Table of contents5 sections
The project was sold for 120,000 PLN. The team worked 900 hours, and the client accepted all the stages. At first glance, delivery ended in success.
The problem appears with the question: how much did the company actually earn?
The number of hours worked alone does not give the answer. An hour of a junior developer, a senior developer, a tester, a UX designer and a Project Manager each has a different value. On top of that come internal meetings, revisions, management, licences, infrastructure, subcontractors and the time of people who support the project but do not report work directly against the client’s tasks.
We know what it is like when a project looks profitable until an exact summary is prepared. Revenue is visible on invoices, the number of hours is in the project system, and salaries and contractor invoices are in the financial documents. The data exists, but it stays scattered.
That is why the cost of an IT project should be calculated automatically and updated with every reported hour. Only then can the business owner and the Project Manager see whether the project really earns money or merely generates turnover.
The project was sold for 120,000 PLN. The team worked 900 hours, and the client accepted all the stages. At first glance, delivery ended in success. The problem appears with the question: how much did the company actually earn?
Why does the number of man-hours not show the real cost of a project?
In many software houses, project control comes down to comparing the number of hours used with the original estimate.
If a project was quoted at 1,000 hours and the team used 800, you might conclude the situation is safe. Such an analysis, however, leaves out one of the most important elements: who worked those hours and how much their work actually cost the company.
Every specialist has a different cost rate
A hundred hours of a junior’s work and a hundred hours of a senior’s work do not burden the budget in the same way.
If the quote assumed that most tasks would be done by a cheaper specialist, but during the project a more experienced person had to be involved, the cost can rise even though the planned number of hours is kept.
Example:
- 100 hours of a junior developer at a cost of 70 PLN each: 7,000 PLN,
- 100 hours of a senior developer at a cost of 180 PLN each: 18,000 PLN.
The number of hours is identical, but the difference in cost is 11,000 PLN.
That is why a project can stay within its time budget and at the same time exceed its financial budget.
The selling rate is not the cost of an hour
A company may sell an hour of work to a client for 250 PLN, but this does not mean that the difference between that amount and the employee’s pay is margin.
The real cost of an hour may include:
- gross salary or a B2B invoice,
- employer contributions and charges,
- paid holidays and absences,
- time not used on commercial projects,
- workstation cost,
- equipment and software,
- training,
- team management,
- administration,
- recruitment,
- office and infrastructure costs.
If a company calculates a project solely on the basis of the selling rate or the specialist’s net pay, the result can be significantly overstated.
Part of the work remains invisible
Not all hours go directly into the project’s billing.
Often left out are:
- internal team meetings,
- preparing estimates,
- technical support,
- code review,
- quality control,
- onboarding a new person,
- communication with the client,
- administrative handling,
- fixes resulting from errors,
- project management time.
Each of these activities costs the company money. If it is not assigned to the project, the margin of a given contract looks better, but the cost still weighs on the result of the whole organisation.
Data is analysed only after the project is closed
The biggest problem is not the inaccurate settlement itself. It is the lack of information at a moment when you can still react.
If the real cost is calculated only after the work is finished, the company can only state that the project was unprofitable. It can no longer get back the hours worked or change the way it delivers.
The cost of an IT project should be visible during the work, not only in the final report.
How to calculate the cost of an IT project correctly?
An effective analysis requires combining working time, specialists’ costs and the other expenses related to delivery.
1. Set an individual cost rate for each person
The first step is to determine the real monthly cost of an employee or contractor.
Next you need to determine the number of hours that can realistically be devoted to commercial projects. You should not automatically divide the monthly cost by all the working hours in the month.
An employee spends part of their time on:
- company meetings,
- training,
- internal tasks,
- holidays and absences,
- skills development,
- organisational activities.
A simplified formula can look like this:
Cost rate = full monthly cost of the specialist ÷ number of realistically available project hours
If the full cost of an employee is 18,000 PLN per month and the real project availability is 120 hours, the real cost of one hour is 150 PLN.
2. Assign every hour to a project and a type of work
Recording time alone is not enough. Hours should be properly classified.
It is worth distinguishing:
- analysis and discovery,
- design,
- development,
- testing,
- project management,
- communication with the client,
- in-scope revisions,
- bug fixes,
- extra work,
- post-implementation support.
This way you can see not only the total cost, but also its source.
If most of the overrun comes from revisions, the problem may lie in the scope or the acceptance process. If the cost grows because of management and communication, perhaps the project requires too many meetings or has an inefficient decision-making model.
3. Add external and indirect costs
The full cost of a project should also include expenses that do not result directly from employees’ time.
These may include:
- subcontractor invoices,
- cloud infrastructure,
- project licences,
- purchased components,
- test environments,
- additional tools,
- travel and meetings,
- the recruitment cost of a person hired for the project,
- an agreed share of overheads.
Expenses should be assigned to the project on an ongoing basis. If an invoice covers several contracts, the cost can be split by percentage.
4. Forecast the cost needed to finish
The cost incurred shows history. The Project Manager also needs to know how much work remains.
To do this you need to combine:
- the cost of the hours completed,
- external costs already incurred,
- the planned number of remaining hours,
- the team composition needed to finish,
- expected subcontractor invoices,
- a buffer for testing, revisions and rollout.
Example:
- contract value: 150,000 PLN,
- cost incurred: 70,000 PLN,
- forecast cost of the remaining work: 55,000 PLN,
- forecast final cost: 125,000 PLN,
- expected margin: 25,000 PLN.
Without a forecast, the company might conclude that the current margin is 80,000 PLN. But that is only the difference between the contract value and the cost incurred so far, not the real final result.
How did we solve this problem in Administy?
While running agencies and delivering digital projects, we saw for ourselves that the number of hours alone is not enough to assess profitability.
In one project, some of the tasks were meant to be done by people with lower cost rates. During delivery, however, problems appeared that required the involvement of more experienced specialists. The project did not significantly exceed the original number of hours, but its cost grew because the team structure had changed.
Previously the data was scattered:
- working time was in the project system,
- team rates in a separate spreadsheet,
- contractor invoices in accounting documents,
- the contract value and invoicing schedule in further files,
- additional costs in invoices and bank transactions.
To calculate the result, this information had to be combined by hand. The report was therefore prepared periodically and quickly went out of date.
In Administy we defined the individual labour cost of each specialist and then combined it with the time imported from the project system.
Every reported hour:
- goes to the right project,
- is assigned to a specific person,
- is multiplied by their cost rate,
- updates the labour cost in the project,
- affects the current and forecast margin.
As a result, an hour of a developer, designer, tester or Project Manager has the right financial value. We do not treat the whole team as if the labour cost of every person were identical.
We can also assign to a project:
- revenue and sales invoices,
- subcontractor costs,
- cost invoices,
- additional expenses,
- amounts invoiced,
- funds actually received,
- the cost needed to finish.
In a single view we therefore get answers to the questions:
- how much the project has cost to date,
- what the cost of each person’s time is,
- how many hours remain in the budget,
- how much it will cost to finish the work,
- what the current margin is,
- what the forecast final margin will be,
- whether the payments received cover the costs incurred,
- whether the project generates a cash gap.
This lets us react before the project ends. When cost grows faster than progress, the Project Manager can:
- change the team composition,
- limit unplanned tasks,
- identify the source of the overrun,
- separate revisions from new scope,
- prepare a quote for the extra work,
- renegotiate the schedule,
- update the margin forecast.
The most important change is that the conversation about profitability no longer relies on the number of hours or on intuition. It relies on the real cost of the work done.
Hours show involvement, but only costs show profitability
The number of hours is an important operational indicator, but it does not answer how much the company earned. To calculate the cost of an IT project correctly, you need to take into account individual cost rates, the team composition, external costs and the work needed to finish.
The earlier a company combines this data, the greater the chance that it will react before losing margin.
Administy combines team working time, individual specialists’ costs, revenue, invoices and forecast margin in one place.
Contact the Administy team and check which projects really earn money and which look good only on the basis of the number of hours and issued invoices.
