When you price out a project for a client, you’re likely factoring in a mix of time and materials. To make your project profitable, you need to ensure you’re considering the right amount of time for your projects as well as the appropriate rate.
Cost Rate vs. Billable Rate
Profit on labor costs comes down to the difference between your cost rate and your billable rate. Cost rate is your internal cost – what an employee or contractor costs your business. For employees, you’ll want to factor in all of their costs, including salary & benefits.
The billable rate is the rate that you charge your customers for the work. Your billable rate is what you would use in invoicing your clients.
The difference between the cost and your billable rate is your hourly profit.
Estimated vs. Actual Hours
Once you’ve ensured that you’re charging enough for your work per hour, you need to do an accurate job of forecasting the amount of work required to complete the project.
The first time you run a project, you’re likely going with gut instinct and your previous experience to estimate your hours. But once you get into project execution – particularly if it’s the kind of project that you want to run in the future, your team should track the amount of time they spend on each task.
Comparing your estimated versus actual hours gives you insight into project profitability as well as performance.
Actual Hours Exceed Estimated Hours
In some projects, your actual hours will exceed your estimated hours. This has several impacts on your business:
- Lower project profitability. If you have a fixed price that you have already agreed to with your client, then chances are you’ll have to take the extra expense out of your profit.
- Delayed delivery. When project tasks take longer than expected, the entire project can deliver later than anticipated.
- Reduced team availability. Not only will a task that takes longer than expected impact the delivery of the project you are currently working on, those delays can also affect the work your team is doing on other projects.
- Lower quality output. If you’re told that you only have an hour to run a marathon – and it normally takes you over three hours – chances are you may cut a few corners. The same is true with your team members when they don’t have enough time to do a task well.
Estimated Hours Exceed Actual Hours
Of course, there’s also an instance in which you estimate that a project will take longer than it actually does. While this is a better situation, it also comes with impacts:
- Improved project profitability. If you have a fixed price that you have already agreed to with your clients, and it takes less time than you built into your cost, then you will benefit from improved profitability.
- Earlier delivery timelines. When the work is done faster, you can deliver projects to your clients faster.
- More resource availability. Your team members will have more time to work on other project tasks if they’re able to complete some tasks faster than your estimates.
Improving Profitability Outcome
Monitoring your actual and billable rates, along with the actual versus estimated hours on your projects helps you do better project forecasting and improve your project profitability. Whether you discover that you can continue to charge the same amount – while getting the work done in less time, or that you need to change your pricing and billing models, by tracking your rates and time you’ll find ways to increase your profits.