In our most recent Ebook, The Five Most Critical Project Metrics, we have shared the best practices surrounding how to measure the most important metrics for services businesses. In this blog, we will dive into the first metric, Project Margin at Completion and how to calculate it for your business.
What is Project Margin at Completion?
It’s insufficient to know the profitability of your department, practice area, or office. The best run services companies manage every project as a distinct Profit and Loss statement (P&L). P&Ls provide details about a project’s revenues, costs and expenses, revealing the ability of each project to generate profit for the company. When you have this level of insight into every single project, you can predict outcomes that will positively impact your business. For example, you can see what projects regularly meet or exceed margin targets, as well as which ones are routinely unprofitable.
One truth in client services is that your project scope will change during execution. It’s relatively easy to plan to deliver great margins, it’s much more difficult to manage this inevitable change in a way that allows you to remain profitable, as you had planned, at completion. To understand project margins, you will need to track the current cost of the project and then add in any scheduled cost in the future to get a predictive Estimate at Complete (EAC) margin percentage. With this information you can view the P&L of a specific project, then roll projects by any dimension to discover trends.
Decisions to be Made:
This metric is critical to help you stay on top of project margins while there’s still time to make adjustments to hit your margin targets. With insights into project margin at completion, you will be able to determine if moving resources around or modifying project scope would allow you to increase margins at completion.
- Fixed Fee Revenue + Time & Materials Revenue: The financials set aside for project delivery.
- Non-Billable Expense: When a resource is doing work that cannot be billed to a client (i.e. administrative duties).
- Resource cost rate x hours logged: Cost of given resource x hours worked.
A Look Inside the Report:
Here is an example of a Mavenlink Insights report calculating Project Margins at Completion. For this Fixed Fee project for ABC Healthcare, it appears from cost accumulated to date as well as projected costs for scheduled resources going forward, that the project will end up with $174,100 of cost versus the $400,000 budget we will be invoicing the client. The result is a projected Estimate-at-Completion Margin of 56.5%.