Project Accounting for Agencies: Track Profitability by Client | Jumpstart Partners

If you're running your agency on generic accounting, you're flying blind. Here's how to see what's actually making money.

Why Generic Accounting Fails for Agencies

Traditional accounting answers: "Did we make money this month?"

Agency project accounting answers: "Which clients made us money, which lost money, and why?"

The Problem with Company-Wide P&L

Your standard Profit & Loss statement shows:

Total Revenue: $150,000
Total Expenses: $120,000
Net Profit: $30,000 (20% margin)

This tells you nothing about:

• Which of your 15 clients are profitable vs. unprofitable
• Whether your new client is covering their costs
• If your largest client is actually your lowest margin
• Which project types make the most money
• Where your team is spending time (billable vs. non-billable)

Real example from a client:

Their company P&L showed 22% profit margin—healthy. When we implemented project accounting, we discovered:

• 3 clients had 45-55% margins (subsidizing everything else)
• 5 clients had 15-25% margins (acceptable)
• 4 clients had 5-10% margins (barely profitable)
• 3 clients had negative margins (losing $2,000-$6,000/month)

They were working 50-hour weeks to serve clients that were costing them money. Within 90 days, they fired the 3 unprofitable clients, raised prices on the low-margin 4, and redirected resources to acquiring more clients like their top 3.

Result: Revenue dropped 12% but profit increased 35% while working 40-hour weeks.

"Agencies that can't measure client profitability are essentially running a charity for their worst clients," says Michael Roberts, former CFO at Ogilvy. "We've seen agencies where 25% of clients generate zero or negative margin. That's not a business—that's a subsidy program funded by your good clients. The moment you implement project accounting, the illusion of 'all revenue is good revenue' shatters immediately."

According to the American Association of Advertising Agencies (4A's) 2024 Benchmarking Report, agencies without project-level tracking overprice unprofitable clients by an average of 18% and underprice profitable clients by 23%, leaving massive money on the table.

What Is Agency Project Accounting?

Project accounting (also called job costing) tracks financial performance by project or client, not just company-wide.

Core Components

1. Project Setup:

• Each client gets a project code or class
• Within each client, individual projects get sub-codes
• All revenue and expenses are tagged to specific projects

2. Time Tracking:

• Every team member logs hours by client/project
• Time entries include: Client, Project, Task, Billable vs. Non-Billable
• Hours × hourly cost rate = labor cost allocation

3. Cost Allocation:

• Direct costs: Assigned to specific projects (ad spend, freelancers, software for that client)
• Indirect costs: Allocated across projects (overhead, admin, office space)

4. Revenue Recognition:

• Match revenue to costs in same period (accrual accounting)
• Track Work-in-Progress (WIP) for completed work not yet billed
• Handle retainers, project fees, and hourly billing differently

5. Profitability Analysis:

• Project P&L: Revenue minus direct costs minus allocated overhead = true profit
• Margin calculation: (Profit ÷ Revenue) × 100
• Compare actual vs. estimated (budget) to see variances

Why Agencies Need Project Accounting

See True Profitability by Client

Scenario: You have a $10,000/month retainer client and a $3,000/month project client.

Without project accounting, you assume:

• Retainer client is more valuable (bigger revenue)
• Project client is less important

With project accounting, you discover:

• Retainer client: $10,000 revenue - $9,200 labor cost - $1,200 overhead = -$400 (losing money)
• Project client: $3,000 revenue - $1,500 labor cost - $360 overhead = $1,140 profit (38% margin)

The "big" client is costing you money. The "small" client is your profit center.

Without this visibility, you'd invest more in the wrong client.

Catch Scope Creep Before It Kills Margins

Agencies die by a thousand "quick favors."

The pattern:

1. Estimate 20 hours for project
2. Client asks for "one more revision"
3. Team spends 35 hours total
4. You bill the agreed $4,000 (20 hours × $200)
5. Your actual cost was $5,250 (35 hours × $150 loaded rate)
6. You lost $1,250 and didn't even know it

According to HubSpot's 2024 Agency Growth Report, 71% of agencies underestimate project hours by 30% or more, primarily due to scope creep. Project accounting makes this visible so you can course-correct.

"Scope creep is the silent killer of agency profitability," says Lisa Thompson, Managing Director at VMLY&R. "Without project accounting, you have no idea you're drowning until you're already underwater. We had a retainer client that 'felt' profitable until we implemented time tracking—turned out we were delivering 50% more hours than the retainer covered every single month. That's $4,000 walking out the door monthly that we never even saw."

Price New Projects Accurately

When a prospect asks "How much for a website redesign?" you need data, not guesses.

Without project accounting:

• You guess based on "what feels right"
• Or copy what competitor charges
• Or ask what their budget is and work backwards

With project accounting:

• Pull up last 5 website redesigns you did
• See actual hours spent: 65-85 hours
• See actual costs: $9,750-$12,750 (labor + direct expenses)
• Add target margin (20-30%): $12,200-$16,600 quote
• Adjust for scope differences

You're pricing based on your actual costs and desired margin, not guesswork.

Improve Resource Utilization

You can't manage what you don't measure.

Project accounting reveals:

• Which team members are at 85% utilization (ideal) vs. 50% (underutilized) vs. 110% (burned out)
• Which clients monopolize your senior talent (high cost, low margin)
• How much time goes to non-billable work (admin, internal meetings, proposals)

The Databox Agency Benchmarks show top-performing agencies (top 20% by profitability) maintain 75-85% billable utilization. Average agencies run 55-65%. The difference is visibility—you can't fix utilization you can't see.

"The biggest mistake agencies make is treating utilization as a people problem when it's actually a visibility problem," says Carlos Rodriguez, Principal at McKinsey's Marketing Practice. "We worked with an agency convinced they needed to hire three more people. Project accounting revealed 40% of their team's time was going to non-billable internal work and proposal creation. They didn't need more people—they needed to convert more proposals and reduce internal meetings. Six months later, same team size, 30% higher revenue."

Negotiate Better Retainers

Armed with project accounting data, retainer conversations change:

Old approach:

• Client: "We want to reduce retainer from $10K to $8K"
• You: (panic, agree because you need the revenue)

New approach:

• You: "Let me pull our project accounting. Over the past 6 months, we averaged 62 hours/month on your account at a fully loaded cost of $9,300. At $8K, we'd be losing $1,300/month. Let's discuss reducing scope to match $8K, or we need to stay at $10K to break even."

Data changes the conversation from negotiation to math.

How to Set Up Project Accounting for Your Agency

Step 1: Choose Your Accounting Structure (QuickBooks)

Option A: Classes (Recommended for Most Agencies)

Set up Classes for:

• Each client as main class
• Each project as sub-class

Example structure:

Client: Acme Corp
  ├── Project: Website Redesign
  ├── Project: Monthly Retainer (Jan 2025)
  ├── Project: PPC Management
  └── Project: Content Marketing

Client: Beta LLC
  ├── Project: Brand Strategy
  └── Project: Social Media Management

Every transaction (revenue, expenses, time entries) gets tagged with appropriate class.

Option B: Projects (QuickBooks Online Advanced or Enterprise)

Use built-in Project feature:

• Create project for each client engagement
• Track time, expenses, and revenue within project
• Generate project-specific P&L automatically

Option C: Jobs (QuickBooks Desktop)

Set up each client as Customer, each project as Job under that customer.

Step 2: Implement Time Tracking

Choose time tracking software that integrates with QuickBooks:

• Harvest - Simple, clean interface, great for agencies
• Toggl Track - Robust reporting, easy to use
• Productive.io - All-in-one agency management + financials
• QuickBooks Time (TSheets) - Native integration with QuickBooks

Time tracking requirements:

• Every team member logs hours daily
• Each entry includes: Client, Project, Task Description, Billable (yes/no)
• Submitted and approved weekly
• Synced to QuickBooks monthly for cost allocation

Best practice from the 4A's Agency Operations Guide: Implement time tracking as non-negotiable policy. Agencies that enforce 95%+ compliance report 23% better project profitability because they see actual costs, not estimates.

Step 3: Calculate Loaded Labor Rates

Your team's hourly cost isn't their salary ÷ 2,080 hours. It includes benefits, taxes, and overhead.

Formula:

Loaded Hourly Rate = (Annual Salary + Benefits + Taxes + Overhead) ÷ Billable Hours

Example: $70,000 Salary Designer
  + $21,000 Benefits & Taxes (30%)
  + $14,000 Allocated Overhead (20%)
  = $105,000 Total Cost
  ÷ 1,560 Billable Hours (75% utilization, 2,080 hours - 10% PTO)
  = $67/hour Loaded Rate

Calculate loaded rate for each team member or use average rate by role (junior, mid-level, senior).

Use this rate to allocate labor costs to projects based on hours tracked.

Step 4: Allocate Direct Costs

Direct costs are expenses for specific clients:

• Advertising spend (Facebook Ads, Google Ads)
• Freelancer/contractor fees for specific projects
• Stock photos or design assets for that client
• Software subscriptions used only for that client
• Travel expenses for client meetings

In QuickBooks:

• Tag every expense with appropriate Class (client/project)
• When entering bills or expenses, select class
• Run P&L by Class to see direct costs per project

Step 5: Allocate Overhead (Optional but Recommended)

Overhead includes costs that benefit all clients but aren't directly billable:

• Office rent
• Utilities and internet
• General software (Slack, Google Workspace)
• Insurance
• Admin salaries
• Marketing and business development
• Unbillable time (internal meetings, training)

Simple allocation method: Allocate overhead based on revenue percentage.

Client A: $15,000 revenue (30% of total $50,000)
  → Assign 30% of $10,000 overhead = $3,000

Client B: $25,000 revenue (50% of total)
  → Assign 50% of overhead = $5,000

Client C: $10,000 revenue (20% of total)
  → Assign 20% of overhead = $2,000

Advanced allocation method: Allocate based on hours worked (more accurate for services businesses).

Client A: 95 hours (38% of 250 total billable hours)
  → Assign 38% of overhead

Client B: 125 hours (50% of total)
  → Assign 50% of overhead

Client C: 30 hours (12% of total)
  → Assign 12% of overhead

Step 6: Track Work-in-Progress (WIP)

WIP represents work completed but not yet billed.

The problem:

• You complete a project on March 25th (costs incurred in March)
• You invoice on April 5th (revenue recorded in April)
• March looks unprofitable, April looks overly profitable
• Neither month is accurate

The solution: WIP accounting

1. At month-end, calculate unbilled work completed

2. Create journal entry to record WIP as asset:

   • Debit: WIP Asset (Balance Sheet)
   • Credit: Revenue (P&L) or Contra-Expense

3. When you bill the client:

   • Debit: Accounts Receivable
   • Credit: WIP Asset (moving from WIP to AR)

Result: Revenue and costs match in the same period, giving accurate monthly project profitability.

According to Deltek's Professional Services Benchmarks, agencies that track WIP report 35% more accurate monthly financials because revenue and costs align properly.

Step 7: Generate Project P&Ls

Monthly routine:

1. Export time tracking data to QuickBooks (allocate labor costs)
2. Verify all expenses are coded to correct classes/projects
3. Calculate and allocate overhead to projects
4. Record WIP for completed unbilled work
5. Run Profit & Loss by Class report

Your report shows:

Client: Acme Corp - Website Redesign Project
Revenue:                    $25,000
Direct Costs:
  - Labor (125 hours)       $15,625
  - Freelancer (design)     $3,000
  - Stock photos            $400
  Total Direct Costs:       $19,025
Gross Profit:               $5,975 (24% margin)
Overhead Allocation:        $2,500
Net Profit:                 $3,475 (14% margin)

Now you know: This project made $3,475 with 14% margin.

Compare to estimate:

• Estimated hours: 100
• Actual hours: 125 (25% over)
• Estimated profit: $5,000
• Actual profit: $3,475 (30% below estimate)

Action: Next similar project, estimate 125-130 hours, not 100. Or tighten scope management.

Key Metrics to Track

1. Project Profit Margin

Formula: (Project Revenue - Project Costs) ÷ Project Revenue × 100

Targets:

• 30-40% margin: Excellent
• 20-30% margin: Good
• 15-20% margin: Acceptable
• <15% margin: Review for scope creep or repricing

2. Utilization Rate

Formula: Billable Hours ÷ Total Available Hours × 100

Example:

• Designer works 160 hours in month
• Logs 120 billable hours
• Utilization: 120 ÷ 160 = 75%

Targets (from Databox Agency Benchmarks):

• 75-85%: Ideal (time to bill clients, some internal investment)
• 60-75%: Acceptable (watch for efficiency)
• <60%: Underutilized (need more work or wrong team size)

• 90%: Unsustainable (burnout risk, no time for growth initiatives)

3. Realization Rate

Formula: Actual Hours Billed ÷ Actual Hours Worked × 100

Example:

• Worked 50 hours on project
• Billed client for 40 hours (absorbed 10 hours due to scope creep/inefficiency)
• Realization: 40 ÷ 50 = 80%

Targets:

• 90-100%: Excellent (billing for nearly all time worked)
• 80-90%: Good
• 70-80%: Review for write-offs and scope issues
• <70%: Major profitability problem

Low realization means you're working more hours than you can charge for—either scope creep, inefficiency, or pricing problems.

4. Client Lifetime Value (CLV)

Formula: Average Monthly Revenue per Client × Average Client Lifespan (months) × Gross Margin %

Example:

• Average retainer: $5,000/month
• Average client stays 24 months
• Gross margin: 30%
• CLV: $5,000 × 24 × 0.30 = $36,000

Use CLV to:

• Justify customer acquisition costs (should be <30% of CLV)
• Identify high-value client profiles to target
• Prioritize client retention over constant new business

5. Project ROI (vs. Estimate)

Formula: (Actual Profit - Estimated Profit) ÷ Estimated Profit × 100

Example:

• Estimated profit: $5,000
• Actual profit: $3,800
• Variance: ($3,800 - $5,000) ÷ $5,000 = -24%

Use this to:

• Improve estimating accuracy over time
• Identify which project types you consistently under/overestimate
• Adjust pricing or process for future projects

Common Agency Project Accounting Mistakes

Mistake #1: Not Tracking Time Consistently

The error: Team members log time sporadically or not at all.

Why it kills profitability: You can't allocate labor costs accurately, so you don't know true project costs.

The fix:

• Make time tracking mandatory (part of job description)
• Review compliance weekly (who didn't log time?)
• Tie time tracking to performance reviews and bonuses
• Use simple, mobile-friendly tools (Toggl, Harvest)

Best practice: Block 15 minutes at end of each day for team to log time before leaving.

Mistake #2: Using Billing Rate Instead of Cost Rate

The error: Calculating project costs based on what you bill ($150/hour) instead of loaded cost rate ($85/hour).

Why it's wrong: Overestimates profitability. Client pays $150/hour but your actual profit is $150 - $85 = $65/hour, not $150.

The fix: Always use fully loaded cost rates for project profitability analysis. Reserve billing rates for client-facing proposals only.

Mistake #3: Ignoring Overhead Allocation

The error: Only tracking direct costs (labor, ad spend), ignoring overhead (rent, insurance, admin).

Why it's wrong: Every project uses overhead resources. Ignoring it makes projects look more profitable than they are.

The fix: Allocate overhead systematically using revenue or hours-based method. Even simple allocation (divide total overhead equally across all projects) is better than ignoring it.

Mistake #4: Not Reviewing Project Profitability Until Year-End

The error: Running project accounting only annually for tax prep.

Why it's wrong: By the time you discover an unprofitable client, you've lost money for 12 months.

The fix: Review project profitability monthly. Set calendar reminder to run P&L by Class and review every client/project. Catch problems early.

Mistake #5: Keeping Unprofitable Clients Out of Fear

The error: Discovering a client is unprofitable but keeping them because "revenue is revenue" or "they might get better."

Why it's wrong: Unprofitable clients consume team capacity that could serve profitable clients. You're literally working to lose money.

The fix: Address immediately:

1. Analyze why unprofitable (scope creep, underpriced, inefficient delivery)
2. Renegotiate scope or price
3. If client won't budge, fire them politely
4. Reallocate team capacity to profitable work

According to AgencyAnalytics' 2024 State of Agency Report, agencies that terminate bottom 20% of clients by profitability see average profit increase of 22% within 6 months while working fewer hours.

Mistake #6: Mixing Revenue Types Without Proper Tracking

The error: Treating retainer revenue, project revenue, and hourly revenue identically.

Why it's problematic: Each has different cost structures and profitability profiles.

The fix: Track separately:

• Retainer clients: Consistent monthly revenue, risk of scope creep
• Project clients: One-time revenue, risk of underestimating hours
• Hourly clients: Variable revenue, usually highest margin but unpredictable

Project accounting reveals: Retainer clients might have lower margins (30% average) than project clients (45% average), even though retainers feel more stable.

Tools & Software for Agency Project Accounting

All-in-One Agency Management Platforms

Productive.io ($9-20/user/month)

• Time tracking, project management, and financials
• Real-time project profitability dashboards
• Integrates with QuickBooks
• Built specifically for agencies

Forecast ($29/user/month)

• Resource planning and project accounting
• Tracks utilization, profitability, WIP
• Integrates with QuickBooks and Xero

FunctionPoint ($29/user/month)

• Project accounting, time tracking, resource management
• Strong reporting for client profitability
• CRM and project management included

Time Tracking + QuickBooks Integration

Harvest ($12/user/month)

• Simple time tracking with invoicing
• Integrates with QuickBooks
• Project budgets and profitability reports
• Great for smaller agencies (5-15 people)

Toggl Track ($10/user/month)

• Powerful reporting and analytics
• QuickBooks integration
• Project profitability dashboards

QuickBooks Time (TSheets) ($8/user/month)

• Native QuickBooks integration
• Built-in job costing features
• Works seamlessly with QuickBooks

QuickBooks Native Features

QuickBooks Online Advanced ($200/month)

• Built-in Projects feature
• Track time, expenses, profitability by project
• No additional integration needed

QuickBooks Desktop Enterprise ($1,300+/year)

• Advanced job costing features
• Custom reporting
• Handles complex project accounting

Choosing the Right Tool

Small agency (3-10 people, simple projects):

• Harvest + QuickBooks Online - $500-1,000/month total
• Simple, affordable, easy to learn

Mid-size agency (10-30 people, multiple project types):

• Productive.io or Forecast + QuickBooks - $1,200-2,500/month
• More robust, handles complexity

Large agency (30+ people, complex operations):

• FunctionPoint or QuickBooks Enterprise - $2,500-5,000/month
• Full-featured, enterprise-grade

Frequently Asked Questions

Stop Guessing Which Clients Are Profitable

You shouldn't work 50-hour weeks to serve clients that lose money while your profitable clients wait for attention. Real numbers beat guesswork every time.

Ready to see which clients actually make money—and which are costing you? Contact us for a free consultation and see how project accounting can transform your agency profitability.