First calculate a consistent hourly cost, value all time actually spent on the engagement, add direct costs and compare the result with earned fees excluding tax. For a fixed fee, also monitor realisation variance: the difference between fees and time valued at the planned selling rate.
Distinguish cost, value and billing
- Hourly cost: the cost of one productive hour to the organisation.
- Time value: hours multiplied by a selling rate or internal rate card.
- Earned fees: revenue recognised for the period, which may differ from the invoice issued.
- Direct costs: purchases, subcontracting or non-recharged expenses attributable to the engagement.
Do not confuse selling price and cost. The first explains commercial positioning and realisation variance; the second is used for economic margin.
Build a documented hourly cost
A straightforward method divides annual employment cost plus an allocated share of overheads by realistic productive hours.
Hourly cost = (annual employment cost + allocated overhead) ÷ productive hours.
Worked example: €54,000 employment cost + €18,000 overhead, divided by 1,200 productive hours, gives €60 per hour. Leave, training, internal time and absence are already excluded from the denominator; excluding them again would distort the result.
Complete worked example
| Item | Calculation | Amount |
|---|---|---|
| Earned fees | Agreed fixed fee | €12,000 |
| Senior time | 40 h × €85 | €3,400 |
| Consultant time | 90 h × €55 | €4,950 |
| Subcontracting | Direct cost | €800 |
| Total cost | 3,400 + 4,950 + 800 | €9,150 |
| Margin | 12,000 − 9,150 | €2,850 |
| Gross margin percentage | 2,850 ÷ 12,000 | 23.75% |
If the 130 hours were valued at a €110 selling rate, their value would be €14,300. The €12,000 fee therefore produces a €2,300 adverse realisation variance. This does not contradict the positive margin: the two indicators answer different questions.
Handle billed, unbilled and work to complete
For a long engagement, invoices alone do not measure performance. Compare budget, actuals, work to complete and earned fees using a stable rule. A payment on account improves cash flow but does not prove profitability. Conversely, work not yet billed may have generated earned revenue.
Read a report without losing the source rows
Review at least margin amount, gross margin percentage, realisation variance, hours consumed, progress, work to complete and unbilled amount. Segment by engagement, manager, team and period, then return to the time and cost rows behind every material variance.
See also: profitability management, time and expense management, choosing a billing method and the operational FAQ.