Project Finances for Project Managers

Project Budget Management. Use Cases and Examples

Now that we have covered the breakdown of project finances, we will review a few different billing scenarios and see which financial metrics would be useful in each case.

1. Managing the budget for an internal project

Scenario: You need to organize a company retreat.

Financial needs:

  • Prepare a budget for the retreat.
  • Monitor costs as the preparation goes on.

Initial Setup:

  1. Create a detailed project plan (WBS)
  2. Specify estimated hours for the tasks, where internal labor costs are expected (for example, Marketing department acting as a profit center and charging internally for its work on the retreat signage)
  3. Add planned expenses for each task in the plan that has any costs associated with it (for example, accommodation booking, catering, canoe rental, etc.)

    Initial Setup

  4. Set aside an additional budget for unexpected expenses and force majeure.
  5. Combine estimated labor cost (24 hours * $50/hr = $1,200), additional contingency project budget ($4,500), and all planned expenses ($18,600).
  6. Your total project budgeted cost comes to $24,300.

    Budget

Metrics to track:

  1. As the project progresses, compare the Actual Project Cost and Estimate at Completion (EAC) Project Cost with Project Budget to make sure you’re staying on track.

    Metrics to track

2. Managing a Flat Fee Project

Scenario: The Customer Success team needs to implement and deploy a software platform for a customer. Implementation will be sold as a fixed cost contract. This project will only involve labor costs, with no expenses to occur.

Financial needs:

  • Determine the value of the contract using a 30% profit margin requirement.
  • Make sure certain high-risk activities do not exceed their budgets.
  • Monitor overall internal labor costs.
  • Bill customer and track payments according to the agreed schedule.
  • Calculate project profitability.

Initial Setup:

  1. Create a detailed project plan (WBS). Use a template if available.
  2. Assign employees to each task.
  3. Specify estimated hours for all tasks (activities).
  4. Make sure all resources involved in the project have their internal rates specified.
  5. Add the budget for all activities that have a previous demonstrated history of potentially exceeding estimated costs.


    Add the budget for all activities

  6. Set aside an additional budget for unexpected expenses and force majeure.
  7. Calculate Estimate at Completion (EAC) Project Cost: Labor Cost ($7,000) + Additional Project Budget ($1,000) = $8,000.
  8. Calculate Project Flat Fee based the desired 30% Profit Margin. Project Fee = Project Cost ($8,000) + 30% = $10,400.

    Calculate Project Flat Fee

  9. Setup agreed upon payment schedule, i.e., 25% prepayment, 20% when the initial platform configuration is done, 35% when the training is completed, 20% when User Acceptance Testing is completed.

    Payment schedule

  10. Make sure your team tracks their time.

Metrics to track:

  1. For high-risk activities, monitor and compare their Activity Actual cost with Activity Budget.

    Activity Budget

  2. Compare Actual Project Cost, EAC Cost and Estimated to Complete (ETC) Cost with the overall Project Budget.

    the overall Project Budget

  3. Record and track all received payments.

    Record payments

  4. Monitor project profitability.

    Monitor project profitability

3. Time & Material Engagement with a Profit Margin Goal

Scenario: A time and material contract has been signed for an IT Support project. An in-house team, as well as 3rd-party contractors, will be involved. Different billing rates and fixed billing amounts need to be applied based on the type of activity performed.

Financial needs:

  • Set different billing rates based on the type of activity performed (hourly or fixed cost).
  • Add a 15% billing markup for all jobs performed by vendors and contractors.
  • Monitor overall internal project costs and maintain a 30% profit margin.
  • Monitor billable hours compared to total available hours to maintain at least 75% Utilization rate.
  • Bill customer monthly.

Initial Setup:

  1. Create a detailed project plan.
  2. Assign employees to each task.
  3. Specify estimated hours for all tasks (activities).
  4. Make sure all resources involved in the project have their internal rates specified.
  5. Set Project Billing Type as “Time and Material” and choose “Activity Rate” as a billing preference.

    Activity Rate

  6. Specify hourly billing rates for activities that should be billed based on time (both for internal team and 3rd-party contractors).

    Specify hourly billing rates

  7. For all fixed cost activities performed by 3rd parties:
    • Add them as actual non-billable expenses.

      non-billable expenses

    • Add them as fixed-fee activity billing costs with an extra 15% markup.

      fixed-fee activity billing

  8. Add all labor-based payments to 3rd parties as non-billable expenses as well.
  9. Set a 30% Profit Margin as a target to track.

    Profit Margin

Metrics to track:

  1. Compare Actual Project Cost, EAC Cost, and Estimated to Complete (ETC) Cost with the overall Project Billing.

    Overall Project Billing

  2. Record and track all time logs and expenses.
  3. Monitor project profitability.

    Monitor project profitability

  4. Compare Billable and Non-Billable Time Entries to monitor Utilization Rate.

    Billable and Non-Billable Time Entries

  5. Run monthly billing reports to charge the customer for all unbilled activities.

4. Time & Material Engagement with Rate Cards

Scenario: A time and material contract has been signed for an engineering project. Billing will be based on the role a person has in the project.

Financial needs:

  • Set different billing rates based on the role, skills, and seniority of each team member.
  • Set a target revenue of $250,000 and a target profit amount of $50,000.
  • Monitor overall internal project costs.
  • Bill customer monthly.

Initial Setup:

  1. Create a detailed project plan.
  2. Assign employees to each task and assign them the appropriate role in this project.
  3. Specify estimated hours for all tasks (activities).
  4. Make sure all resources involved in the project have their internal rates specified.
  5. Set Project Billing Type as “Time and Material” and choose “Rate Cards” as a billing preference.
  6. Specify Rate Cards for this project.

    Specify Rate Cards

  7. Set a $250,000 revenue target and a $50,000 profit target.

    revenue

    profit

Metrics to track:

  1. Compare Actual Project Cost and Actual Billing to track real-time project profit, and EAC Cost vs. EAC Billing to track expected profit.
  2. Record and track all time logs and expenses.
  3. Monitor project total billing (revenue) and profitability.

    Monitor project total billing

  4. Run monthly billing reports to charge the customer for all unbilled activities.

Now that you have read Easy Projects’ Ultimate Guide to Project Finances, you should feel more confident in understanding your future projects’ finances. For additional help on project finances, we invite you to learn more about Easy Projects’ Financial Module. The Financial Module makes it easier to accurately track project finances as it has all of the features we have covered in this guide built into the work management platform. 

Take the next step in ensuring all of your projects are always profitable by requesting a tour of  Easy Projects.