Accountants Project Profit (Hourly) Formula
Learn how hourly accounting project revenue, costs, profit, margin, and effective hourly revenue are calculated.
This calculation estimates the profitability of an accounting engagement billed by the hour. It allows for expected write-offs, staff delivery cost, allocated overhead, and fixed direct costs so that the result reflects expected net revenue rather than only the quoted billing value.
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Estimated Project Profit
Where:
First estimate revenue after write-offs. Then subtract staff labor cost, hourly overhead, and other direct project costs. The amount left is estimated project profit before tax and financing costs.
Variables Explained
| Variable | What It Means | Unit |
|---|---|---|
| H - Billable hours | Hours expected to be invoiced for the engagement. | hours |
| R - Hourly billing rate | Average amount charged to the client for each billable hour. | currency |
| W - Expected write-off rate | Percentage of gross billing value expected to be discounted, written off, or not recovered. | percent |
| S - Staff cost per hour | Fully loaded hourly cost of staff time used to deliver the work. | currency |
| O - Overhead per hour | Hourly allocation of indirect costs such as software, office costs, management, and administration. | currency |
| D - Other direct costs | Fixed project-specific costs, such as subcontractor fees, travel, or filing charges. | currency |
Step-by-Step Calculation
Calculate gross project revenue
Multiply expected billable hours by the standard hourly billing rate before discounts or write-offs.
grossRevenue = billableHours * hourlyBillingRate
Allow for expected write-offs
Reduce gross revenue by the expected unrecovered percentage to estimate net revenue.
netRevenue = grossRevenue * (1 - writeOffRate / 100)
Calculate labor cost
Multiply the project hours by the hourly cost of the staff doing the work.
laborCost = billableHours * staffHourlyCost
Calculate allocated overhead
Apply the hourly overhead allocation across the expected billable hours.
overheadCost = billableHours * overheadPerHour
Calculate total project cost
Add labor, allocated overhead, and fixed direct costs.
totalProjectCost = laborCost + overheadCost + otherDirectCosts
Calculate project profit and margin
Subtract total cost from net revenue. Divide profit by net revenue to express the outcome as a margin.
projectProfit = netRevenue - totalProjectCost; profitMargin = projectProfit / netRevenue * 100
Worked example: 40-hour accounting project
Gross revenue
40 × $150
$6,000
Net revenue
$6,000 × (1 − 5 / 100)
$5,700
Labor cost
40 × $65
$2,600
Allocated overhead
40 × $20
$800
Total project cost
$2,600 + $800 + $300
$3,700
Profit and margin
$5,700 − $3,700; $2,000 / $5,700 × 100
$2,000 profit; 35.1% margin
Final Result
Estimated project profit is $2,000, with a 35.1% profit margin and effective hourly revenue of $142.50.
Assumptions
- ✓Billable hours represent the time expected to be invoiced to the client.
- ✓The write-off rate is applied evenly to gross project revenue.
- ✓Staff cost per hour reflects the relevant delivery cost for the personnel assigned.
- ✓Overhead is allocated at a consistent amount per billable hour.
- ✓The calculation is before business taxes, interest, owner drawings, and costs not entered.
Limitations
- !Actual hours may exceed or fall below the estimate, especially where scope changes or rework occurs.
- !Recovered revenue can differ from the write-off assumption because of billing disputes, caps, discounts, or collection outcomes.
- !A single hourly staff cost may not reflect a project delivered by several grades of staff.
- !Hourly overhead allocation is a planning approach and may differ from actual indirect costs.
- !The estimate does not measure cash timing, working capital, or tax treatment.
Common Mistakes to Avoid
Using quoted hours rather than the hours likely to be invoiced after scope changes.
Entering a staff pay rate instead of a fully loaded hourly delivery cost where the firm uses one.
Omitting partner, manager, reviewer, or administrative time that is economically attributable to the project.
Treating the standard billing rate as realized revenue without allowing for anticipated write-offs.
Leaving out fixed direct costs such as specialist subcontractors, travel, or filing fees.
Calculating margin from gross revenue instead of net revenue after write-offs.
Related Formulas
Frequently Asked Questions
How do you calculate hourly accounting project profit?
Estimate net revenue by reducing billable hours times billing rate for expected write-offs, then subtract labor cost, allocated overhead, and other direct project costs.
What is the formula for profit margin on an accounting engagement?
Profit margin equals estimated project profit divided by expected net revenue, multiplied by 100.
Why is a write-off rate included in project profit?
The write-off rate estimates billing value that may be discounted or not recovered, so the calculation uses a more realistic revenue figure.
What is effective hourly revenue?
Effective hourly revenue is expected net revenue divided by billable hours. It shows the average recovered revenue per billable hour after write-offs.
Should overhead be included in an hourly project profit calculation?
Including an hourly overhead allocation can help estimate the wider delivery cost of a project. The appropriate allocation method depends on the firm's internal costing approach.
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