How is it calculated?
Most project-based companies work out a job's profit by subtracting material and subcontractor invoices from the quoted amount. That figure is misleading, because the hours of your own team doing the work and the overheads that keep the company running don't come with an invoice.
- Apparent profit = quoted amount − materials − subcontractors − other direct costs
- Real profit = apparent profit − (hours worked × hourly cost) − (quoted amount × overhead rate)
- Break-even hours are found by dividing what's left after all costs other than team hours by the hourly cost. If the job goes past these hours, it starts losing money.
Hours are where estimates go wrong most often. The hours planned when quoting and the hours spent by the time the job is done are rarely the same, and the gap only shows if hours are booked to the job. In a system where hours are logged against jobs every day, you can follow this picture while the job is still running, not after it's finished. More on this in the article how to measure project profitability.
Frequently asked questions
What overhead rate should I enter?
Add up last year's costs that aren't booked directly to projects, such as rent, office staff, vehicles and software, and divide by your annual revenue. The result is your overhead rate. If you don't know it, start with 10–15% and then try the result with 20% too.
Where do I get the hourly cost from?
Divide an employee's total annual cost to you by the hours in the year that can actually be billed to jobs. The hourly cost tool does this and carries the result over here.
Why is the gap between apparent and real profit so big?
Costs that come with an invoice (materials, subcontractors, transport) are easy to see. The hours your own team spends on the job and the company's overheads don't come with an invoice, and are often left out of the calculation altogether. The gap is exactly these two items.
Are the numbers I enter sent anywhere?
Not unless you send them. The calculation is done entirely in your browser and nothing is saved. Your figures reach us only if you fill in and send the “Evaluate my result” form, so that we can get back to you.