How to Calculate ROI for a Project: Formula Explained

Return on investment (ROI) is an evergreen project management metric for gauging the value of various types of projects.

Learning how to calculate ROI for a project is necessary to understand its financial gain and make informed decisions for future projects. Let’s get started.

Here’s the basic formula for how to calculate project ROI:

A positive ROI means that your project was successful and brought in more financial benefit than its immediate costs, while a negative ROI means the opposite.

You can also monitor two different types of ROI:

Let’s say you’re running a website with around 1,000 users and 50$ ARPU (average revenue per user). You’re planning on implementing a redesigned sign-up page to increase your user base, and you want to calculate whether this is a good investment.

For example, if your expectations are a 5% increase in the user base the month after implementation, your anticipated ROI will amount to:

So, your potential return in that first month will be negative if the userbase increases by only 5%.

The same calculation can be done with different variables, such as signups increasing permanently, which you can calculate with payback period analysis or internal rate of return — learn more below.

Now you know the simple formula.

However, there are additional types of formulas you can use for calculating return on investment, depending on how in-depth you want to go: cost-benefit ratio, payback period, and internal rate of return (IRR) analysis.

Let’s explore them in more detail.

The cost-benefit analysis, also known as the cost/benefit ratio, depicts your return of investment with an index. The formula is as follows:

In cost-benefit analysis, a ratio of 5 (often written as 5:1) would mean that for each dollar spent, five are returned in benefits.

The standards for what is considered an acceptable vs bad cost/benefit ratio usually depends from organization to organization:

Source: The Project Management Scorecard

Payback period analysis looks at how many years it will take to recuperate the cost of the initial investment into a project, program, software, etc.

For example, let’s say you’re considering buying a machine that costs $50,000. The machine is expected to save you $15,000 annually (having subtracted the project expenses).

This means your payback period is: $50,000 / $15,000 = 3.33, meaning that the period of time to pay back your initial investment is 3 years on average.

The payback period ignores the time value of money or the fact that money has a different value in the present vs the future.

The internal rate of return (IRR) can be a bit of a complex calculation to explain, but in its essence, it’s the rate at which your investment will break even, considering the time value of money.

So, let’s say your initial investment is $1,000. You expect that the investment will result in a cash flow of $400 in the following 3 years — however, you’ll need to account for cost factors in the future (such as inflation, but there are other factors as well) to understand the value of this money in the present.

So, you want to find the so-called discount rate by which to multiply the future cash flow to find out the present value of your money.

The IRR looks for a discount rate at which the cost of investment is equal to the benefit of the investment; or, in other words, that the sum of your future cashflows (translated into present value, since money devalues) is equal to the cost of investment.

We can separate the process of calculating ROI into three steps:

Needs analysis identifies the goals and objectives of an investment or project. It usually involves meetings with various stakeholders, analysis of historical data, setting estimates, and documenting all conclusions.

A well-executed needs analysis helps determine whether the project or investment is aligned with business goals and if the expected ROI will justify the investment. It also supports effective resource prioritization.

Tracking actual costs in project management ensures that all financial inputs related to the project are accounted for. Without it, you won’t have accurate data for optimizing your investment strategy.

This includes direct costs, such as initial investments, materials, and labor, as well as indirect costs, like maintenance, overhead, and any recurring expenses.

Learn more about managing your costs and accounting for budget overruns.

By keeping a precise record of all expenses, businesses can ensure their ROI analysis remains grounded in real numbers. An incomplete or inaccurate cost assessment risks overestimating or understating the impacts of a project.

Finally, once you have some tangible project results, you’ll need to collect the results into a report and share them with stakeholders. This will more usually be done for internal projects, as data is more readily accessible.

For client projects, a project progress report is the more common type of data collected (including time, budgets, and other project-related data), since calculating overall ROI usually requires insights into the client’s finances and other sensitive data.

In any case, a ROI analysis report is a useful source for managing future projects, creating internal benchmarks for revenue goals and the profitability of investments, and a great way to iterate on and improve your processes.

So, here’s why ROI can be such a powerful metric in the right hands:

However, there’s a catch (or a couple of them).

Here are the main challenges you might face in your ROI analysis:

The example above (calculating anticipated ROI of a web design) is a good way to explain this challenge.

While you might be able to reasonably attribute the rise in signups in the first month after implementing the new redesign, doing this for subsequent months might be more difficult.

For example, maybe you’re running new marketing campaigns that have increased traffic, leading to a natural rise in signups. Seasonality can also have a marked impact on various business metrics.

Businessess will often use A/B testing to help them isolate the effects of a specific project (check out some reporting tools). However, A/B testing can also be difficult to perform reliably, as you need a sizable sample of users to get accurate results.

If you don’t, it might take multiple months to get results, which can slow down your decision-making and be a detriment to your agency’s processes.

This brings us to the next point:

Not all projects are suitable for a comprehensive ROI analysis, and even if they are, they might not need it. For example, certain initiatives will result in benefits that are difficult to quantify and put in monetary terms — for example, employee benefits and skill-building initiatives. However, this doesn’t make them any less important.

Additionally, a ROI study also requires valuable resources, so being selective when to conduct one or not is the cost effective approach. The need for ROI can also vary depending on your organizational maturity:

Source: Handbook of Improving Performance in the Workplace

Finally, your ROI analysis starts with estimating. This is why it’s necessary to:

Using agency project management software can help you achieve all of these three points. An all-in-one platform is a reliable source of your business information, including employee cost rates, overhead and expenses, and previous project performance (for ex. the average time needed to complete specific tasks).

This helps you get accurate data when estimating your average ROI, and makes the process of gathering all of these numbers much less tedious.

We’ve talked about the impact software software has on your financial management. In short, this includes consolidated data, workflow efficiency, and faster decision-making processes.

An example of such a tool is Productive, the all-in-one agency management software. Productive helps improve project delivery, client relationships, and overall agency operations.

Learn how you can support your data accuracy with Productive.

Productive’s key features include:

Book a demo with Productive to learn more about the benefits of flexible budget management and financial forecasting for agencies.

To conclude, here are some tips for improving your ROI calculations:

If you want to learn more about cost savings in project management, check out our articles on cost variance and schedule variance.