Understanding the financial aspects is key to ensuring a project’s success and sustainability. The four core financial metrics that stand as the bedrock of project finance are Cost, Budget, Revenue, and Profit. Each metric serves as a lens through which the financial health and performance of a project can be assessed.
What are the key project finance metrics?
The four core financial metrics that stand as the bedrock of project finance are Cost, Budget, Revenue, and Profit. Each metric serves as a lens through which the financial health and performance of a project can be assessed.
Cost
Cost refers to the total expenses incurred during the execution of a project. This includes materials, labor, overheads, and any other expenses directly related to the project. Effective cost management is crucial for keeping the project within budget.
There’s no single formula for total Cost since it aggregates all expenses. However, tracking individual costs can be summarized as
Budget
The Budget represents the financial plan for the project, outlining the total money allocated for all aspects of the project. It serves as a financial blueprint, setting the limits for project expenditure.
Similar to Cost, the Budget is an aggregate figure rather than the result of a specific formula. It’s determined during the project planning phase based on estimated costs:
Revenue
Project revenue is the total income generated from the project. This can include sales, funding, or any other income streams related to the project’s outcomes. It’s a critical metric for understanding the project’s financial contribution to the organization.
Profit
Profit, or net profit, is the financial gain after subtracting all costs from the total revenue. It’s the ultimate indicator of the project’s financial success, showing the actual economic benefit derived from the project.
The 15 most important additional finance metrics in project management
While Cost, Budget, Revenue, and Profit are the clearest, most popular, and critical figures for a project’s finances, below are 15 additional project financial metrics and formulas every project manager should be aware of, measure, and track.
These project metrics offer valuable insights into financial performance, ensuring that the project remains within budget and is completed in accordance with its financial constraints.
Cost Performance Index (CPI)
This project financial metric gauges how effectively the project manages its budget, comparing the planned versus the actual expenditure. A CPI above 1 signifies that the project is being completed for less than anticipated, while below 1 indicates overspending.
Where:
EV = Earned Value (the budgeted cost for the work actually performed)
AC = Actual Cost (the actual costs incurred for the work performed)
Schedule Performance Index (SPI)
This index measures how well the project is sticking to its timeline by comparing the actual progress to the planned schedule. An SPI over 1 suggests the project is ahead of schedule, whereas below 1 shows a lag.
Where:
PV = Planned Value (the budgeted cost for the work planned to be done by now)
Budget at Completion (BAC)
The complete financial outline allocated for the project, encompassing all expected expenses.
Estimate at Completion (EAC)
An updated estimate of the overall project cost upon completion, taking into account the current progress and any potential risks. This offers a revised budget forecast.
Estimate to Complete (ETC)
An estimation of the remaining financial resources required to finish the project, determined by the difference between the PTC and the costs already incurred.
Variance at Completion (VAC)
This finance metric in project management indicates the anticipated difference between the original budget and the projected total costs, offering insights into potential over or under-spending.
Return on Investment (ROI)
A profitability measure that calculates the ratio of net gains to the project’s costs. Projects with a higher ROI offer better returns on the invested funds.
Where net profit is the total benefits (or returns) minus the costs.
Net Present Value (NPV)
This calculates the present value of the project’s expected earnings, discounting future cash flows to their present worth. Projects with a positive CVA are considered financially viable.
Payback Period
The time it takes for the project to recoup its initial investments from its cash flows. Shorter payback periods are generally preferable as they reduce risk.
Internal Rate of Return (IRR)
The discount rate that makes the NPV of all cash flows from a particular project equal to zero. IRR can be used to evaluate the attractiveness of a project. Higher IRR values indicate more profitable projects.
Work in Progress (WIP)
Shows how much work has been completed that has not been billed to the Client yet. This project financial metric is often used in milestone-based billing scenarios where you have to ensure you are billing appropriately the amount of work done.
WIP helps Project Managers track their projects’ financial progress by knowing what has been billed and what is available to bill (WIP). This information can proactively manage a project’s budget and help discover any potential cost overruns.
Earned Value Analysis (EVA)
Earned Value Analysis (EVA) helps Project Managers evaluate the effectiveness of their overall project schedule and budget. EVA uses three factors: cost, schedule, and scope, to predict completion dates, future team performance, and the likely end cost.
EVA objectively measures project performance through these two parameters:
- Cost Performance Index (CPI) – shows how well the project is performing relative to the project budget.
- Schedule Performance Index (SPI) – calculates how well the project is performing relative to the project timeline.
CPI and SPI are calculated as follows:
Usually, if either CPI or SPI has a value less than 1, your project is at risk, and if both of these indicators are below 1, then your project is definitely in trouble.
Further Reading
Utilization Rate
Utilization rate is another vital in project management project health metric that shows how well you are utilizing your resources. Essentially, it is a ratio between the total billable hours spent by each resource to their available hours and is calculated as a percentage.
For example, if your team has marked as billable 800 hours out of 1,000 hours available, your Utilization Rate would be 80%.
Utilization rate is helpful to determine if you have enough billable work for your resources. If this number is low, it means your team is spending way too much time working on internal projects.
Realization Rate
Realization Rate metric can be more suitable for professional services organizations since it calculates the ratio between total billed hours compared to the total available billable hours.
For example, your engineering team of 3 people has a total of 480 available hours per month. 30 Hours are allocated to internal training, and the remaining 450 hours should be spent working on paid engagements. In reality, only 315 hours were billed to the customer.
A low realization rate would indicate that you are not using your resources profitably.
Realized Rate
Not to be confused with Realization Rate, Realized Rate shows your effective billing rate based on the Realization Rate and your resources’ billing rate.
For example, Linda, your Lead Engineer, has a billing rate of $120/hour. Her realization rate is 75% (meaning that Linda only bills 75% of her available billing time per month). Linda’s Realized Rate will be 75% * $120/hr = $90/hr
Realized Rate is useful to determine how profitable your resources are and whether you need to increase your billing rates or the number of billable hours.
