on fixed-price projects turn every extra hour into pure cost.

Then there is an often-forgotten factor: time to payment. A project paid months late weighs on cash flow and requires chasing, and invoice aging should be part of how a customer is assessed, alongside margin. Utilization matters too: an underused team pushes up the effective hourly cost of every project.

From report to decision

A profitability analysis is useful only if it leads to concrete decisions: revising the price of a service, changing the contract model for certain customers, correcting proposal estimates, investing in the most efficient activities. Reviewing it every quarter, with the same indicators, lets you check whether the decisions taken have worked.

In Sales, the analytics reports show revenue, profitability, utilization, budget consumption, invoice aging and forecast, fed by the same approved hours and expenses used for invoicing. There is no second system to keep in sync. The most useful rule, however, holds whatever the tool: measure margin with a stable method and look at it often enough to still be able to change something.

Looking only at revenue ends up rewarding the projects that consume the most resources.