In our e-book, Compass, we take a look at a number of important Key Performance Indicators that every services business should track and analyze on an ongoing basis. At a macro level, these KPIs are relatively easy to come by; if you are building out a monthly P&L, you should already be tracking Services Revenue, Cost of Goods Sold, and Operating Expense. Those three, aggregated figures give you what you need to calculate Services Gross Margin and Services Contribution Margin for your business as a whole. But, what about tracking financial KPIs at a project level?
Well, Compass goes into that, too, but one area to expand on is how Ruddr calculates Services Revenue on fixed fee projects and the effect that the calculation has on fixed fee project KPIs.
Services Revenue
Accurately tracking KPIs on a fixed fee project starts with calculating the services revenue. On your company P&L, you may currently track all revenue related to fixed fee projects as “services revenue”. You might ask, why would you not do that when calculating services revenue on the project itself? The answer lies in how non-billable expense on a fixed fee project affects KPIs that rely on the project’s services revenue calculation.
In Ruddr, we calculate the services revenue for fixed fee projects as:
- Recognized Fixed Fee Revenue – Non-billable Project Expenses
To illustrate this via an example, assume we have a $100,000 fixed fee project where the travel expenses are "built in" to the $100,000 fee. The project team delivers the project in 500 hours and has $25,000 in travel expenses in total. Ruddr considers $75,000 of the fixed fee to be services revenue and $25,000 to be expenses revenue. This would yield an effective bill rate of $75,000 / 500 = $150 per hour. Had Ruddr considered the entire $100,000 to be services revenue, the effective bill rate would be inflated to $200 per hour.
On fixed fee projects, we can't calculate services revenue as we would on a Time & Materials project (where we multiply hours by bill rates). As such, we need to find the best representation of revenue attributed to the services work performed to-date. By removing non-billable expenses from the revenue that we have recognized to date, we get a more accurate depiction of the revenue generated by the services effort alone.
An accurate calculation of services revenue is important given its impact on the following project KPIs:
- Services Gross Profit (dollars)
- Services Gross Margin (percentage)
- Effective Bill Rate
A project's Total Gross Margin and Services Gross Margin will differ any time there are expenses or other items (such a product licenses) involved. If non-billable expenses are not removed from earned services revenue, this creates an inflated Effective Bill Rate and would also overstate services margin. By accounting for non-billable expense in our services revenue calculation for fixed fee projects, we get a much more accurate depiction of services performance across our portfolio of projects.
