Project Profitability Analysis
If a Software company delivers projects in parallel, questions arise:
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Questions
☛ How much money company earns or loses per project?
☛ Is every customer worth the efforts?
☛ Would overall financial output be better if resources wait on bench until better project?
You came to the right place! We do know the stuff - not only the management accounting, and how software companies structure PnL, but also the underlying management practices - why it is better done this or the other way.
Formula
project Gross Profit = project Revenue - Cost of labor and materials directly related to the project
Basic concept seems simple, the devil is in the details - per what period of time? what costs are directly related to particular project? is your C-level fixed or variable costs? what about office rent?..
If management doesn't answer the questions correctly, rough estimations may lead company to wrong decisions: "no go" for actually profitable client, or wasting time with "black holes" jeopardizing business existence.
The devil is in the details
Things are more complicated for a Software company where:
✔ Several projects are delivered in parallel
✔ Employee lifetime is longer than average project's
✔ Engineering department acquires structure in addition to "projects" division
✔ Mix of project pricing models - fixed-price, T&M, SCRUM, out-staff
✔ People resources are less dedicated to projects: can be shared, or wait "on bench"
✔ Types of employment: "full-time in office on monthly payroll" is accompanied by part-timers, remote contractors or even freelance teams.
Such a company already implemented, or would fit the most - a Matrix org structure for its core employees:
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