PM4Profit Knowledge Center
Because we do things differently, the Project Management for Profit system uses different terminology than GAAP accounting and other common methods of financial tracking. Here are a few explanations of the more common PM4Profit terms that we use regularly to help you become familiar with the way that we use them.
Terms and Definitions
Gross Profit per Hour (GP/H)
The Gross Profit per Hour (GP/H) metric reflects the labor hours and materials already invested in the project, along with the hours and materials estimated to complete the project. This is one of the most important metrics used in the PM4Profit system. Every time a project task is worked on, a corresponding portion of the overall project gross profit is recognized as "earned." GP/H provides a full 360 view of the financial health of the project, whether it’s measured on a weekly basis or the cumulative total for the project
Here’s a simple example to help illustrate how the GP/H metric is measured: Let’s start our example project with revenue of $1 million. The estimated cost of materials, or ‘Cost Of Goods Sold’ (COGS) for the project is $600,000. When we subtract the COGS total from our $1M revenue total, we’re left with a projected gross profit of $400,000. Now let's jump ahead in time and visit the project at the one month mark of the schedule. At this point, our projected COGS total is still exactly $600,000 as budgeted. Next, we determine the project to be 10% complete and note that our team worked 500 hours on the project over the first month. This data translates to an average cumulative total of $80.00 GP/H for every hour our team has worked. The math for that equation looks like this:
$1,000,000 Total project revenue
- 600,000 Cost of goods sold (COGS)
-----------------
$400,000 Gross profit
x 10% Completion percentage achieved
-----------------
$40,000 Earned gross profit
÷ 500 Hours logged by the project team
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$80.00 Gross profit per hour (GP/H)
Project Revenue
Project Revenue is the total value of the contract for the project. If you’ve bid your job correctly, this sum should include expenses for materials, labor, profit, and G&A overhead expenses. If you’re working on an internal project, your total budget for the project is the “revenue” number.
Project Start Date
While this is extremely self-explanatory, we’ll go ahead and explain it here anyway. This is the date the project started. In most cases, it’s the day the contract is executed.
Completion Date
This is the target date the project requires completion by. The general rule is that this is the date that everything is ready to be turned over to the customer.
Cost of Goods Sold
This is where the material costs get figured into the mix. Because this category is so broad, many companies label it Cost of Goods Sold rather than calling it just ‘materials’. The Cost of Goods Sold (COGS) metric in the PM4Profit system includes the cost all of the materials and outside services that are required to complete a project. If we were building a house, it would include all the lumber, concrete, bricks, wiring and subcontractor services required to build the house. If you were creating a software product, it would include outsourced services, royalties paid to outside companies, and of course any materials purchased directly for the project.
Got all that? Good…..but be sure to remember this one critical point: The Project Management for Profit system, unlike GAAP, includes no in-house labor costs in COGS. It only represents the materials and services that you're buying from outside your company.
Total Costs Incurred To-date
This number reflects the actual incurred project expenses to-date. This data will usually come from your purchasing database. You may need to ask your accountant or accounts payable clerk to run a report for you that shows all of the incurred expenses that are related to your project. Be sure you get the most up to date information available in order to get the true financial picture of the project.
Total Future Costs Remaining
The ‘Future Costs Remaining’ number is one that is estimated by the project manager. Based on what’s left to buy for the project, the PM estimates the total COGS required to complete the project. When added to the ‘Total Costs Incurred To-Date’ number, the PM now has an estimated total COGS number for the project.
Actual Hours To-date
How many hours have been spent by your employees performing labor on this project? Pull the information from your time tracking system or ask your payroll clerk to run a report for the total hours spent on the project.
Estimated Actual Hours Remaining
In the PM4Profit system, project managers are regularly required to estimate the number of hours that will be required to complete the project. This is a critical step in calculating the project’s percentage complete metric.
Average Hourly Employee Wage
This is another self-explanatory item. If you were to add up all of the hourly employees and average them out, what is their average wage? This data is required to calculate your “cost per hour” metric.
Employee Benefits
As employees, we all enjoy benefits. This may include health & life insurance, 401K contributions, vacation and sick leave, paid holidays, and many other perks that employers regularly give to employees. The thing you have to remember is, the company has to pay for these benefits, and consequently they are a constant factor in figuring true expenses. This information is crucial to have in order to properly calculate your ‘cost per hour’ metrics.
Overhead Factor
Every business has some level of G&A overhead to factor into their overall business expenses. These are expenses that cannot be directly attributed to a specific project or task, but are required for all projects in some manner. These overhead expenses can include but are not limited to: management, accounting & marketing personnel, building rent, utilities, etc. In order to accurately accrue your project costs, you’ll need to understand how this is calculated. If you take your total overhead costs (rent, utilities, etc.) and divide them by your direct costs (labor, etc.) you get your ‘overhead rate’. For example, if your overhead costs are $30,000 and your direct costs are $60,000, your calculated overhead rate would be .5. Once you establish this benchmark you should check it regularly to make sure that your business is staying as profitable as possible.