How do you calculate ROI for a project?

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Gunesh Apte PMP (Helping you to become project management expert)
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Overview: What is project ROI?
Why is project ROI important to understand?
It helps you decide which projects to invest in
It helps you track project financial health
It helps you allocate your project resources
2 benefits and 1 drawback of project ROI
1. It’s pretty straightforward to calculate
2. It’s an accepted and well-used project metric
3. It only tells you about project financial health
An industry example of project ROI
3 best practices when thinking about project ROI
1. Consider your project timing carefully
2. Capture all of your project costs
3. Clarify any non-financial returns
Frequently Asked Questions (FAQ) about project ROI
1. What is a good ROI?
2. How can I improve my ROI?
3. What does 20% ROI mean?
A final thought on project ROI
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How do you calculate project ROI?
What is a good ROI for a project?
How do you calculate ROI for a project in Excel?
What is the best way to measure ROI?

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Gunesh Apte PMP (Helping you to become project management expert)

Freelance Trainer & IT Consultant [PMP, CAPM, Project Management, Function Point Analysis, SNAP, Business Case Writing, Mentoring]

Published Dec 8, 2020

The basic ROI calculation is to divide the net return from an investment by the cost of the investment, and to express this as a percentage.

ROI % = (Return – Investment Cost)/Investment Cost x 100

Important Points about ROI are:

• Comparing the ROI of different projects/proposals provides an indication as to which IT projects to undertake.

• ROI proves to corporate executives, shareholders, and other stakeholders that a particular project investment is beneficial for the business.

• A project is more likely to proceed if its ROI is higher – the higher the better.

For example, a 200% ROI over 4 years indicates a return of double the project investment over a 4-year period.

• Financially, it makes sense to choose projects with the highest ROI first, then those with lower ROI.

Common Issues with ROI Calculations are:

ROI calculations can be manipulated if you are not careful.
Project savings, income and expenditures should be measurable and realistic.
In some cases, these measures are not easily measurable, and their realism is questionable.
Project benefits may be attributable to more than one improvement – so care needs to be taken to avoid double counting.
When forecasting costs and benefits, it is not always possible to obtain a high degree of certainty with respect to the accuracy of project costs and benefits.

Most Common Financial Benefits of the IT project which should be considered while calculating ROI are:

Revenue enhancement : After successful implementation of IT project, there will be increase in revenue (service upsell) e.g., Providing a new service that results in increased sales to new and existing customers.
Cost Reduction : IT project will reduce the cost of your business process. One example of this could be travel reduction (e.g., online meetings replacing face-to-face meetings, remote support replacing onsite support).
Cost Avoidance : This benefit will allow your organization to avoid specific costs completely. Your organization may see substantial time saved in your business process (increased productivity and reduction in time to complete tasks).
Capital Reduction : Post implementation of IT project, capital expense will be reduced. There could be lower costs for servers and storage.
Capital Avoidance : This is similar to cost avoidance but avoiding a capital expense. There could be avoidance of the planned purchase of new data center, due to innovative IT project implementation.

Apart from the above financial benefits, there could be lot of non-financial benefits as well:

Increased customer satisfaction.
Ability to offer improved customer service and support.
Increased usability leading to increased sales.
Increased user satisfaction.
Improved/automated business processes that the new system supports and enables faster and more accurate information.
Improved analytical solutions.
Better forecasting.
Better controls to improve data input accuracy.
Improved software vendor support and service, improved communications, better knowledge of software, system set-up.

There are various other ROI calculation methods such as, NPV, IRR and Payback period, which are also widely used and discussed in various Project Management seminars.

You can learn more about ROI, in my ROI workshop.

Gunesh Apte, PMP

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Definition of Project Return on Investment (ROI):

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Don’t we all want to understand how to deploy our project resources to give the best return? Do you want to track and evidence your project investment decisions? If you’re answering yes to these questions, understanding project return on investment (ROI) could be important for you. Let’s investigate further.

Overview: What is project ROI?

In its purest form, project return on investment (ROI) is a commonly used business metric to help us understand a project’s financial return that can be expected based upon our investment. You may hear it called the project profit ratio, and it is typically quoted as a percentage.

Mathematically, it is expressed as:

((project financial gain or loss – project total cost) / project total cost)) x 100

A negative project ROI indicates a financial loss, a positive project ROI a financial gain. Importantly, project ROI is independent of time period, so care needs to be taken when reviewing and comparing project ROI data and the underpinning assumptions. Two projects both with 20% ROI are potentially very different business decisions when taking into consideration a 1 or 5 year project completion time.

In a classic Six Sigma project that follows a DMAIC approach, we would expect to see project ROI calculations generated in the Define phase or earlier as part of the project charter.

When generating a project ROI calculation, the project team needs a clear and complete understanding of all associated costs and projected financial gain (or loss). To help with this, it’s useful to understand and explore the meaning of tangible benefits and intangible benefits.

Why is project ROI important to understand?

By using project ROI, we have a developed and recognised metric that helps build the business case to invest or proceed.

It helps you decide which projects to invest in

There may be multiple project opportunities to develop products, processes, or services, and clear project ROIs help us develop an investment strategy.

It helps you track project financial health

Project ROI calculations and forecasts are useful tools for evidencing the project financial health during delivery and keeping stakeholders informed.

It helps you allocate your project resources

It’s rare to be allocated infinite resources, so we can be both tactical and strategic with resource deployment if we have well developed and realistic project ROIs.

2 benefits and 1 drawback of project ROI

There are many reasons we might invest resources in a project, and using ROI can be a helpful project selection tool. Let’s explore some benefits and drawbacks of ROI.

1. It’s pretty straightforward to calculate

The mathematical formula for calculation is not too challenging but relies heavily on you doing your due diligence in capturing all costs and a realistic assessment of the project financial gain (or loss).

2. It’s an accepted and well-used project metric

Whether it’s a chemical industry capital project or a marketing team business project, ROI calculations and forecasts are typically used as part of a project’s financial audit and governance.

3. It only tells you about project financial health

Be careful to consider project impacts that may not be included in a standard ROI calculation as they have no directly attributable project cost or financial gain. These can typically be socio-environmental impacts, those intangible benefits that may be as a consequence of your project delivery.

An industry example of project ROI

A global chemical company wanted to expand their lubricant testing portfolio to take advantage of their development in ultra-low-viscosity driveline fluids. A project was initiated to investigate the potential for investment in a new driveline test rig. Due to the size of the investment, a formal project ROI was requested.

The project team analysed all associated project costs, including lost revenue from service disruption during the build and installation of the new test rig, hiring and training costs for operators, and commissioning and calibration costs. Business gains were assessed with the number of new customers and volumes of tests that could be completed per annum with assumed run rates and test charge rates.

The ROI period was set at five years and included asset depreciation calculations. The project was forecast at a positive ROI at 3 years and 15% @ 5 years, which secured the investment from the executive board and the test rig project was authorised.

3 best practices when thinking about project ROI

When calculating and presenting project ROI values, we should be thorough and transparent. Let’s explore three best practices to consider.

1. Consider your project timing carefully

When we calculate and quote a project ROI, this is typically for the project duration. This could be three years, five years, or maybe a shorter duration, but it always needs to be clearly defined.

2. Capture all of your project costs

For accurate project ROI calculations, we must capture all of the project costs. It sounds simple and obvious, but often, things are missed. Personnel costs are a classic example — it’s much more than the hourly rate!

3. Clarify any non-financial returns

Projects often deliver much more than just financial returns, and it’s important we clarify and capture these. Maybe there is improved employee satisfaction, leading to reduced absenteeism that does not have a direct dollar value assignable — remember those intangible benefits.

Frequently Asked Questions (FAQ) about project ROI

1. What is a good ROI?

There is no simple answer to this, and it will depend upon your industry sector, appetite for risk, and the maturity of the product or service in question. Typically a range of 5% to 10% is viewed as a good target return.

2. How can I improve my ROI?

Strong and disciplined project financial control in combination with maximising your project output whilst maintaining quality targets is a good strategy for a strong ROI.

3. What does 20% ROI mean?

To achieve an ROI of 20%, a project’s financial gain will be 20% higher than the project cost.

A final thought on project ROI

Initially, the thought of generating project ROI calculations and forecasts may be daunting. However, good financial discipline and a methodical approach to cost and financial gain calculations can help you win project investment utilising realistic ROI numbers.

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How do you calculate project ROI?

How to calculate project ROI.

ROI = (Net profit / cost of investment) x 100..

Net profit = expected revenue - total expenses..

Total expenses = material costs + (hours to complete the project x number of people working on the project x hourly wage) + equipment costs + software costs + building costs + additional costs..

What is a good ROI for a project?

Frequently Asked Questions (FAQ) about project ROI Typically a range of 5% to 10% is viewed as a good target return.

How do you calculate ROI for a project in Excel?

This is displayed as a percentage, and the calculation would be: ROI = (Ending value / Starting value) ^ (1 / Number of years) -1. To figure out the number of years, you'd subtract your starting date from your ending date, then divide by 365.

What is the best way to measure ROI?

Calculating Simple ROI You take the sales growth from that business or product line, subtract the marketing costs, and then divide by the marketing cost. So, if sales grew by $1,000 and the marketing campaign cost $100, then the simple ROI is 900%.