Financials Project profitability and margin
The profitability of a project is easy to calculate: what was sold, minus what production cost. The difficulty lies elsewhere, and it is a matter of timing. This calculation is almost always done at close, that is, at the precise moment when no one can change anything any more. On a fixed-price project, that means learning at the end of the project something that was readable from the second month.
Three margins that are all called "the margin".
They are not calculated at the same moment and do not call for the same decision.
The forecast margin
The one in the quote, calculated on a workload estimate. It says what you hope for, not what you will get.
The margin at completion
Time spent plus remaining work, set against what was sold. It is the only one that allows correction, and the one least often kept.
The recorded margin
The one at close. It is exact, it is audited, and it informs only the next project.
The gap between the first and the third is what is called a nasty surprise. The second is the only place where you can act, and it requires remaining work kept up as you go rather than a subtraction.
Why the margin is discovered at close.
Because its two terms live in two different places. What was sold is in the contract or in the sales management system; time spent is in time management, and it becomes usable there only after approval, often at month end.
The reconciliation is therefore a separate job, done by someone, at a frequency that depends on their availability. In an organization with no dedicated management control, that frequency is monthly at best, quarterly in practice, and sometimes annual.
There is a second cause, less visible and more costly: remaining work is not kept up. Without it, you cannot project. You compare time spent to a budget, which gives a consumption rate, and you read it as a progress rate. The two coincide only if the initial estimate was right, which is exactly the thing to check.
Watch the margin take shape, rather than discover it.
A margin recorded after the fact is information with no operational use: it feeds analysis, it saves no project. A margin projected continuously is an instrument, because it moves when something moves, and it moves early.
The condition is twofold, and simple to state. What was sold and what was spent must live in the same place, attached to the same work packages. And remaining work must be kept up by those who produce, revised as you go rather than estimated once.
Bringing the commitment and the production together in a single piece of data is what we call operational commitment management.
In pylotik.
Four points, all meant to shorten the delay between a fact and its financial reading.
Calculation at entry
Each quarter-day entered moves the time spent, and so the gap. No month-end processing is needed to read the margin.
The gap by work package
At project level, a work package that overruns can be masked by another that is ahead. At work package level, the drift is located.
The projection at completion
Time spent plus remaining work, against what was sold. It is the view that allows a decision while it is still possible.
Profitability by client
Beyond the project: which relationship produces margin, which one consumes it, and for how long.
The financial terms are detailed on project financial tracking, and the fixed-price case on fixed-price project tracking. The full tour is on the product page.
What is lost, and where.
Scope that slips without leaving a trace is the first cause of margin lost on a fixed-price project, ahead of poor estimation. The detail is on the value lost in projects.
What we are asked about margin.
How do you calculate the profitability of an assignment in progress?
By comparing what was sold to time spent plus remaining work, work package by work package. The difficulty is not the formula but the third term: without remaining work kept up by those who produce, the projection does not exist.
What is the difference between consumption rate and progress?
The first says what share of the budget is spent, the second what share of the work is done. They coincide only if the initial estimate was right. Confusing them is the most frequent and most costly mistake.
How do you analyze a loss of margin?
By looking for the mechanism: untracked scope, optimistic estimation, overestimated capacity, delay in an approval expected on the client side. Only the first calls for an amendment, the others call for different corrections.
Can you track profitability by client?
Yes, by consolidating the projects of the same account. It is often the most instructive reading: a client can be profitable on one project and destroy value across the whole relationship.
Does the client see the margin?
Never. Margins, costs and workload are the supplier's internal data. The client sees progress, milestones and what concerns them on the financial side, such as orders and billing milestones.
And on a time-and-materials assignment?
The question of the margin at completion arises less, since time is billed: the contract calculates the monthly schedule on the days produced and the rate of each profile, and flags when the ordered envelope is exceeded. Profitability shifts to the actual daily rate and the occupancy rate, which also fall under business activity steering.
Going further.
- Project financial tracking: budget, time spent, remaining work.
- Fixed-price tracking: the seven leaks, and where they are plugged.
- Project management control: the monthly review and variance analysis.
- Operational commitment management: the definition of the category.