A large invoice does not tell you whether a client is profitable. Start with completed project revenue, subtract direct project costs, then account for the cost of the time required to deliver the work. Review effective hourly rate alongside profit margin: each answers a different question.
Use a consistent project record
For every completed project, record the client, revenue, direct costs, estimated hours and actual hours. Include client meetings, revisions, preparation and project administration in actual hours. Record costs only once, and use the same basis across projects.
Keep unpaid invoices and collection risk visible separately. Revenue earned, cash collected and profit are different measures. A profitable project can still create a cash shortage if payment arrives late.
Calculate effective hourly rate
Effective hourly rate = (project revenue − direct project costs) ÷ actual hours
Suppose a project earns $2,400, has $300 of direct costs and takes 42 hours. Its effective hourly rate is ($2,400 − $300) ÷ 42 = $50 per hour. That figure is before an internal labor charge and any overhead not included in direct costs. It is not take-home pay.
If the same project was estimated at 30 hours, the expected effective rate was $70. The 12-hour overrun reduced the result even though the invoice stayed the same.
Include an internal cost for working time
Choose a consistent internal hourly cost for planning. For an owner, this can be a management allowance for time rather than a wage actually paid. For employees, use a cost basis appropriate to your business. State what the figure includes so that you do not add the same labor or overhead twice.
Using an illustrative $30 internal hourly cost:
- Revenue: $2,400
- Direct costs: $300
- Internal labor allowance: 42 × $30 = $1,260
- Project profit after these costs: $840
- Project margin: $840 ÷ $2,400 × 100 = 35%
This is a management view of project profitability. If general overhead, financing costs or taxes have not been allocated, the result is not final business net profit.
Compare clients without averaging percentages
Aggregate the underlying amounts. Suppose Client A's projects produce $6,000 of revenue, $600 of direct costs and 90 hours of work. The combined effective rate is $5,400 ÷ 90 = $60 per hour. Do not average individual project hourly rates unless their hours are identical.
For a combined margin, divide total project profit by total revenue. A simple average of a small project's margin and a large project's margin can misrepresent the client relationship.
Separate completed work from active work
An active project may have most of its fee recorded while many delivery hours remain. Treating it as finished can make the client appear more profitable than the final result. Review active work for remaining effort and scope risk; use completed work for final comparisons.
Choose an action based on the cause
- Hours overrun: review estimation, meetings and revision limits.
- High direct costs: check whether the quote includes those costs.
- Repeated unpaid extras: document changes and agree the fee before delivery.
- Low rate despite controlled scope: review the next proposal's price or service design.
A low result does not automatically mean ending a client relationship. Consider repeatability, payment behavior and strategic value alongside the numbers, and make any future pricing changes through the normal client agreement process.
Build a monthly review
The Dovea Client Profitability Tracker records project figures and separates completed profitability from active work in Excel and Google Sheets. For extra requests, the Scope Creep Tracker supports the change-request workflow. Before accepting the next fixed-fee project, test the quote with the free project profit calculator.
At each review, choose one practical change and compare the next completed project's result. Consistent records are more useful than a dashboard built from incomplete time estimates.