As a business owner, it’s easy to get caught up in the excitement of winning bids and landing large contracts. But if you’re not closely tracking the actual costs behind those jobs, especially labor, you might be leaving money on the table. Bigger projects don’t always mean bigger profits. In fact, some of your smaller, recurring maintenance jobs could be quietly outperforming your headline projects. That’s where a project accounting software comes into play, offering tools to track, analyze, and optimize your operations seamlessly.
At OMZY, we see a lot of service companies who know if projects are profitable intuitively without having the cold hard facts. Here are some steps that we recommend that our customers look at when they want to gauge the profitability of their project more closely.
Step 1: Make sure you can track your costs accurately.
Today’s project accounting software solutions like those integrated into Microsoft Dynamics 365 Business Central can track everything in your business from payroll and hourly rates to revenue and receivables, giving you a clear picture of where your money is going and where it’s coming from.
Once you have the right data, you need to make sure that you are allocating the costs to your different projects effectively. This will help you make smarter decisions, improve margins, and run a more efficient operation. Configuring these tools to match your business realities ensures you can focus on prioritizing profitability without risking inefficiencies.
Step 2: Start with the right questions (and use software to find answers!)
No, this doesn’t really require a detailed project accounting, but it will help you build your baseline for activities to come. Before assuming that large-scale jobs are your bread and butter, analyze your company’s current operations and answer vital questions like:
- How many employees do I have, and how many hours are they working each week?
- How many weeks per year are we actually working? (Don’t forget to factor in downtime due to weather, holidays, or other disruptions.)
- What’s our current profit margin, and what is our target?
By leveraging detailed reports generated by the software, you can access real-time data that highlights labor costs, profit trends, and operational gaps to make strategic adjustments.
Pro tip: Look at Microsoft Fabric (previously Microsoft Power BI) to see how you can link all of these different costs together. This way you can make it easier to slice and dice the information in a way that makes sense for you and your organization.
Step 3: Calculating your hourly rate (to ensure profitability)
An hourly billing rate is determined by adding a profit margin to the cost rate. These are the basics, but what you need to remember is that when calculating an hourly cost rate, businesses must not only account for all direct but also indirect expenses associated with an employee or a project. By including both these set of costs when coming up with an hourly rate, companies can more accurately forecast budgets while maintaining profitability.
- Direct costs: wages, benefits such as health insurance or retirement contributions, and payroll taxes.
- Indirect costs: overhead expenses like equipment maintenance, utilities, rent, and administrative costs that aren’t directly tied to a specific job but are crucial for overall operations.
Calculating a profit margin is a strategic step. It helps cover unforeseen expenses, downtime, and ensures your pricing remains both competitive and sustainable. The ideal margin will vary depending on your industry, the type of services you offer, and your business goals.
Read this article to learn more about typical profit margins in the services industry.
Step 4: Track and measure your budgets against costs and revenue
Imagine a scenario where your company takes on a large landscaping contract that promises $250,000 in revenue. At first glance, this seems like a lucrative opportunity. However, as the project progresses, unforeseen expenses begin to pile up. The equipment necessary for the job; mowers, soil aerators, and heavy machinery require extensive maintenance due to the constant workload. Repairs and maintenance costs, initially estimated at $10,000, balloon to $25,000 as breakdowns occur more frequently than anticipated. Additionally, the project's timeline stretches unexpectedly due to delays caused by weather and supply chain disruptions.
To meet the revised deadlines, your team is forced to work overtime. While your standard hourly labor rate is $20/hour, overtime pay jumps to $30/hour. Over the course of three months, your crew logs an additional 1,000 overtime hours, adding $30,000 in extra labor costs to your budget. Combined, the maintenance expenses and overtime wages now account for $55,000—more than one-fifth of your total revenue from the project.
Meanwhile, other costs such as materials, fuel, and administrative overhead remain unchanged at $125,000. This brings your total project expenditure to $180,000. Although this still leaves a profit margin of $70,000, unforeseen inefficiencies further erode your profitability.
For instance, the overtime hours result in diminished worker productivity, and frequent equipment repairs disrupt the workflow, causing additional delays. By the end of the project, your margin has significantly narrowed due to these cascading inefficiencies. What seemed like a highly profitable venture at the outset became an exercise in damage control, underscoring the importance of meticulous planning and cost tracking.
Step 5: Make job costing a continuous practice with software support
The key phrase here is “to date.” Job costing isn’t a one-time task, it’s an ongoing process. Using project accounting software ensures you have continuous tracking of your labor and material costs. Regularly updating the software allows you to avoid waste and plan more effectively. Think of it like meal planning: if you’re constantly cooking without checking what’s already in the fridge, you’ll end up wasting food (and money). The software helps you forecast needs and eliminate inefficiencies.
Food for thought: Why smaller jobs deserve a closer look
Large projects often come with additional risks, such as unknowns, scope changes, or unexpected setbacks. Smaller maintenance jobs, on the other hand, tend to be more consistent and easier to plan. Project accounting software can simplify this planning by predicting costs and tracking performance metrics for recurring jobs. For example, if your team has a monthly contract with the same services, you already know what tools and time are needed. That predictability, combined with accurate billing based on data, can translate into higher margins.
Profitability is in the Planning
Whether it’s a large-scale project or a routine maintenance job, profitability comes down to planning and precision. Maintenance contracts, in particular, can offer steady income and predictable costs, plus the potential for referrals and long-term client relationships.
By leveraging project accounting software integrated with tools like Microsoft Dynamics 365 Business Central, you can move beyond guesswork and build a business that’s not only profitable but also sustainable. The software empowers you to make data-driven decisions, track costs in real time, and optimize resource allocation.
Bigger isn’t always better, but smarter always is.
By OMZY,
