The Profitability Illusion
Your project report says 35% margin. Your P&L says 20%. Finance says the projects are profitable; the CFO says the company isn't making money. Both numbers are "correct" in their own context, but they tell completely different stories. And neither one is helping you make better decisions.
This gap isn't a reporting error. It's not a software bug. It's a fundamental disconnect between how costs flow through your project accounting and how they ultimately land on your income statement. Understanding this gap is the first step to closing it—and to finally having project economics that you can trust.
Professional services firms, agencies, and project-based businesses all struggle with this. The project managers think they're hitting targets. The delivery team believes they're efficient. Meanwhile, the finance team is trying to explain why the company isn't as profitable as the project reports suggest. Everyone is frustrated, and the real economics remain murky.
Where the Numbers Diverge
Unallocated Costs
This is the biggest source of the gap, and it's often invisible in project reporting.
Your people have PTO. They attend training. They sit in internal meetings. They do business development. They work on proposals that don't win. They have bench time between projects. All of this is real labor cost that doesn't get charged to projects.
If your utilization assumption is 80% but actual utilization is 65%, your project margins are overstated by definition. Those projects showing 35% margin are being calculated as if staff spent 100% of their time on billable work. But 35% of their time (and cost) went elsewhere—cost that has to be covered somehow.
Project reports typically show only direct costs charged to projects. They don't show the indirect costs that must also be covered by project revenue. The gap between direct project margin and actual P&L margin is the cost of everything that doesn't get billed.
A 35% project margin with 65% utilization is really more like a 10-15% margin when you account for the cost of non-billable time. That math explains why the P&L looks so different from project reports.
Timing Mismatches
Costs hit when incurred; revenue often recognizes on a different schedule. The mismatch creates period-by-period profitability that's meaningless—or actively misleading.
Consider a fixed-price project with heavy upfront effort. You staff up immediately, burning through labor costs in months one and two. But you're recognizing revenue ratably over six months (as you probably should under ASC 606). Month one shows a massive loss. Month six shows incredible profit. Neither reflects true project economics.
Time-and-materials projects have different timing issues. You might bill monthly in arrears, but you're incurring costs in real-time. If you're looking at project profitability mid-month, you see costs but not the corresponding revenue. End-of-month looks better, but then next month's costs start accumulating again.
These timing effects average out over long periods, but they make short-term project profitability reports nearly useless for management decisions.
Missing Cost Components
Direct labor is easy to capture—hours times rate. But what about everything else?
Allocated overhead: Facilities, management, HR, IT support, administrative staff—these costs exist because you have projects, even though they don't get charged to projects
Software and tools: Project management tools, time tracking, collaboration platforms—often treated as G&A but really part of project delivery cost
Subcontractor costs: Easy to capture, but what about the overhead of managing subcontractors? Procurement time, review time, coordination time
Travel and expenses: Hopefully captured, but are they in the right periods? Against the right projects?
Benefits burden: Health insurance, retirement contributions, payroll taxes—typically 25-40% on top of salary that may not be reflected in project cost rates
If your project costs are labor hours times salary rate, you're missing a significant chunk of what those projects actually cost. The P&L includes everything; the project report might not.
Inconsistent Rate Calculations
There are multiple ways to calculate project costs, and each produces different margins:
Billing rate: What you charge customers—used for revenue calculation
Cost rate: Salary-based cost, what you pay the employee per hour
Burden rate: Fully-loaded cost including benefits and overhead
Standard rate: A fixed rate used for planning regardless of who actually works
If projects use cost rate but the P&L includes full burden, margins won't reconcile. If different projects use different rate methodologies, comparisons are meaningless.
We've seen companies where project A uses actual cost rates, project B uses standard rates, and project C uses some hybrid—and then leadership tries to compare profitability across them. The comparison is apples to oranges, but nobody realizes it because all the reports use the same "margin" label.
Revenue Leakage
The gap between what you could bill and what you do bill is real cost that erodes margin. Project reports might show planned or potential revenue; the P&L shows actual.
Sources of leakage:
Scope creep: Work done outside the original scope that never gets billed because nobody wants to have the conversation
Unbilled time: Hours worked but not recorded, or recorded but written off during billing review
Rework: Fixing mistakes at your cost, not the client's
Discounts and concessions: Price reductions negotiated after the fact
Change orders that never get invoiced: Scope expanded but billing never adjusted
A project might show 35% margin based on contracted value. But if you only collect 90% of that value due to leakage, actual margin is substantially lower.
Getting to Truth
Capture All Time
Not just billable time—all time. You can't understand profitability without understanding where capacity goes. This requires discipline that many organizations resist.
"Why do I have to track time when I'm in training?" Because training is a cost that reduces available capacity. "Why track internal meetings?" Because meetings consume time that isn't generating revenue.
The goal isn't to eliminate non-billable time (some is essential). The goal is to know where time goes so you can make informed decisions. If 30% of time goes to non-billable activities, you need to price your billable work to cover that. If one team has 70% utilization and another has 85%, that's useful information.
Custom time tracking solutions can make this easier—simplified entry, mobile access, categorization that matches your business model, validation that catches missing time before it's too late.
Apply Full Burden Rates
Load labor costs with everything: benefits, payroll taxes, overhead allocation. True cost, not just payroll cost.
A typical burden calculation:
Salary: $100,000/year base
Benefits: $25,000 (health, retirement, etc.)
Payroll taxes: $8,000
Overhead allocation: $20,000 (facilities, management, tools)
Total burden: $153,000/year
Available hours: 1,800 (accounting for PTO, holidays)
Burden rate: $85/hour vs. $56/hour using salary alone
If you're calculating project costs at $56/hour and someone is billing $150/hour, you see a 63% margin. At $85/hour burden rate, margin is 43%. That difference explains a lot of the gap between project reports and P&L.
Custom burden calculations can be automated—updating as costs change, applying appropriately to each project based on who's actually working on it.
Match Revenue and Costs
Use project accounting that aligns revenue recognition with cost recognition. The method should match the economics of how value is actually delivered.
Percentage of completion: Recognize revenue proportional to costs incurred. If you've spent 60% of expected costs, recognize 60% of revenue. This smooths out timing differences.
Milestone-based: Recognize revenue at defined project milestones. Works when clear deliverables exist.
Completed contract: Recognize all revenue at project end. Conservative but creates lumpy results.
Whatever method you choose, apply it consistently. Mixed methods within a company make comparison impossible.
Track Non-Billable Leakage
Scope creep, rework, discounts, write-offs—capture them separately and visibly. The gap between potential and actual revenue is information. Hiding it in blended results means you can't manage it.
Custom reporting can expose leakage:
Planned vs. actual revenue by project—what did we expect to bill vs. what did we actually bill?
Write-off amounts and reasons—why are we eating these costs?
Scope changes without corresponding revenue—are we giving away work?
Time worked vs. time billed—what's the realization rate?
When leakage becomes visible, people manage it. When it's invisible, it grows.
Reconcile to P&L
Project margins should roll up to company margins. If the sum of project profitability doesn't reconcile to the P&L, find the gap and explain it.
The reconciliation should account for:
Non-project costs: G&A, sales, marketing—costs that exist regardless of projects
Utilization shortfall: The cost of unbillable time not captured in project costs
Unallocated overhead: Costs not distributed to projects
Timing differences: Revenue/cost recognition mismatches
Revenue leakage: Billed vs. collected vs. recognized differences
When the reconciliation is clean—when you can explain every dollar between project margin and P&L margin—you can trust project-level data to drive decisions.
The Uncomfortable Conversations
Accurate project profitability often reveals truths that people would rather not face:
That "strategic" client is actually unprofitable when fully burdened—you're paying for the privilege of serving them
That star PM delivers revenue but destroys margin through scope creep and concessions
That fixed-price contract was mispriced from day one—you never had a chance at reasonable margin
That utilization targets are aspirational, not achievable—you're pricing based on fiction
That certain service lines don't cover their costs—you're subsidizing them with profits from elsewhere
These are hard conversations. But you can't fix problems you don't see. The right custom project accounting solution exposes truth—which is the first step to improvement.
Some projects should be unprofitable if they lead to profitable follow-on work. Some clients are worth serving below target margin for strategic reasons. But those should be conscious decisions, not discoveries after the fact.
Building the Right Solution
NetSuite's native project management and job costing can handle basic scenarios. More sophisticated requirements—full burden allocation, revenue matching, leakage tracking, P&L reconciliation—often require custom development.
The investment in proper project accounting pays back through:
Better pricing: Understanding true costs leads to accurate pricing
Informed decisions: Knowing which projects and clients are profitable
Improved utilization: Seeing where time goes enables optimization
Reduced leakage: Visibility drives accountability
Trusted reporting: Numbers that executives can actually use
The gap between project reports and P&L doesn't have to be a mystery. With the right system design, it can be a reconciled, understood, managed number. That clarity is worth the investment to achieve.
