How to measure project financial performance in your consulting firm

Research shows that adopting a Professional Services Automation (PSA) tool is one of the best ways to boost performance and growth within your consulting firm.

A 2024 independent study by The Consultancy BenchPress found that consulting firms using a PSA had 19% higher gross margins than those using spreadsheets, as well as a 40% higher operating profit.

These firms also grow revenues faster, can expect a much higher revenue portfolio under the wing of each of its partners, and are more tuned into measuring KPIs regularly.

The benefits of having an integrated (eco)system are significant both in terms of operational efficiency and time & cost saving, as well as key insights into the performance of a consulting business, automating core processes, and supporting faster and better decision making that is crucial to be successful in a highly competitive market.  

Interested readers can find more detail on the benefits of a PSA and an overview of our 5-point performance measurement framework here.

Adopting a measurement framework appropriate for your needs can really help you see the areas of your business that are working well and those that might need some attention if you want to stay on track and hit your performance goals.  

We think of a PSA as an operations platform that supports the core consulting processes across the areas of sales and pipeline, revenue and margin, project financial performance, invoicing and WIP, and people and resourcing – plugging that “operations black hole” between your CRM and your finance system.

So, let’s take a deeper look into which metrics we should be measuring to see how we're performing in terms of project financials.

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Budget vs actual

This measure tracks the actual performance of the project against budget in terms of total time consumed or fees and costs delivered and incurred compared to budget.  Let’s break that down a little bit:

Time-based

• Calculating actual time: Total actual time booked to date in timesheets

• Calculating budgeted time: Total time estimated to complete the project

• Budget v Actual: Compare the actual time booked to the total budgeted time to calculate how much of the budgeted time has been consumed so far

Fee-based

• Calculating actual fee: Total actual time booked to date in timesheets x charge rate

• Calculating budgeted fee: Total time estimated to complete the project x charge rate

• Budget v Actual: Compare the actual fee earned to the total budgeted fee to calculate how much of the budgeted fee has been consumed so far

Cost-based

• Calculating actual costs: Total actual time booked to date in timesheets x cost rate

• Calculating budgeted costs: Total time estimated to complete the project x cost rate

• Budget v Actual: Compare the actual costs incurred to the total budgeted costs to calculate how much of the budgeted cost has been incurred so far

Project recovery rate

This is used to help identify projected or actual project over/under runs, in terms of the value of the total estimated (or actual) time to complete the project compared to the project completion as a % of total budgeted fees.  

This can be calculated as:

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Project Fee Value / Actual Time Value as a percentage

where 

Project Fee Value = Total Budget Fees x % Complete
Actual Time Value = Time Booked to Date x Charge rate

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Note: Calculating % complete:

• Step 1 - estimate of the actual amount of work to complete the project

• Step 2 – divide the estimate by the total planned hours to give you % of the project remaining to complete

• Step 3 - 1 minus this figure represents the % complete

• Step 4 - Multiply the % complete by the total project fees to calculate recognized revenue

% complete compared to % time used

This comparison measure can be used as an early warning indicator to assess whether the actual time booked to a project as a percentage of the total budgeted time is running ahead or behind the project % complete (see calculation above).  

If the % time used is greater than the % complete this may indicate that more time has been consumed in delivery to this point than was expected and the project is running behind budget.  

Conversely, if the % time used is less than the % complete this may indicate that less time has been consumed in delivery to this point than was expected and the project is running ahead of budget.

% revenue recognized compared to % complete

Another early warning indicator measure, this compares how much of the project revenue has been recognized to the project % complete and is typically assessed at month end (when the revenue is recognized).  

If the % revenue recognized is greater than the % complete, this may indicate that too much of the total project revenue has been recognized in comparison to the progress through the project.  

As highlighted in my previous blog, this can lead to unhappy situations where, towards the end of an engagement, all the revenue has been recognized (the full contracted value of the project) but there is still work to do (and costs to incur) to finish the project off.

Project profitability (current and projected)

The ultimate measure for your project engagements!

Project profitability or profit margin is relatively simple to measure, being revenue minus costs, but there are few different ways that you can achieve this.

Project profitability (current)

Fee-based

• Calculating actual fee: Total actual time booked to date in timesheets x charge rate

• Calculating actual costs: Total actual time booked to date in timesheets x cost rate

• Project margin:  Actual fees to date minus actuals costs to date

% complete-based

• Calculating actual fees: % complete x total budgeted project fees

• Calculating actual costs: Total actual time booked to date in timesheets x cost rate

• Project margin:  % total fees to date minus actuals costs to date

Recognized revenue-based

• Calculating actual recognized revenue: Total revenue recognized to date

• Calculating actual recognised costs: Total actual time booked to date in timesheets x cost rate

• Project margin:  Actual revenue recognized to date minus actual costs to date

Project profitability (projected)

• Calculating actual fee (projected): Total budgeted project fees

• Calculating actual costs (projected): (Total actual time booked to date in timesheets x cost rate) + (Total projected time to complete x cost rate)

• Project margin: Total fees/revenue minus (actuals costs to date + projected costs to complete).

Effort/rate variance analysis  

This measure analyzes the underlying cause of project over or under-runs by highlighting either a variance in actual effort compared to budget, or a variance in actual charge rates compared to target charge rates for the individual consultants on the project.  

Let’s use an example to bring this to life.

Let’s assume Jonny had been allocated 7 days on the project at a daily charge rate of 1,600.  The expected total billable revenue would therefore be 7 days x 1,600 = 11,200.

Jonny’s target charge rate is 1,800 per day and unfortunately it took him 10 days to deliver it instead of the 7 days budgeted.

The additional 3 days at the agreed charge rate of 1,600 created a project over-run of 4,800, and the reduction in charge rate from 1,800 to 1,600 created a rate variance of 1,400, giving a total variance of 6,200.

In conclusion

Remember, it would likely be too onerous for you to be measuring all of these, so choose the ones that make most sense for you and your business.

In my next blog, we'll be stepping through Invoicing and WIP (Work in Progress) measures in more detail to explain how and why these measures help you understand your delivery projects and tracking and how profitability they will be.

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