Project Finances for Project Managers

What is Project Billing (Revenue)?

While almost every project has a cost and budget, Project Billing only comes to life when you have a paying Customer. At Easy Projects, we use the following definition:Project Billing or Project Revenue is the total amount of money a Customer pays for a project.

Similar to Project Cost, Project Revenue can be represented as multiple metrics, such as:

  1. Target Revenue

    The expected total amount of money your Customer will pay for this project. If your project Billing Type is Flat (Fixed) Fee, your Target Revenue is equal to Project Fixed Fee. Otherwise, if your project Billing Type is Time & Material, you should set your Target Revenue at the amount you plan to collect from the Customer and still make a profit (more on it later).

  2. Actual Billing

    the amount of money matching the work you are ready to bill your customer for. Actual Billing is the sum of all Actual Time spent on the project multiplied by the Billing Rates plus all Actual Billable Expenses and Flat Fees of all completed activities. Ideally, at the end of the project, Actual Billing should equal or be greater than Target Revenue.

  3. Estimate at Completion (EAC) Project Billing (Revenue)

    Summary of the Actual Billing and all remaining Labor Billing, remaining Planned Billable Expenses plus Flat Fees of all unfinished activities. Ideally, the difference (Revenue Variance) between Target Revenue and EAC Project Revenue should equal or be greater than zero.

What is Project Profit?

This one is easy. At Easy Projects, we use the following description:

Project Profit is the difference between Project Revenue and Project Cost.

Naturally, you want to collect more money from the Customer than it costs to complete your project.

Below are the different types of Profit metrics throughout the project lifecycle:

  1. Target Project Profit

    The expected delta between Project Revenue and Project Cost at the end of the project. This target can be tracked as an absolute number in your project’s currency or as a percentage, often referred to as Profit Margin.

  2. Actual Project Profit

    The real-time difference at any given moment between Actual Project Revenue and Actual Project Cost.

  3. Estimate at Completion (EAC) Project Profit

    The real-time difference between EAC Project Revenue and EAC Project Cost.

Project Profit

If you are charging Customers for your services, essentially there are two types of agreement on how you will charge them:

  1. Flat Fee – no matter how much time you spend on the project and what kind of expenses you have, you agree with a customer on a fixed amount that you will charge.For example, a client is charged $50K for a project. Clients are not charged for time or expenses. Instead, these are tracked for internal cost calculations and reference.
  2. Time and Material – with this approach, the customer agrees to pay for the actual billable hours spent on the project and cover certain billable expenses or fixed costs.

In the case of Time and Material billing, there are multiple ways to charge for your team and contractors’ time spent on the project.

Resource Hourly Rate – the billing amount will be calculated based on the Hourly Billing rate specified for each employee, regardless of what project they are working on.

Project Hourly Rate – the billing amount will be calculated based on the Hourly Billing rate specified for the entire project, regardless of who is doing the work.

Customer Hourly Rate – all projects done for this Customer will be billed based on one specific rate, regardless of who is doing the work.

Activity Hours Rate – billing will be based on the rate’s set for the project’s individual activities (tasks), regardless of who is doing the work. With this option, it is possible to use a combination of hourly and fixed cost tasks.

Rate Cards – this is the most flexible option, suitable for complex billing situations. With rate cards, different people might have different rates in various projects, depending on their role.For example, Linda can be a designer with a billing rate of $150/hr in Project A and can act as a Senior Design Lead in Project B with a billing rate of $200/hr.

Further Reading:

Once you have agreed with the customer on the billing type, you also probably want to decide on the payment schedule (when and how much the customer will pay you). Such arrangements vary by customer and project; however, it is common to have a fixed installment schedule for the Flat Fee projects.

For example, 25% of the project cost will be billed upfront, 50% when the working prototype is delivered, and another 25% when user acceptance testing is completed. Additionally, you can have some type of recurring payments (monthly or bi-weekly) for the Time & Material billing.

It is useful for a Project Manager to be able to track Schedule (or Planned) Payments against the Actual Payments to always know what is outstanding and when to expect the next tranche.