PM Excellence Academy
Module 2 of 12 · Project Finance
The economic model of a project, and the one relationship that shows whether a project is healthy today.
Illustrated module guide · the complete walkthrough · companion to the Quick ReferenceModule Home › Module Overview
A fifteen minute read that connects the two module videos. Keep the Quick Reference open while working through this page, and go deeper in the Field Guide.
On the Oakhaven Public Safety Campus, the Construction Documents phase is running to plan. The monthly budget report is green. Nothing on the dashboard is flagged. Nothing has been escalated.
But $100,000 of margin has already left the phase, and the difference between the project manager who finds it this week and the one who finds it at closeout is a single question. Not how much has the team spent, but how much has the team actually earned?
That second question is the subject of this module. By the end of it, the question becomes the first one a project manager asks on any project.
The two videos followed a single dollar of revenue and then a project's margin. This lesson follows that $100,000 back to the decisions that created it, from the composition of a fee, through the cost of a single hour, to the point at which effort outruns the value a team has earned. The work is the same work described in Module 1, Outcome #4, Sustained Financial Health, now measured in money.
Think of a project you have run or supported where the technical work went well and the financial result did not. What was the first sign that the money was moving differently from the work? Now consider the five outcomes named in Module 1. Which one do these two finance videos address?
Module 1 established the five outcomes a project manager owns. This lesson addresses the fourth, sustained financial health. Every outcome a project manager protects carries a cost, because every decision consumes hours and hours become dollars. Protecting the outcomes is how a project manager creates the money that funds the firm's capacity to hire, to invest, and to perform its best work.
A large fee and the money Grace earns are two different figures. A substantial share of any fee belongs to other parties long before the firm records a dollar of its own revenue.
| Stage | What it is |
|---|---|
| Fee | The total amount the client pays. |
| Pass‑through | Consultants, travel, and printing. This money moves through the firm without the firm ever earning it. Strip it out before evaluating anything. |
| Net Service Revenue | The amount Grace earns with its own people. This is the figure the project manager manages. |
| Slice | Share | What it covers |
|---|---|---|
| Direct labor | ~30¢ | The people performing billable work such as design, drawings, and engineering. |
| Overhead | ~50¢ | Everything the firm cannot invoice to a client, including proposals, reviews, management, rent, software, and insurance. |
| Profit | 15 to 20¢ | Whatever remains once the first two shares are paid. It is the entire reward for the risk of running the project, and the first amount to disappear. |
VisualWhere the net dollar goes
After pass‑through is stripped out, every dollar Grace actually earns splits roughly three ways. Profit is the thin share that survives the project, and it is the first share to disappear.
Profit is the share that survives the project rather than an amount added to it at the end. Every additional hour, every round of rework, and every week a decision sits open consumes part of that 15 to 20¢. Closeout is simply the point at which the firm sees how much of it remains.
When the economic model is focused on one hour, it demonstrates how Grace's billing rates are intentionally designed to support the direct labor of the team member, that team member's share of overhead, and a small amount of profit.
ToolBuild the hour · what an hour really costs
The $110 hour from the script is a model rather than a fixed Grace number. Move the wage and the overhead factor, and watch the burdened cost and the billing rate move with them.
There are no forty dollar hours. Every hour costs approximately 2.75× the wage, which produces the $110 hour on a $40 wage. An hour spent on rework or on the wrong person consumes the 15 to 20¢ of profit.
That $70 buys real capacity. It funds every proposal the firm pursued and did not win, every software license and seat of design authoring software, every quality review performed by someone who will never invoice the client for it, and every hour of management, recruiting, and business development the firm requires to stay in business. It is the actual cost of keeping the doors open, recovered one billable hour at a time.
The $110 hour states what a single hour costs. Three metrics state whether the firm's entire book of work is healthy, and a project manager moves all three of them through ordinary staffing and scheduling decisions.
U · Utilization
How busy the team is
Direct labor ÷ total labor
The share of every payroll dollar that lands on billable work funded by the client. The remaining share covers management, proposals, and review, the cost of running the firm and the source of the 1.75 overhead factor.
Grace base case: 62.5%
M · Net labor multiplier
How hard each hour works
Net revenue ÷ direct labor
How many revenue dollars each direct labor dollar brings in, and what a billing rate has to deliver. A $40 wage billed near $138 is carrying exactly this number.
Grace base case: 3.44×
R · Revenue factor
The master metric
U × M = net revenue ÷ total labor
Net revenue earned per dollar of total payroll. It rolls the other two metrics into a single score for the firm. On a single project, the simpler read is profitability.
Grace base case: ≈2.15 (≈2.0 at plan)
When utilization drops, the multiplier must climb to hold the same performance. When utilization rises, the overhead carried by each hour falls, the breakeven hour gets cheaper, and the multiplier eases at the same time. The firm holds R steady. The project manager moves the inputs. Try it:
ToolThe three KPIs · move the dials
A firm controls two levers, which are how busy the team is (utilization) and how much each direct hour earns (multiplier). Watch overhead, the breakeven hour, and the master metric move as you adjust them. Grace base case: U 62.5% · O 1.75 · M 3.44 · R 2.15.
Why utilization carries meaning only across a group, the three habits a project manager controls hour by hour, and how the Revenue Factor reads at each level of the firm, all live in the Finance Field Guide.
Reading the money states whether a fee is healthy. Building the fee states where that fee came from. A fee is assembled from the hours up rather than handed down, and it is something a project manager builds. A project manager who has never built one will reduce it on request without learning what the firm gave away.
Adding 20% to cost produces a margin of approximately 16.7%, not a margin of 20%. $1.1M × 1.20 = $1.32M, and $1.32M carrying $1.1M of cost leaves 16.7%. Holding a true 20% margin requires that the cost be divided by one minus the target margin. The two calculations look almost identical on the page, and on Oakhaven they differ by approximately $80,000.
A project manager who never built the fee answers that the team will make it work, and commits the firm to approximately an 8% job while believing it is a 20% job. A project manager who built the fee answers the same $1.2M request three specific ways:
In Module 4 a project manager steps into a fee someone else built, and rebuilds it backward to take ownership of it. In the Planning Studio (Modules 5 and 6) a project manager builds one forward: scope → tasks → hours → dollars, the same chain that makes a fee defensible.
The fee is what Grace earns. The Opinion of Probable Construction Cost, the OPCC, is what the building costs to construct, and it carries real exposure for a project manager who treats it casually. Carrying the OPCC as a tightening range, disclaiming it properly, and reconciling it against the Owner’s budget at every phase is a discipline of its own. The OPCC is the Owner’s money, and it is covered in Module 3’s Finance Field Guide.
A project manager holds two numbers side by side at all times. Effort = hours charged × the cost of an hour. Earned value = the percent of the work truly finished × the fee. Margin is the distance between them.
When effort runs ahead of earned value, margin is leaving the project, and the budget report will not show that loss, since spend and earnings are two different numbers. The distance between them is the Margin Gap.
?Green, or leaking?
Think of a phase you are running right now. Estimate two numbers before reading further, the percent of the work truly finished and the percent of the fee already spent. Now consider a phase that is 60% complete with 55% of the fee spent, on schedule, with a satisfied client. Is that phase healthy?
Earned value measures the work that would still be done if the project stopped today. A team can spend forty honest hours reworking a drawing around a decision that remains open and earn almost nothing, since the effort was real and the finished work was not. Hours measure consumption. Finished work measures progress.
Two quantities advance in parallel across the life of a project, one being the value the team has earned, the other being the cost the team has spent. A healthy project keeps the first of them ahead of the second. When cost moves ahead of earned value, the distance between the two is the Margin Gap, and profit leaves the project through that distance. Keeping earned value ahead of cost is the job.
The Margin Gap is not slow work and it is not bad pricing. It opens when work keeps advancing against a decision that is still open, a failure of Control Advancement, now measured in dollars.
The Competent Coordinator checks the budget, confirms that half the fee is spent and the schedule is on track, and moves on. The Accountable Owner reads the same report and asks the one question that protects margin: how much value has the team actually earned? Two project managers read identical numbers and reach opposite conclusions, and becoming the second one is the work of this module.
Oakhaven’s total design fee is $2.8M, of which Grace’s net portion, the fee the project manager manages, is $1.4M (consultants carry the rest).
| Moment | The numbers |
|---|---|
| Priced right | ~$1.1M cost / ~$300k profit / ~20% |
| Partway through | $600k earned / $700k spent |
| Margin Gap, live | $100k |
Caught at a $20k gap rather than $100k, the phase recovers to a margin near 20%. Left alone, the same phase finishes with minimal profit, an exhausted team, and a client who never heard the word red.
ToolRun the phase · find the Margin Gap
This tool illustrates Grace’s $1.4M Oakhaven fee from the video. Set how far along the work truly is and how much the team has spent, then watch effort move ahead of earned value.
The projected end margin assumes the current pace holds. Caught early, at a small gap, the phase can still land on target.
The video presented the model. The screen the Oakhaven team opens is the My Projects Review tab of the BST11 Project and Resource Management dashboard, with its Project Scorecard across the top. Every number is keyed below to a term from this lesson. The column to watch is Variance④. It sets what the team has earned next to what the team has spent and prints the difference, which makes the Margin Gap a column that can be seen.
The scorecard above uses plain English teaching labels so the ideas land clearly. Below is the identical Oakhaven data in the exact columns BST11 prints, drawn from the My Projects Review tab of the Project & Resource Management dashboard. Learn these words, because they are the words on the screen the team opens.
| Phase | Budget Effort | Effort | Effort % Complete | Effort Remaining | Revenue | Revenue % Complete | Effort Performance Index | Variance | Variance At Completion |
|---|---|---|---|---|---|---|---|---|---|
| Schematic DesignComplete | 280,000.00 | 224,000.00 | 80.0000 | 56,000.00 | 280,000.00 | 100.0000 | 1.2500 | 56,000.00 | 56,000.00 |
| Design DevelopmentComplete | 280,000.00 | 224,000.00 | 80.0000 | 56,000.00 | 280,000.00 | 100.0000 | 1.2500 | 56,000.00 | 56,000.00 |
| Construction DocumentsIn progress | 490,000.00 | 400,000.00 | 81.6327 | 90,000.00 | 300,000.00 | 61.2245 | 0.7500 | -100,000.00 | -163,333.33 |
| Bidding & NegotiationNot started | 70,000.00 | 70,000.00 | 14,000.00 | ||||||
| Construction AdministrationNot started | 280,000.00 | 280,000.00 | 56,000.00 | ||||||
| TOTAL · project to date | 1,400,000.00 | 848,000.00 | 60.5714 | 552,000.00 | 860,000.00 | 61.4286 | 1.0142 | 12,000.00 | 18,666.67 |
All three tabs with live data. Oakhaven across My Projects Review and Trends & Status, and the firm‑wide My Portfolio Alerts, every column named the way the software names it.
Profit ⑥ on that screen is a forecast rather than a record, since EAC (estimate at completion) = spend to date + the cost of the work that remains. At the current pace, CD has spent $400k to earn $300k, which projects to approximately $653k against its $490k share of the fee, and that projection is the −$163k printed in the Profit column. Found now, that number is a recovery plan. Discovered at closeout, it is a write‑off. The levers run in a fixed order: close the open decision that is generating the rework, restaff the remaining work to the rate the fee supports, rescope what is left to the fee that is left, and price whatever the client has changed since the fee was built.
Everything above assumes a fixed fee. Hourly and T&M work runs on the identical scorecard, but it needs an Effort Projection, the planned value of the work, entered before the work starts. Without that projection, Budget Effort reads zero and Variance carries no meaning. On a fixed fee the projection already exists, since the fee is locked to the invoicing ceiling by contract. On hourly work the project manager builds the projection and can flex the invoicing ceiling as the work develops, since the client is billed for hours actually spent. The planning discipline is the same either way, which is why a negative Variance on hourly work is a signal to check the projection rather than proof the firm is losing margin. Full walkthrough in the Finance Field Guide.
The scorecard captures one moment. Phasing also gives a baseline, the curve showing how the fee is planned to be earned across the schedule. Every week, a project manager compares what the team has actually earned against the point the curve calls for.
The Project Manager restrains the pace of work in the early phases, where uncertainty is high and the key decisions remain open, drives the work through the middle once those decisions are locked, and then curtails effort late, in anticipation of QA/QC and client review time. The S shape of the curve is the result of deliberate management.
The project manager who closed the dashboard at the opening of this lesson and the project manager who would have caught the $100,000 are the first and last cards below, the Competent Coordinator who read spend, and the Accountable Owner who read earned value. The work is moving from the first to the last, avoiding the two failure modes in between.
The Competent Coordinator
The Obsessed Designer
The People Pleaser
The Accountable Owner
Open the Quick Reference and read your own project’s BST scorecard the way section 4 read Oakhaven’s: set Revenue (earned) beside Effort (spent) and find the Variance between them. That single habit puts this module to work on a Monday morning.
?Challenge · from memory.
What does an hour cost relative to the wage, and what exactly is the Margin Gap?
Then do
Act as the second project manager. Open the report and ask what the team has earned, not just what it has spent, while the gap is still small enough to close.
“A budget report states what a team has spent. Earned value states what the team has produced. Margin lives in the distance between them.” Watch the module videos →
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