High project revenue does not always mean a profitable project
Trace project revenue, staff time and delivery costs before judging overhead, rework and the next quotation.
To understand whether a project is worthwhile, match its revenue with the resources needed to deliver it, then examine shared overhead and collection timing. A large contract, cash already received, or a loss after allocating overhead cannot answer the question alone.
Define the result you need
A project review, the next quotation and a decision to accept another order serve different purposes. A review explains resources consumed. A quotation considers future delivery costs and risks. An acceptance decision also considers available capacity and other work that could be displaced.
Here, “project contribution” means revenue less costs attributable to the project. Those costs may include the project's use of salaried employees, so this is not the same as contribution margin calculated using only variable costs. It is also not company net profit. State the cost boundary alongside the result.
Use the same project, period, currency and delivery scope throughout. Keep the contract value, recognized revenue, invoiced amount and cash received separate. For an unfinished project, subtracting costs incurred so far from the full contract price does not establish its eventual profit.
Account for the resources the project actually uses
| What to check | Useful records | Common omissions |
|---|---|---|
| Revenue and scope changes | Contract, agreed changes, delivery and acceptance records | Extra requests without an agreed price or evidence of approval |
| Internal staff time | Time records, employment costs and staffing plans | Rework, coordination and senior review time |
| Outsourcing and dedicated purchases | Purchase commitments, deliveries and invoices | Costs already incurred but not yet paid |
| Tools, travel and delivery work | Licence scope, expense records and service logs | Charging reusable resources entirely to one project |
| Work still owed | Progress, acceptance issues and commitments | Remaining obligations despite receiving the final payment |
Use available time records with an appropriate cost basis. Where records are missing, an evidenced range can support a provisional result. Missing labour records do not make labour free. Avoid deducting the same payroll once as project labour and again in full as overhead.
A worked service-project example
Assume a completed project has recognized revenue of CNY 120,000. These invented figures illustrate the calculation, using amounts excluding tax on a consistent basis. Tax, financing and shared overhead are outside this example. Internal labour is 300 recorded hours at an assumed cost rate of CNY 150 per hour; that rate is neither an industry benchmark nor a statutory rate.
| Item | Amount |
|---|---|
| Recognized revenue | CNY 120,000 |
| Attributable internal labour | CNY 45,000 |
| Outsourced delivery | CNY 32,000 |
| Project-only licence | CNY 8,000 |
| Travel and acceptance work | CNY 11,000 |
| Total attributable project cost | CNY 96,000 |
| Project contribution before shared overhead | CNY 24,000 |
The calculation is CNY 120,000 − CNY 96,000 = CNY 24,000. The contribution under this cost definition is 20% of revenue. That does not establish company net profit of CNY 24,000.
If another 80 hours of previously unrecorded rework are found, the same assumed hourly rate adds CNY 12,000 of attributable cost. Project contribution falls to CNY 12,000, or 10% of revenue. Before changing the next quote, investigate whether that rework arose from scope changes, delivery quality or an inaccurate time estimate.
Does an allocated loss mean you should stop taking the work?
Suppose the company also allocates CNY 30,000 of office and management overhead to this project. The original CNY 24,000 result becomes a CNY 6,000 allocated loss. Whether refusing this type of work would actually remove that CNY 30,000 is a separate question.
An acceptance decision examines future cash flows changed by the choice. Reallocating unchanged overhead does not create a cash saving; additional fixed commitments and displaced opportunities also matter. See ACCA's explanation of relevant costs.
Keep both views: the project review records resources consumed, while the new-order comparison examines incremental receipts, payments, capacity and opportunity cost. An unchanged salary does not make staff time valueless. A short-term incremental assessment requires evidence of spare time, no extra expenditure and no displacement of other work.
Over time, the project portfolio still needs to cover the company's full operating costs. Pricing also depends on customers' willingness to pay and market conditions. ACCA's practical pricing article discusses these considerations.
Use the review to improve the next decision
Turn findings into specific actions: agree the price or limits of additional work, investigate recurring rework, allocate scarce staff to suitable projects, and identify costs that still need evidence. Avoid ranking every project using a single overhead-allocated profit number.
Check collections separately. The example can show CNY 24,000 of project contribution while customer money remains unpaid and suppliers are already due. Profit and cash pressure belong in the same decision, with separate calculations. See the cash-planning guide.
You can ask CaiGeek: “What did this project leave us, where did the extra work go, and what should we consider in the next quote?” Continue from existing business records and fill in facts that remain uncertain and affect the conclusion. CaiGeek is an AI financial assistant for small and medium-sized businesses; see the official website for available capabilities and access. This example is an illustration, not a customer case or evidence of product performance.
Written with AI assistance. Examples illustrate analysis methods; apply them using business records and relevant conditions.
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