Project profitability is what a project earns after every cost of delivering it. Take revenue, subtract tracked hours at a fully loaded cost rate plus direct expenses, then divide by revenue to get margin.
Most teams get the formula right and the inputs wrong. The usual culprits are a salary-only cost rate, hours that never reach a timesheet, and budgets nobody checks until the invoice. This guide covers the calculation, a worked agency example, and how to build a project budget that keeps margin visible.
Quick Answer
How do you calculate project profitability? Subtract total project cost from project revenue. Total cost is every tracked hour multiplied by that person’s fully loaded cost rate, plus direct expenses such as subcontractors or licences. Divide the profit by revenue for the project margin. A £24,000 project that costs £15,000 to deliver makes £9,000 profit, a 37.5% margin.
What is project profitability?
Project profitability measures whether a single client project made or lost money once delivery costs are counted. It differs from company profit because it ignores costs that no project caused, such as the office lease or the finance team.
That distinction matters for decisions. A firm can be profitable overall while one client or one service line loses money every month. Project-level numbers show which work to price up, scope tighter or stop selling.
The project profitability view in Keito is built on the same idea: approved time, expenses and budgets sit together, so margin is visible during delivery.
What is the project profitability formula?
The profitability calculation formula has three parts. Labour is usually the largest cost in services work, so it gets its own line.
Labour cost = Σ (hours worked × fully loaded cost rate)
Project profit = Project revenue − (Labour cost + Direct expenses)
Project margin % = Project profit ÷ Project revenue × 100Project revenue is what the client pays: the fixed fee, or billed hours × bill rate on time and materials work. Direct expenses are costs you would not have without the project, such as freelancers, travel or project-specific software.
Two related numbers help explain the result:
- Effective hourly rate = revenue ÷ total hours worked. It shows what each hour really earned.
- Budget burn = hours used ÷ hours budgeted. It tells you early whether the margin is at risk.
You can test the arithmetic with the free margin calculator before building a spreadsheet.
Which cost rates do most teams forget?
The cost rate is where most profitability calculations go wrong. Many teams divide salary by working hours and stop there. That figure leaves out the real cost of employing someone.
A fully loaded cost rate adds employer on-costs and a share of overhead, then divides by hours actually available for project work.
| Line | Annual amount |
|---|---|
| Salary | £46,500 |
| Employer on-costs (employer NI, pension, benefits) at 20% | £9,300 |
| Overhead share (rent, software, management, admin time) | £11,700 |
| Fully loaded annual cost | £67,500 |
| Hours available for project work | 1,500 |
| Fully loaded cost rate | £45 per hour |
| Salary-only rate (£46,500 ÷ 1,500) | £31 per hour |
These are example figures, not benchmarks. Use your own payroll and overhead numbers. The point is the gap: the salary-only rate understates cost by £14 for every hour worked.
The available-hours figure deserves care too. Holidays, sick days, training and internal meetings all reduce it. Our guide to employee utilisation rate shows how to measure the hours people actually spend on client work.
Worked example: fixed fee vs time and materials
Here is an example agency running two projects in the same quarter. Both use the £45 fully loaded cost rate from the table above. The numbers are illustrative, but the pattern is common.
Project A, fixed fee. A website rebuild sold for £24,000, scoped at 260 hours. The team tracked 320 hours. Direct expenses were £600.
Project B, time and materials. A support retainer billed at £95 per hour. The team tracked 200 hours, but 24 were marked non-billable, mostly internal handovers and rework.
| Project A plan | Project A actual | Project B actual | |
|---|---|---|---|
| Hours tracked | 260 | 320 | 200 |
| Revenue | £24,000 | £24,000 | £16,720 (176 billed hours) |
| Labour cost at £45/h | £11,700 | £14,400 | £9,000 |
| Direct expenses | £600 | £600 | £0 |
| Project profit | £11,700 | £9,000 | £7,720 |
| Project margin | 48.8% | 37.5% | 46.2% |
| Effective hourly rate | £92.31 | £75.00 | £83.60 |
What the example shows
Each pricing model leaks margin in a different place:
- Fixed fee leaks through overrun. Sixty unplanned hours cut Project A’s margin by more than 11 points. Revenue never moved, so only the timesheet shows the problem.
- Time and materials leaks through unbilled hours. Billing all 200 hours would have earned £19,000 and a 52.6% margin. The 24 non-billable hours cost £2,280 of revenue.
- The wrong cost rate hides both. At the £31 salary-only rate, Project A looks like a 56.2% margin. The overrun disappears from view.
Our comparison of fixed price vs time and materials covers when each model suits the work. For the wider picture of earned income that never gets billed, read what is revenue leakage.
What is a project budget?
A project budget is the planned cost and effort for a project, set before work starts. In services firms it is mostly hours by role or task, priced at cost rates, plus expected expenses.
The budget is the baseline for profitability. Without one, you only learn the margin after the last invoice. With one, every week of tracked time tells you whether the project is on course.
Budgets can be set in hours, in fees, per task or per person. Hours suit capped retainers. Fees suit fixed-price work. Per-task budgets suit phased projects where one stage tends to overrun.
How do you create a project budget?
Build the budget from the scope, not from the price you hope to charge. Then check the price against it.
- Break the scope into tasks or phases. Discovery, design, build, testing and launch is a typical split.
- Estimate hours per task and role. Use tracked hours from similar past projects, not memory.
- Apply fully loaded cost rates. This turns hours into a cost budget.
- Add direct expenses. Freelancers, licences, travel and anything else the project alone will need.
- Add contingency. Size it to the uncertainty in the estimate, and track it as its own line.
- Set the price and target margin. If the margin is too thin, change the scope or the fee now.
- Load the budget into your time tracker. Track every hour against it from day one.
The last step is the one teams skip. A budget kept in a spreadsheet goes stale within a week. A budget attached to the project, as in project budget tracking, updates as people log time.
How do you manage a project budget during delivery?
Managing a project budget means comparing actual hours with planned hours often enough to act. Monthly is too late for most projects.
- Review budget burn weekly. Compare percentage of hours used with percentage of work complete.
- Approve time before it counts. Approved timesheets stop guesses and late edits from distorting the numbers.
- Flag scope changes as they happen. Log extra requests as change requests, not as quiet overruns.
- Set alerts before the limit. An alert at 75% or 80% leaves room for a client conversation.
- Cap hours where the contract caps them. For capped retainers, stop new time once the hours are used.
Industry context changes the detail. Architects often budget by work stage, as our guide to time tracking software for architects explains. Consultants tend to budget by engagement and person, covered in time tracking for consultants.
What does project profitability analysis look like?
Project profitability analysis compares margin across projects to find patterns. One project’s margin is a data point. Twenty projects show you where the business makes money.
Group the results in four ways:
| View | Question it answers |
|---|---|
| By client | Which clients are worth growing, and which need a price review? |
| By service line | Which offers make money at current rates? |
| By pricing model | Do fixed-fee projects overrun more than retainers? |
| By person or role | Where are senior hours going into junior tasks? |
Look at write-offs alongside margin. A project with a healthy margin and heavy write-offs means the team worked more hours than the client accepted.
If AI agents now handle part of your delivery, their cost belongs in the calculation too. Our guide to project profitability with AI agents shows how to add it.
What should project profitability software do?
Project profitability software turns tracked time into margin without a monthly spreadsheet rebuild. Whether it is a time tracker, a professional services automation (PSA) tool or a full ERP, check for these:
- Separate cost rates and bill rates for each person, with cost rates hidden from most users
- Budgets in hours, fees, per task and per person, with alerts before the limit
- Timesheet approvals so margin is calculated from reviewed hours
- Expenses linked to projects so direct costs sit next to labour
- Invoices built from approved time, so billed and worked hours reconcile
- Live reporting during delivery, not only after the project closes
Real-time project profitability tracking in an ERP for professional services is powerful but heavy to roll out. Many small and mid-sized firms get most of the value from a time tracker with budgets and cost rates. Our explainer on professional services automation covers where the larger suites fit.
In Keito, admins set an internal cost rate per team member alongside the bill rate. Projects carry hours, fee, per-task or per-person budgets, and capped hours budgets can refuse time once they are used. Compare features on the project profitability software page or see Keito pricing.
Key Takeaway
Project profitability is only as accurate as its inputs. Use fully loaded cost rates, track every hour and check budget burn weekly.
See project margin before the invoice goes out
Keito keeps tracked time, cost rates, expenses and budgets in one place, so margin is visible while you can still act on it.
Frequently Asked Questions
How do you calculate project profitability?
Subtract total project cost from project revenue. Total cost is tracked hours multiplied by fully loaded cost rates, plus direct expenses. Divide the profit by revenue to get the project margin as a percentage.
What is the difference between project profit and project margin?
Project profit is a money amount: revenue minus delivery cost. Project margin is that profit as a percentage of revenue. Margin is easier to compare across projects of different sizes.
What is a fully loaded cost rate?
A fully loaded cost rate is the true hourly cost of a team member. It adds employer on-costs and a share of overhead to salary, then divides by hours available for project work. It is usually well above the salary-only rate.
What is a project budget?
A project budget is the planned cost and effort for a project, set before work starts. In services firms it is mostly hours by role or task, priced at cost rates, plus expected expenses and contingency.
How do you create a project budget?
Break the scope into tasks, estimate hours per task and role from past projects, and apply cost rates. Add expenses and contingency, then check the price gives your target margin. Load the budget into your time tracker so actual hours are tracked against it.
How do you manage a project budget?
Compare actual hours with planned hours every week. Approve timesheets before they count, log scope changes as change requests, and set alerts before the budget runs out.
What is project profitability analysis?
Project profitability analysis compares margins across projects, clients, service lines and pricing models. It shows which work makes money at current rates and where write-offs or overruns repeat.