Project Finances for Project Managers

Additional Project Financial Metrics

While Cost, Budget, Revenue, and Profit are the most critical numbers for project finances, some additional metrics are also beneficial to measure and track.

Shows how much work has been completed that has not been billed to the Client yet. This metric is often used in milestone-based billing scenarios where you have to ensure you are billing appropriately the amount of work done.

WIP helps Project Managers track their projects’ financial progress by knowing what has been billed and what is available to bill (WIP). This information can proactively manage a project’s budget and help discover any potential cost overruns.

Work In Progress Formula = (1 – (Total Billed / Total Project Billing)) * 100%

Earned Value Analysis (EVA) helps Project Managers evaluate the effectiveness of their overall project schedule and budget. EVA uses three factors: cost, schedule, and scope, to predict completion dates, future team performance, and the likely end cost.

EVA objectively measures project performance through these two parameters:

  • Cost Performance Index (CPI) – shows how well the project is performing relative to the project budget.
  • Schedule Performance Index (SPI) – calculates how well the project is performing relative to the project timeline.

CPI and SPI are calculated as follows:
CPI and SPI are calculated

Usually, if either CPI or SPI has a value less than 1, your project is at risk, and if both of these indicators are below 1, then your project is definitely in trouble.

Further Reading:

Utilization rate is another vital project health metric that shows how well you are utilizing your resources. Essentially, it is a ratio between the total billable hours spent by each resource to their available hours and is calculated as a percentage.

Utilization Rate = Billable Hours / Total Available Hours * 100%

For example, if your team has marked as billable 800 hours out of 1,000 hours available, your Utilization Rate would be 80%.

Utilization rate is helpful to determine if you have enough billable work for your resources. If this number is low, it means your team is spending way too much time working on internal projects.

Realization Rate metric can be more suitable for professional services organizations since it calculates the ratio between total billed hours compared to the total available billable hours.

Realization Rate = Total Billed Hours / Total Billable Hours * 100%

For example, your engineering team of 3 people has a total of 480 available hours per month. 30 Hours are allocated to internal training, and the remaining 450 hours should be spent working on paid engagements. In reality, only 315 hours were billed to the customer.

Realization Rate = 315 / 450 * 100% = 70%

A low realization rate would indicate that you are not using your resources profitably.

Not to be confused with Realization Rate, Realized Rate shows your effective billing rate based on the Realization Rate and your resources’ billing rate.

Realized Rate = Realization Rate * Billing Rate ($)

For example, Linda, your Lead Engineer, has a billing rate of $120/hour. Her realization rate is 75% (meaning that Linda only bills 75% of her available billing time per month). Linda’s Realized Rate will be 75% * $120/hr = $90/hr

Realized Rate is useful to determine how profitable your resources are and whether you need to increase your billing rates or the number of billable hours.