As a business owner, you already know how easy it is to get caught up in the day-to-day management of a particular project. We all get tunnel vision at times and only focus on completing the tasks directly in front of us.
However, it is important to pull back and get a big picture of how a project is functioning and affecting the organization’s overall profitability. Project margin helps to solve this problem.
Many business owners don’t factor project margin into their project management analysis. However, this statistic affects more than tracking and forecasting a project. While many areas could be affecting an organization’s profitability, this article emphasizes how monitoring on the project level will contribute to your overall success.
What Is Project Margin?
Like profit margin, project margin is calculated by subtracting the costs from the revenue but on the project level. This deeper dive provides additional insight while concentrating on each project to determine which ones bring in the most revenue.
The costs associated with each project can be broken down into separate components. For example, you can track and observe the time your team devotes to a particular project and additional expenses such as equipment and third-party vendors.
An organization’s margin is divided into two parts: Current and projected.
- Current Margin – This value represents a specific point in time and is constantly fluctuating due to expenses going out and revenue coming in.
- Projected Margin – This value is the forecasted amount expected once the project is at completion.
To better understand project margins, you will need to track the current margin and then add in any scheduled cost in the future to predict the projected margin accurately.
Once you have this information, you can view the P&L of a specific project to discover trends.
P&L for Each Project
Let’s say your company is producing more new sales, and from the outside, your business appears profitable. However, you still aren’t creating consistent cash flow. Where do you look to find the source for where this money is going?
Many profitable organizations manage every project as a separate profit & loss (P&L). This approach reveals each independent project’s ability to generate profit. These metrics make it easy to refine your offerings and double down on the projects bringing in the most capital.
This level of insight makes it easy to predict outcomes, so you can still make changes in time to meet your project targets. By making these predictions, you can quickly move resources, adjust staff numbers or change your project scope before the deadline approaches.
Leading & Lagging Indicators
Project margin is a lagging indicator which means this metric evaluates only the current production and performance. Many business owners use leading and lagging indicators to track business trends month over month. Below highlights the main differences between these two statistics.
- Leading Indicator – these measurable factors define what actions are necessary to achieve your goals. They are considered leading because they point toward the possible future to meet overall business objectives. Examples used in business include a new product pipeline, new market growth, and brand recognition.
Leading indicators make business owners ask questions such as:
-How can we simplify processes to boost our outcome?
-Where can the team make improvements to reach our goals?
-What steps can be taken to speed up production or development?
- Lagging Indicator – these indicators can only be known after the event completion, and changes in the project landscape can cause companies to alter their course. Even though this factor is not revealed until the end, you can use this information to gain knowledge and prevent future mistakes.
Lagging Indicator questions could be:
-How much of the final product did we produce?
-What were the reasons we missed our deadline or goal?
-Did any other variables pop up to alter the course?
These indicators regularly track performance by creating benchmarks to meet KPIs and overall business objectives.
Since lagging indicators focus on outputs rather than outcomes, some organizations focus too much on the end results and miss opportunities that would have changed the outcome.
Project Margin Best Practices
Below are a few best practice recommendations when tracking and measuring your project margin.
- Resource planning: Project resources often change during the creation of a project. It is critical to have a plan to check and review any resource changes every week so the project margin data is accurate.
- Timesheets: Your business must have a reliable process for employees completing timesheets on time every week. Utilizing payroll software that automatically checks accuracy and alerts for overages might be a great solution to keep projects in check.
- Account reviews: Managers should have recurring monthly meetings with staff to review the leading indicators on specific accounts. These forecasts are a great way to head off potential problems to make strategic changes to the project.
- Benchmarking: As well as measuring and tracking project margin, it is also advantageous to compare your statistics with other organizations. This information can give you a bigger perspective and indicate if you spend too much time and resources in a specific area.
Protect your project margin with FINSYNC’s project management tools that allow you to identify issues in real-time — before delivering a project at a loss.