Do you know which of your most recent projects generated the most profit after expenses? Are you sure each project not only generated income but covered its share of overhead?
A clear, well-organized record of your project expenses is vital if you want to guide your business toward more profitable sales and avoid costly mistakes. Knowing the true costs and profitability of each project empowers you to make good decisions and improve your bottom line.
In this article, we'll cover the key things you need to know about the expenses associated with your projects:
Project expenses include all the expenses that must be covered while your team works on a project, whether they’re directly incurred by the project itself or happening in the background. Each project must be considered to cover a share of the rent, utilities, support staff salaries, software subscriptions, marketing costs and other ongoing expenses to be profitable. Tracking the actual expenses related to your projects will give you the information you need to run your business successfully.
The right tracking system should:
When you know which projects are bringing in the most profit, you’ll know how to focus your sales efforts to maximize your business’s potential in the future.
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Let's explore two common ways of classifying project expenses: direct vs. indirect and fixed vs. variable.
The first classification deals with whether the expense is directly related to the project or not. Direct project costs are pretty straightforward, but business owners often neglect indirect costs — which can result in unprofitable sales or unexpected losses.
This is the most obvious category of project expenses because these costs are directly tied to the project itself. For instance, you may need to travel to meet with a client, buy special software or hire an outside contractor. Some direct project costs can be passed along to the client as expenses, while others are built into your base price or hourly rate.
Examples of direct costs for different types of projects include:
Direct costs can be fixed or variable.
These are costs that aren’t linked to a specific project but need to be paid. Indirect expenses are sometimes overlooked when a business sets rates or creates bids for projects.
Examples of indirect costs include:
These costs aren't directly associated with a project, but they do need to be paid out of project revenues. If your business completes an average of two projects per month, each project needs to cover its own direct expenses plus at least half the indirect costs of running your business for the month.
Indirect expenses can be fixed or variable.
Related: An Overview of Project Accounting with Accelo
A fixed cost is an item that has a set price, either per month or per project. A variable cost will change if the scope of the project changes.
Your office rent is an example of an indirect fixed cost — you must pay the same amount every month, whether you’re managing 10 projects or one project. Your phone bills, software costs and advertising supplies are other examples of indirect fixed costs.
Direct costs can also be fixed in some cases. For instance, if you need to buy a new tablet in order to complete a project, the cost of the tablet is attached to the project, but it is one set cost whether you work on the project for a week or a year.
Variable expenses are costs that grow as a project expands in scope, time or deliverables. If you pay contractors an hourly wage, that’s a variable expense. So are rented equipment costs or a travel allowance for your staff. Variable expenses are usually built into a profitable hourly rate or price per deliverable, along with a share of fixed expenses.
This refers to expenses that have already been incurred. For instance, if a client wants to cancel a contract before it’s complete, you’ll need to know what your sunk costs are in order to negotiate that cancellation.
Learn More: How to Calculate Overhead
There are a number of common ways to keep records of project costs. Some accounting software packages have built-in job cost features. Some business owners use spreadsheets or mobile apps to track expenses related to each project. Dedicated expense management software can give you the information you need to track project profitability in real time.
Now that you understand the different types of costs and expenses, determine the most efficient cost and expense management strategy for your business.
