Plenty of small businesses are busy, invoice well and still make less than they expect. Very often the business as a whole is profitable while a handful of jobs lose money and nobody can see which. Project profitability means tracking each job, contract or client engagement as its own small profit and loss account, so the losers become visible while you can still do something about them.
It suits any business that does distinct pieces of work: builders and trades, agencies, consultants, installers, event companies, software houses.
What to track per project
Give every project a code in your accounting or job-management software (most accounting systems call this a project, job or tracking category), and code these to it:
| Item | Where it comes from | Notes |
|---|---|---|
| Income | Sales invoices, including stage payments and variations | Use the project code on every invoice line |
| Materials | Supplier invoices and receipts | Code at invoice entry; split invoices that cover several jobs |
| Subcontractors | Subcontractor invoices | For construction, CIS deductions do not change the cost |
| Direct expenses | Hire, travel, permits, freight | Only costs that would not exist without the project |
| Labour | Timesheets × cost rate | The item most often left out |
Do not code overheads such as rent, insurance or the accountant to projects at transaction level. They are dealt with separately (below).
Labour: turn time into cost
For most service businesses, labour is the largest cost and it never appears on a project automatically, because wages are paid through payroll, not per job. Calculate a cost rate for each person or grade:
Cost rate = (annual salary + employer NIC + employer pension) ÷ expected productive hours per year
Someone costing the business £42,000 a year in total, with 1,400 productive hours after holidays, training and non-chargeable time, has a cost rate of £30 an hour. Multiply each project’s timesheet hours by that rate and record the result as the project’s labour cost, in a project report or management journal. Owner-managers should include their own time at a notional rate, or the report will flatter every job they work on.
Worked example: a kitchen installation
| £ | |
|---|---|
| Income (quoted £14,000 + one variation £900) | 14,900 |
| Materials | −6,200 |
| Electrician (subcontractor) | −1,450 |
| Skip hire and parking | −380 |
| Labour: 96 hours × £30 | −2,880 |
| Project contribution | 3,990 |
| Contribution margin | 26.8% |
The quote assumed 70 hours of labour. The extra 26 hours cost £780, and the variation recovered less than that. That is the kind of finding that changes the next quote.
Overheads: contribution first, full cost second
Contribution (income minus direct costs and labour) is the most useful figure for comparing projects. To know whether a project covered its share of overheads, add an overhead recovery charge, for example a rate per labour hour based on budgeted overheads divided by budgeted productive hours. Keep the rate simple and update it once a year; the method is the same as in shared cost allocation. Projects are best for time-limited jobs; for ongoing divisions of the business, use cost centres instead.
Unfinished projects at month end
A project that runs across a month end will look wrong in any one month: costs arrive before the invoice, or a large stage payment arrives before the work. Two adjustments keep monthly figures honest:
- work done but not yet invoiced is accrued income or work in progress; see unbilled revenue at period end;
- money invoiced ahead of the work is deferred income; see deferred income and revenue recognition.
For decisions, judge a project on its whole life, from first cost to final invoice, not on one month.
Reading and acting on the results
Each month, list active and recently finished projects with quoted margin, actual margin to date and forecast final margin. Then look for patterns rather than individual disappointments:
- By type of job: are small jobs consistently less profitable than large ones once travel and set-up are counted?
- By client: does one client generate repeated unpaid variations or slow sign-off?
- By estimator: are some quotes systematically light on labour?
- Variations: is extra work being done before it is agreed and priced?
Use the findings to adjust quoting rates, minimum job sizes and payment stages. The goal is not a perfect report; it is to stop repeating the job that loses money. The variance analysis after month end guide shows how to present the differences between plan and actual.