Project margin and billable utilisation: what the hours tell you

In brief

• Hourly work earns revenue from billable hours; fixed-price work from the contract sum. Costs include all project work and other project expenses.
• The margin percentage is calculated on revenue (margin ÷ revenue × 100), and the same formula is kept from one period to the next.
• Billable utilisation is the share of billable hours in the hours worked, and the denominator is chosen before the first report.
• In a fixed price the revenue is locked, so every hour beyond the budget comes straight out of the margin.

Project margin shows what remains of revenue after labour and other project costs. Billability shows what share of working hours is billable. Together, they help you see where work is profitable and where pricing or delivery needs to change.

Use the calculator at the end of this guide to try the example figures or an estimate for your own project.

Two rates on the same hour

Every hour recorded on a project is met by two rates.

The cost rate is the internal cost of an hour, decided by the organisation itself and used to calculate the cost side of the project. It is a parameter of the calculation: the organisation picks the level at which it wants to measure the cost of work in projects and keeps the same level in every project so that they stay comparable with each other. The cost rate is usually set per role (fitter, designer, project manager), and it belongs to management and project finance data.

The sell rate is the hourly price billed to the customer. It is agreed in the quote or in the framework agreement and can vary by role, type of work or customer; overtime or weekend work often gets a rate of its own.

Each rate is given an effective date. When the price list rises at the turn of the year, the new rate starts from the chosen date and earlier weeks are still calculated with the old rate. Without an effective date a price increase changes an already reported margin retroactively, and last year’s figures look different every time from how they looked when they were last read.

When there are several rates, the order in which they match is decided once: the most specific match wins, so a rate given to a person on a project beats the project’s rate, which beats the person’s rate, the role’s rate and the organisation’s default rate.

Billable and internal hours

A billable hour belongs to the work agreed with the customer. Internal working time includes administration, sales, training and internal development. Absences are treated separately: they affect available capacity but are not hours worked.

Billability is settled line by line, not project by project. Even a billable project contains hours that are not billed: rework caused by one’s own mistake, guidance that was not part of the quote, or an internal meeting recorded on the project. Those hours belong to the cost side in full and to the revenue side as zero, and that is exactly why they have to be recorded rather than left out.

There are three states to keep apart, and reports often mix them up:

The difference between billable and billed hours is work awaiting invoicing. Check why that amount is growing: it may reflect the agreed billing schedule, missing approvals or an unclear right to invoice.

Margin in euros and as a percentage

The following calculation can track an hourly project. A fixed-price project’s revenue comes from the contract sum, not the number of hours. This is a project-management calculation; accounting revenue recognition is assessed separately.

• Revenue = billable hours × sell rate (plus billable expenses, materials and subcontracting)
• Cost = all hours recorded on the project × cost rate (plus the cost value of purchases and expenses)
• Margin = revenue − cost, and margin percentage = margin ÷ revenue × 100

Include project work that is not billed to the customer in costs. Omitting it overstates the margin. The margin percentage cannot be calculated with this formula when revenue is zero.

The margin percentage is calculated on revenue, not on cost. The same margin in euros gives a different figure if the ratio is calculated on another basis, and two projects become incomparable if the formula changes in between. The formula is chosen once and written into the definition of the report.

Billable utilisation tells you how much of the work ends up on an invoice

Billable utilisation is the share of billable hours in the hours worked:

billable utilisation = billable hours ÷ hours worked × 100

The figure is used at three levels, and they answer different questions. A project’s billable utilisation tells you how much of the work sunk into the project is sold to the customer. A person’s billable utilisation tells you how their time divides between customer work and internal work. The organisation’s billable utilisation tells you how many sellable hours the whole staff produces.

The denominator has to be decided before the first report. There are two options: all recorded hours worked, or the theoretical available working time with holidays and absences deducted. The first tells you where the work done went; the second tells you how much sellable capacity was available. Either will do, as long as the same choice holds every month and the figure is stated alongside the report.

Check what billability includes. One hundred per cent can be correct for a limited period or an individual project. Across the organisation, sales, onboarding and other internal work must also be recorded consistently.

Example: an hourly-billed project

All the figures in this guide are fictional.

120 hours have been recorded on the project, 100 of them billable. The cost rate is €45/h and the agreed sell rate €95/h.

Revenue per hour worked is €9,500 ÷ 120 h ≈ €79/h. That is about €16/h below the €95 selling rate because 20 hours worked are not billed to the customer.

If ten of those hours had belonged to the agreed work and been billed, revenue would be 110 h × €95/h = €10,450, margin €5,050 and the margin percentage 48.3 %. Cost does not change at all: the work was done either way. The difference in margin came from whether the hour was recorded as the customer’s work or not.

Example: a fixed-price project and hours over budget

The contract sum is €12,000, the budget 120 hours and the cost rate €45/h. The actual is 150 hours.

In this example, 30 extra hours reduce margin by 30 × €45 = €1,350. During the project, review the scope and agree on any additional work before doing it. Use the actual effort in post-project costing to inform the next quote.

Actual revenue per hour worked is €80. This helps compare pricing and effort with similar projects. Ensure the comparison includes the same revenue and cost items: material sales can increase the figure without changing the hourly price of labour.

Example: a project in progress and the forecast

The same fixed-price project mid-work. The percentage of completion has been estimated at 60 per cent and 95 hours have been worked.

The margin forecast is €1,725 below budget. It assumes that remaining work will require the same effort relative to completion. Also review the effort estimate for the remaining tasks: a percentage calculation does not account for differences between project phases.

Assess remaining work separately. In this example, deriving completion directly from hours used against the original budget mathematically returns the forecast to that budget and hides overrun risk. Assess completed deliverables and remaining effort. An hours- or cost-based progress measure can be useful, but is not an independent forecast on its own.

Margin is reviewed monthly, not when the project ends

Margin is a derived figure, recalculated every time hours, rates or expenses change. Its usefulness depends on two things: how quickly the hours are in the calculation, and whether the figure is compared with something.

If the report uses approved hours, late approval also delays the margin calculation. Agree on regular reviews and compare recorded work with the effort remaining. This gives you time to address a possible overrun during the project.

Three points of comparison are worth keeping side by side:

1. Planned – the effort and price in the quote or the resourcing.
2. Actual – confirmed hours at the rates that were in force.
3. Billed – what has actually been sent to the customer.

The differences between the three figures tell you different things. The difference between planned and actual is the estimation of effort. The difference between actual and billed is a delay in invoicing or work left unbilled. When both differences are small, the margin is reliable.

The practical rhythm has three steps: hours are approved weekly, margin and billing are reviewed monthly, and when a phase or a project ends, post-project costing is done, placing the actual hours into the structure of the quote line by line. The post-project costing produces the effort estimate for the next quote.

When projects are divided into phases with hour and euro budgets of their own, the overrun shows at the phase where it arose. At the project total level the first phase’s overrun is hidden by the second phase’s underrun, until both have been done.

Time tracking reveals four things about margin

Unrecorded hours. Work that is not recorded does not show as cost, so the project looks more profitable than it was. The error multiplies into the next deal: the quote is calculated on too small an effort, and the same underpricing repeats.

An underpriced quote. The realised hourly rate splits the error in the quote in two: the price was wrong or the effort estimate was wrong. The price list fixes the first, post-project costing the second.

The real share of internal work. When internal work is recorded on tracking targets of its own, its amount can be measured. Without a record of it, it spreads across projects at random and eats into their margin without explanation.

Work awaiting invoicing. Regularly review billable hours that have not yet been invoiced. The time breakdown helps verify the billing basis and resolve any missing approvals.

The contract decides what can still be fixed in the margin

The pricing model affects workload risk. Hourly work can be billed under the agreed terms; with a fixed price, higher costs reduce margin unless a change is agreed. A cap limits charges for the agreed scope. Compare models in fixed price or hourly work.

Four points are worth spelling out in the quote, because all of them end up in the margin calculation later:

• What the price includes and excludes. Clear scope helps distinguish extra work from the original delivery.
• How additional work and change requests are ordered. Written approval before the work starts; an agreed hourly rate or a fixed additional price.
• How travel, materials and subcontracting are billed. At cost, with a multiplier, or by the price list.
• When billing happens. As milestone payments, monthly by actuals, or after completion. The billing rhythm does not change the margin, but it decides when the margin turns into money.

During the contract, margin is affected by effort, delivery methods and costs. The parties can agree to change price or scope; additional billing needs a contractual basis.

Checklist

Monthly check of the project’s finances:

• The month’s hours are recorded and confirmed by everyone who worked on the project, including the project manager and sales.
• Every hour recorded on the project has a billability, and the number of lines whose billability is unresolved is zero.
• The sell and cost rates that came into force in the current period have been checked and their effective date matches what was agreed.
• The difference between billable and billed hours has been gone through, and every waiting batch has a reason and a date.
• The actuals have been compared with the budget by phase, not only at the project total level.
• The percentage of completion of a fixed-price project has been estimated from the content of the work, not from the hours consumed.
• The forecast has been updated: the remaining effort times the cost rate plus the cost accrued so far.
• The margin percentage has been calculated with the same formula as in the previous period (margin ÷ revenue) and the change from the previous month has been explained.
• Billable utilisation has been calculated from the agreed denominator, and the deviation from the target has been traced to a person or a project.
• Work outside the agreed content has been recorded as additional work or a change request and the customer ordered it before the work was done.
• Purchases, materials and subcontracting have been allocated to the project and billing them onwards has been settled line by line.
• The deviations have been gone through with the project owner, and for each one it is known whether it is corrected in the price, in the scope or in the schedule.