How are revenue, cost, gross profit, and margin calculated?

Operating calculates project profitability by combining two money streams — work and expenses — into cost, revenue, gross profit, and margin. How revenue is calculated depends on the project's billing type; expenses affect margin based on whether they're billable and whether they carry markup.

Written By Lauri Eurén

Last updated 1 day ago

Operating builds project profitability from two streams of money — work (people's time) and expenses — and combines them into four numbers:

  • Cost = work cost + expense cost.

    • Work cost = cost rate × hours.

    • Expense cost = what each expense costs you (billable or not).

  • Revenue = work revenue + billable-expense revenue.

    • Work revenue depends on the billing type (below).

    • A billable expense adds the amount billed to the client — which can include markup. A non-billable expense adds nothing to revenue.

  • Gross profit = revenue − cost.

  • Margin = gross profit ÷ revenue, shown as a percentage.

Work revenue depends on the billing type

  • Time-and-materials: rate × hours.

  • Capped time-and-materials: rate × hours, but capped at the Budget — work beyond the cap earns no revenue.

  • Fixed-price: a share of the Budget, released by the project's revenue recognition method — not rate × hours.

  • Non-billable: always zero.

How expenses move the margin

  • A billable expense adds its cost to cost and the billed amount (cost plus any markup) to revenue. The profit it contributes is the markup — so an expense billed at cost adds no profit, and because expense markup is usually thinner than your service margin, billable expenses often pull the blended margin down even while adding profit in dollars.

  • A non-billable expense adds to cost with no offsetting revenue, so it reduces both gross profit and margin.

Worked examples (time-and-materials)

Start with the work alone — a Person on a $150/hour rate and $90/hour cost rate, working 10 hours:

  • Revenue = 150 × 10 = $1,500

  • Cost = 90 × 10 = $900

  • Gross profit = $600

  • Margin = 40%

Add a billable expense ($200 cost, billed to the client at $250):

  • Revenue = 1,500 + 250 = $1,750

  • Cost = 900 + 200 = $1,100

  • Gross profit = 1,750 − 1,100 = $650

  • Margin = 650 ÷ 1,750 = 37%

  • The expense added $50 of profit (its markup), but at a thinner margin than the work, so the blended margin slips from 40% to 37%.

Add a non-billable expense instead ($200 cost, not billed to the client):

  • Revenue = $1,500 (unchanged — nothing is billed)

  • Cost = 900 + 200 = $1,100

  • Gross profit = 1,500 − 1,100 = $400 · Margin = 400 ÷ 1,500 = 27%

  • No revenue offsets the cost, so both gross profit and margin drop.

On a fixed-price project the work revenue would instead be the recognized share of the Budget, and billable expenses recognize through the same method — but cost, gross profit, and margin combine the two streams the same way.

Things to know

  • Where the numbers come from. Cost always traces to the work and expenses themselves: planned cost from allocations and Planned expenses, actual cost from tracked Time entries and recorded Expenses — on every billing type. Revenue uses those same sources only for time-and-materials; for fixed-price, revenue comes from the Budget, recognized by the chosen method, while allocations and Time entries drive only the cost side.

  • Margin at zero revenue is undefined, not 0% — with no revenue there is nothing to measure profit against.

  • The rate is resolved through the rate-determination chain (position-specific rate → Rate card → global default). Non-billable work carries a zero rate, so it earns no revenue even on a billable project.

Related