Common Misconceptions About Project Profitability
- Misconception: Project profitability means always striving to hand in projects on time.
While timely project deliveries are always good, they have nothing to do with project profitability. More often than not, companies that strive to achieve a faster delivery date end up suffering the consequences of being paid for fewer work hours, thus reducing the company’s margin.
- Misconception: Project profitability means always having as many projects as possible.
In many cases, new companies pile up a wide range of projects without giving a second thought to the company’s ROI (Return of Investment).
Having many projects on the roster might seem like a good idea, but the company won’t be able to earn a large profit unless all of those are highly profitable.
- Misconception: Project profitability means being hard at work.
Working long hours doesn’t exactly mean that you will be in a profit. A project is also considered profitable when it’s possible to put in less work in less time while still achieving positive results and delivering great work to your clients.
When Does a Project Make a Profit?
To make things clear, profits don’t equal the money you get from your clients. Profits are the money that a company earns after completing a project and factoring in the expenses – or doing a resource utilization – including salaries, equipment, expenses, etc.
Basically, profits are the figure you’re left with after you subtract the resource utilization from the billing costs.
Let’s see an example. Imagine that you’ve just completed a project, and you’ve billed your client $1,000 USD. If you spent $650 on the project expenses, you’re running a $350 profit.
Why Do Profitable Projects Matter?
- Survival and growth.
In a nutshell, profits keep companies going and help them to grow and thrive in the open market.
- Rational business moves.
Project profitability analysis helps companies decide which projects, tasks, or clients they should prioritize. By utilizing this information, companies can get a clearer insight regarding their ideal clients, types of suitable and profitable projects, ways to attract those kinds of clients, and more.
- Team alignment.
When a company knows its ideal client type and the most profitable projects for their line of work, the management teams can bring every employee on the same page regarding project operations, starting from the project team workers, sales, marketing, etc.