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A project lead reports a fixed-fee project is on budget. but a month later, finance closes the books and finds the margin is half what is what quoted. Both sides did their sums correctly, they were just counting different costs. The project lead used one set of figures, while finance included a broader range of expenses.
A common what to calculate project margin is fee minus billable hours multiplied by a cost rate, where the cost rate is salary divided by working hours. This leaves out four costs the firm still pays: project hours never invoices, hours written off, employer on-costs, and overhead every hour must carry.
Those gaps matter more when margins are thin. SPI Research's 2026 benchmark found billable utilisation at 66.4% in 2025. the lowest in 19 years. Average EBITDA was 9.9%, according to Deltek's summary. In Magnetic's survey of 104 agencies, 30% of finance teams said their biggest challenge was not knowing which projects and clients were profitable.
The guide shows how to calculate project margin with every cost included, using one worked example from quote to final figure and how to track it while the project is still running.
The basic formula takes the fee, subtracts billable hours multiplied by a cost rate, and divides the result by the fee. It only costs the hours you invoice, and its cost rate usually covers salary and nothing else.
Take a fixed-fee project priced at £30,000 for 250 hours of work or £120 an hour. The teams average salary is £60,000, and £60,000 divided by 1,720 working hours a year gives a cost rate of £34.88. One htose numbers the quote shows a margin of 71%.
During delivery the teams logs the 250 planned hours. It also logs 60 hours on client calls, internal reviews, and rework that nobody bills, plus 20 hours of extra work the account lead agrees to write off. The table shows the margin as each missing cost is added back.
Assumes 1,720 working hours a year and overhead recovered at £25 an hour. Figures rounded.
Overhead is the biggest single factor. Costing each hour to include rent, software, and non-delivery salaries reduces the margin by 27.5 points alone, and unbilled hours reduce it by another 11.1.
Margin reports disagree when people count different costs. These four are the ones a billable-hours formula never sees/
Client calls, internal reviews, scope discussions, handovers between phases, and rework after misunderstandings all exist because the project exists. None of that time appears on an invoice, and in many firms, it is not logged against the project either. It goes to a general admin code or is not recorded at all.
Agencies in our survey reported 22% of their hours were non-billable. Some is genuinely internal, but the part spent on a client's work is a cost that client's project. A project with 100 billable and 25 non-billable hours consumed 125 hours of labour.
Record every hour worked to a specific project, noting whether it is billable or not. Hours spent on training, internal admin, or downtime between projects don't count as project costs, they're captured in your utilisation rate instead. That's why project margins often look higher than the firms overall profit margin.
A team logs 90 hours on work quoted at 80, and the firm invoices 80 because the overrun was small or the conversation felt awkward. Revenue reflects 80 hours, but cost should reflect all 90 since the firm paid for them. Using 80 on both sides hides the write-off.
Retainers make it easy to miss this. A client pays for 40 hours a month, a busy month takes 52, and the extra 12 are absorbed without discussion. Comparing hours worked with value invoices, as a realisation rate does, reveals where this happens.
Employing someone costs more than their salary. A UK employer pays National Insurance at 15% on earnings above £5,000 a year and at least 3% of qualifying earnings into a workplace pension before benefits. training and equipment. In the US, benefits make up 30% of total compensation for private industry workers, according to the Bureau of Labor Statistics.
Overhead adds rent, software, insurance, marketing, and salaries of non-delivery staff, from finance to leadership. Client projects pay for all of it, so every project hour must carry a share. Leaving overhead out makes each project look more profitable than the firm.
Scope creep doesn't usually show up as a single big request. A client asks for another round of changes. then a different approach to one section, and each request takes a few hours that nobody thinks is worth a change order. On a 180-hour project, 18 extra rounds add 10% to the delivery cost, dropping a project priced at 40% to 34%.
In our survey, 40% of agencies named scope creep as a key challenge. A tightly written statement of work sets the boundary. Our guide to preventing scope creep covers how to manage the conversation with the client once hours start running over budget.
Both grow margin and net margin are project margins, and both are worth reporting. They differ in how much of the firm's total expense is assigned to each hour - for example, whether you include only salary and benefits, or add overhead costs as well - so they answer different questions.
Definitions vary. Agencies often use gross profit to mean revenue minus third-party costs, so be explicit with the definition your reports use.
If gross margin is healthy, and net margin is thin, look at the relationship between your prices and your overhead before blaming delivery. If both are weak, start with estimating scope control and write-offs.
Direct expenses belong in both figures: freelancers, travel and any software bought for the project. Leave them our, and both margins are overstated by the same amount.
A fully loaded cost rate, also called a burden rate, is what one hour of an employees time costs the firm. You only need four numbers, all of which your finance team should already have on hand.
Salary alone divided by 1,720 gives £34.88, which understates the true hourly cost by almost half.
Divide by working hours. Dividing by billable hours builds the cost of non-billable time into the rate, and if you also log non-billable time against projects, you count it twice.
Work out the overhead recovery rate from your own accounts. If overhead costs to £1,376,000 a year, and you have 32 delivery staff at 1,720 working hours each, that is 55,040 hours, and every hour needs to recover £25.
Then compare the result with what you charge. At £120 an hour. a salary-only rate suggests a 71% margin on every billable hour, while the fully loaded rte shows 44%. That 27-point different affects every quote and margin report built on the lower rate.
Calculate a rate for each person or at least each role. A junior consultant and a director cost very different amounts per hour, and an average rate makes projects staffed by senior people look more profitable that they are. You can test your figures in the free profitability calculator which uses internal cost rates.
A margin calculated after month-end close tells you what happened. By then the hours are spent, and the remaining choices are to absorb the overrun or raise it with the client after the fact.
Tracking margin during delivery relies on four measures reviewed weekly.
Cost to date and cost to finish should both use fully loaded rates.
Forecast margin at completion is the most useful of the four because it turns a burn rate into a margin you can compare with the quote. Update the estimate to finish at every weekly review. Our guide to real-time profiability dashboards covers who should see these numbers and how often.
In Magnetic, budget warning thresholds notify project watchers when a project reaches a set percentage of its time or money budget, and again if it goes over. The overservicing dashboard compares time spent with the budget by client, project owner and project, in hours or currency.
That visibility is what ShiftONE, a B2B digital and marketing agency, went looking for. Its CEO, Dylan Kohlstadt, said the agency needed "a platform integrating finance, time tracking, and project management to see where we were over-delivering or underquoting."
A margin worked out from an estimate only repeats the quote. Calculate it from logged hours, even if that means waiting a day for timesheets to be approved. Only 33% of agencies in our survey tracked time while working, and time reconstructed from memory at week's end makes the logged figure less reliable.
Discounts, credits, and write-offs reduce revenue. In the example, a 10% discount turns the £30,000 fee into £27,000 and lowers net margin from 26.5% to 18.3%. Always calculate margin based on the actual amount invoices, not the original quoted fee.
A cost rate set last year misses this year's pay rises. Employer National Insurance from from 13.8% to 15% in April 2025, with threshold falling from £9,100 to £5,000, raising the cost of every UK employee. Review cost rates at lead once a year and whenever salaries change.
Hours logged after a project's margin is reporting either vanish from the final figure or appear in a later period. Set a cut-off for timesheet approval and report final margin only once every hour after the project is approved.
Benchmarks are useful once you know what each deducts, so check how a source defines margin before comparing your figure with it.
SPI Figures are averages across 403 firms in the 2025 benchmark and 509 firms in the 2026 benchmark.
Read the first two rows together: the average firm earned 37.7% margin on projects and kept 9.9% EBITDA. The difference between these numbers reflects costs outside of project delivery - such as overhead, time between projects, and unbilled hours. Firms using a PSA platform averages a project margin of about 40%, versus about 36% for firms without one. SPI notes this is a correlation, not proof of causation.
The benchmark that matters most is your own history. Recalculate net margin on fully loaded rates for your last ten closes projects, then compare the results by client, by service and by project lead to see areas consistently delivery strong margins and which ones regularly fall short.
Project margin is only as accurate as the hours and the cost rates that go into it. Log every hour against the project, cost it at a fully loaded rate, and review the forecast weekly; the figure finance closes each month should match what your project leads have been watching. If you want to see that on your own projects Magnetic's project finance management is free to try for 14 days, with no credit card required.
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Subtract the cost of every hour logged to the project, plus any direct expenses, from the fee, then divide by the fee. For gross margin, cost each hour at salary plus employer on-costs divided by working hours. For net margin add an overhead recovery rate to that hourly cost. Use the fee you invoice, not the fee you quoted.
Project margin measures a single project: what it earned against what it cost to deliver. Profit margin measures the whole firm after all costs, including overhead and time not spent on projects. A firm can report healthy project margins and still have a thin project margin if utilisation is low or overhead is hight/
SPI Research's 2026 benchmark, as summarised by Deltek, put the average project margin at 37.7% in 2025 and average EBITDA at 9.9%. Check what a benchmark deducts before comparing your figure, and treat margins from your own closed projects as the more reliable baseine.
A fully loaded cost rate, or burden rate, is the true cost of one hour of a person's time. It is their salary plus employer on-costs such as National iInsurance and pension contributions, divided by their working hours, plus a share of the firm's overhead. Using it in place of salary divided by hours stops quotes and margin reports from overstating profit.
Yes, when the time was spent on the project. Client calls, internal reviews and rework cost the firm the same as billable hours, even though the client does not pay them directly. Time that belongs to no project, such as training or internal admin, is not a project cost and shows up in your utilisation rate instead.
Take the monthly retainer fee, subtract he fully loaded cost of every hour logged to the retainer that month, and divide by the fee. A £10,000 retainer that costs £7,500 to deliver runs at a 25% margin, and if the cost rises to £8,500, the margin falls to 15%. Review it every month against the hours the fee cost priced on.
Magnetic is an all-in-one workflow management platform designed and built for professional services firms.
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