Bookkeeping for Consulting Firms: How to Track Project Profitability in QuickBooks Online

Table of Contents

1. Why Project Profitability Matters for Consultants
2. The Hidden Profit Killers in Consulting
3. QuickBooks Setup for Project Tracking
4. Tracking Time and Billable Hours
5. Allocating Expenses by Project
6. Creating Profitability Reports
7. Calculating True Hourly Rates
8. When to Fire Unprofitable Clients
9. Common Mistakes to Avoid
10. Conclusion

You’re running a successful consulting practice. Projects are flowing in, clients seem happy, and revenue is growing. But here’s the uncomfortable question many consultants avoid: which projects actually made you money?

Most consulting firms can tell you their overall revenue and expenses. Far fewer can tell you whether Project A was profitable while Project B drained resources. Without project-level profitability tracking, you’re essentially flying blind—making decisions based on gut feeling rather than financial reality.

In this comprehensive guide, we’ll show you exactly how to set up QuickBooks Online to track profitability by project and client. You’ll learn which clients are worth keeping, which services to expand, and where you’re losing money without realizing it.

Why Project Profitability Matters for Consultants

Here’s the hard truth: your consulting firm’s overall profitability means nothing if individual projects are bleeding money.

Consider this scenario: Your firm shows a healthy 25% profit margin overall. Sounds great, right? But when you dig deeper, you discover that three major clients contribute 40% profit margins while two others operate at -10% (yes, negative). The profitable clients are subsidizing the unprofitable ones, and you had no idea.

The Consulting Profitability Paradox

Consulting firms face a unique challenge. Unlike product-based businesses where costs are relatively fixed and predictable, consulting profitability depends on:

• Accurate time tracking – Did your team spend 20 hours or 40 hours on deliverables?
• Scope creep management – How much “free” work are you doing beyond the contract?
• Utilization rates – What percentage of consultant time is actually billable?
• Overhead allocation – How much does it really cost to deliver each project?

Without tracking these elements by project, you’re making critical business decisions—pricing, hiring, client selection—based on incomplete information.

💡Key Industry Insight

According to the 2023 Professional Services Maturity Benchmark by SPI Research — a study of 709 professional services firms representing over 430,000 consultants — firms in the bottom two maturity levels generate an average of just $131,000 in annual revenue per billable consultant, compared to $270,000 for top-performing firms. The difference isn’t talent or rates — it’s operational visibility. Top firms know exactly where they make money. Most others are guessing.

The Hidden Profit Killers in Consulting

Before we dive into how you can setup QuickBooks to help you track and maintain profitability, let’s identify what silently destroys that profitability.

1. Untracked Scope Creep

The client asks for “just one small addition.” You want to maintain the relationship, so you say yes. It takes three hours. Multiply that across dozens of projects, and you’ve donated thousands of dollars in consulting time.

Without project-level tracking, you’ll never see this pattern.

2. Invisible Overhead

You calculate that consultants cost $50/hour in salary. But what about:

• Office space and utilities
• Software subscriptions (QuickBooks, project management tools, industry software)
• Professional development and training
• Marketing and business development time
• Administrative staff supporting consultants
• Benefits and payroll taxes

Suddenly that $50/hour consulting gig actually costs you $85/hour. If you’re billing at $100/hour, your margin just dropped from 50% to 15%.

3. Mixed Billing Models

Many consulting firms offer both hourly projects and fixed-fee retainers. Without proper tracking:

• Retainer clients consume more hours than the monthly fee covers
• Hourly clients get undercharged because you don’t capture all billable time
• You can’t compare profitability between billing models

4. Non-Billable Time Sink

Consultants spend significant time on activities that don’t directly generate revenue:

• Proposals and pitches (some convert, many don’t)
• Internal meetings and training
• Administrative tasks
• Account management and relationship building

This time must be tracked and allocated correctly, or your profitability calculations will be pure fantasy.

QuickBooks Setup for Project Tracking

Now let’s get tactical. Here’s exactly how to configure QuickBooks Online to track project profitability.

Classes vs. Projects vs. Jobs: Understanding the Options

QuickBooks Online offers several ways to track project-level data. The right choice depends on your firm’s structure and reporting needs.

Projects (QuickBooks Projects Feature)

• Best for: Firms that want comprehensive project management integrated with bookkeeping
• Pros: Dedicated project dashboard, time tracking integration, profitability reports built-in
• Cons: Only available on Plus and Advanced plans, learning curve for initial setup

Classes

• Best for: Tracking profitability across multiple dimensions (project types, service lines, offices)
• Pros: Flexible, available on all plans, can track multiple classifications
• Cons: Requires discipline to always select classes, no dedicated project dashboard

Jobs (Sub-customers)

• Best for: Simple project tracking when you have limited projects per client
• Pros: Easy to set up, works with invoicing naturally
• Cons: Can get unwieldy with many projects, limited reporting compared to Projects

Our Recommendation: If you’re on QuickBooks Plus or Advanced, use the Projects feature. It’s purpose-built for exactly what consulting firms need. If you’re on Essentials or lower, use Classes for project types combined with Sub-customers for individual client projects.

Step-by-Step: Setting Up QuickBooks Projects

Let’s walk through setting up proper project tracking using QuickBooks Projects:

1. Enable Projects

Navigate to: Projects menu → Click “New Project”

Enter:

• Project name (e.g., “ABC Corp – Digital Strategy”)
• Customer (ABC Corporation)
• Start date and projected end date (optional)
• Status (In progress, Not started, Completed)

2. Create Comprehensive Project Categories

QuickBooks allows you to track both income and expenses by category within each project. Set up categories that match your consulting services:

Income categories:

• Strategy Consulting
• Implementation Services
• Training & Workshops
• Ongoing Support/Retainer

Expense categories:

• Consultant Labor
• Subcontractor Fees
• Travel & Expenses
• Software/Tools
• Research & Materials

3. Configure Time Tracking Integration

If you’re using QuickBooks Time (formerly TSheets) or manually tracking time:

• Enable time tracking in QuickBooks settings
• Create service items for each type of consulting work
• Set billing rates for each service
• Link services to appropriate income categories
• Train your team to log time to correct projects

4. Set Up Budget and Billing Method

For each project, configure:

• Fixed price or hourly billing
• Estimated budget (hours and/or dollars)
• Alert thresholds (get notified when reaching 75% of budget)
• Billing schedule (milestone-based, monthly, upon completion)

Tracking Time and Billable Hours

Accurate time tracking is the foundation of consulting profitability. Here’s how to do it right.

The 80% Utilization Myth

Many consulting firms target 80% utilization (consultants billing 32 hours of a 40-hour week). But this is often unrealistic and doesn’t account for:

• Business development (proposals, networking)
• Administrative tasks (timesheets, expense reports)
• Professional development
• Internal meetings
• Vacation and sick time

More realistic: 65-70% utilization for senior consultants, 70-75% for mid-level, 60-65% for juniors who do more internal work.

Track ALL time—billable and non-billable—to understand true capacity and costs.

Time Tracking Best Practices

Track in Real-Time
Don’t rely on memory to fill in timesheets Friday afternoon. Use:

• Timers in QuickBooks Time or other tools
• Calendar blocking (match calendar to timesheet)
• End-of-day logging while details are fresh

Categorize Granularly
Instead of just “worked on ABC project,” track:

• Specific task (research, analysis, deliverable creation, client meeting)
• Billable vs. non-billable
• Project phase or milestone

This granularity helps you identify:

• Which activities consume more time than estimated
• Patterns of scope creep
• Training opportunities for efficiency

Capture Non-Billable Time
Create internal “projects” or classes for:

• Business development
• Internal meetings
• Training and professional development
• Administrative time
• PTO (vacation, sick time)

This ensures 100% of consultant time is accounted for in your cost calculations.

Billing Against Tracked Time

QuickBooks makes it easy to convert tracked time into invoices:

1. Navigate to Projects > Select project > Time tab
2. Review unbilled time entries
3. Click “Create invoice”
4. QuickBooks automatically populates invoice with time entries
5. Adjust as needed for:

• Scope-included work vs. additional services
• Rounding or billing minimums
• Fixed-fee vs. actual hours for retainer clients

Pro Tip: Before creating invoices, review the time entries for accuracy. This weekly review catches errors early and gives you visibility into project progress.

Allocating Expenses by Project

Time isn’t the only cost. Properly allocating expenses to projects reveals true profitability.

Direct Project Expenses

These are straightforward costs clearly tied to specific projects:

Travel & Meals (within CRA guidelines)

• Client site visits
• Airfare, hotels, meals
• Ground transportation

When recording in QuickBooks:

• Tag expense with correct project
• Use expense categories (Travel, Meals, etc.)
• Attach receipts for documentation
• Note if billable to client or absorbed by firm

Subcontractor Costs
Many consulting projects involve specialists or additional capacity:

Record subcontractor bills:

• As expenses (not cost of goods sold unless you’re reselling services)
• Tagged to appropriate project
• With clear categorization (Subcontractor – Technical, Subcontractor – Design, etc.)

Project-Specific Software or Tools
Sometimes you purchase tools specifically for a client project:

• Industry research databases
• Specialized software licenses
• Data or content purchases

Tag these to projects just like any other expense.

Allocating Overhead and Indirect Costs

Here’s where it gets trickier—and where most consulting firms fail.

The Overhead Reality

Your firm incurs costs that support all projects but aren’t directly billable:

• Office rent and utilities
• Administrative staff salaries
• Accounting and bookkeeping (hello!)
• General software (QuickBooks, email, file storage)
• Marketing and business development
• Professional liability insurance
• General office supplies

How to Allocate:

Method 1: Percentage of Revenue
Allocate overhead to projects proportional to their revenue contribution.

Example: Project A generates $50K revenue, total firm revenue is $500K

• Project A represents 10% of revenue
• Total overhead for period: $100K
• Allocate $10K overhead to Project A

Method 2: Hours-Based Allocation
Allocate based on consultant hours consumed.

Example: Project A consumed 200 hours, total billable hours were 2,000

• Project A represents 10% of billable time
• Allocate 10% of overhead costs

Method 3: Consultant-Specific Rates
Calculate a loaded hourly rate for each consultant including their proportionate overhead.

Example:

• Junior consultant salary: $60K/year = ~$30/hour
• Benefits and taxes: 25% = $7.50/hour
• Allocated overhead: $25/hour
• Total loaded rate: $62.50/hour

Track this loaded rate to each project based on who worked on it.

At New Flow Bookkeeping, we help consulting firms establish overhead allocation methodologies that make sense for their business model. There’s no one-size-fits-all approach—the right method depends on your team structure, project types, and reporting needs. We’ll set up your QuickBooks to track allocations automatically, so you get accurate profitability without manual calculations every month.

Creating Profitability Reports

Once you’re tracking income, time, and expenses by project, QuickBooks can generate powerful profitability reports.

Project Profitability Dashboard

QuickBooks Projects includes a built-in profitability dashboard showing:

Per Project:

• Total revenue (billed and unbilled)
• Total costs (labor, expenses, overhead if you’ve allocated it)
• Profit margin (dollars and percentage)
• Budget vs. actual comparison
• Timeline and status

To access: Projects menu > Click on any project > Overview tab

Custom Profit & Loss by Project

For more detailed analysis, create custom P&L reports:

Reports → Profit and Loss

Customize:

1. Set report period (month, quarter, year-to-date)
2. Filter by customer or project
3. Compare columns: This month vs. last month, This year vs. last year
4. Customize rows to show income and expense categories you care about

Pro Tip: Create memorized reports for:

• Month-over-month project comparison
• Client profitability (all projects for each client)
• Service line profitability (all strategy projects vs. all implementation projects)

Save these as templates so you can run them instantly each month without recreating filters.

Key Metrics to Track

Beyond simple profit margins, track these consulting-specific metrics:

Revenue per Consultant Hour
Total project revenue ÷ Total hours worked on project

Benchmark: Should exceed consultant loaded cost by desired margin

Realization Rate
Actual revenue ÷ Standard billing rate for hours worked

100% = you billed every hour at standard rates
<100% = discounts, write-offs, or scope creep

100% = premium pricing or efficiency bonuses

Utilization Rate
Billable hours ÷ Total available hours

Track by consultant and overall. Identifies capacity and efficiency issues.

Project Profit Margin Trends
Compare margins across:

• Project types (strategy vs. implementation)
• Client industries (tech vs. healthcare)
• Client sizes (enterprise vs. mid-market)
• Time periods (identifying seasonal patterns)

Calculating True Hourly Rates

Most consultants significantly overestimate their effective hourly rate. Let’s calculate what you’re really earning.

The Formula

True Hourly Rate = Net Profit ÷ Total Hours Worked (billable + non-billable)

Notice this is NOT:

• ❌ Billing rate (that’s what you charge, not what you earn)
• ❌ Revenue ÷ billable hours (ignores costs and non-billable time)
• ❌ Salary ÷ hours (only relevant if you’re an employee, not owner)

Step-by-Step Calculation

Let’s walk through a realistic example:

Annual Figures:

• Total Revenue: $250,000
• Total Expenses: $175,000 (including your salary, overhead, everything)
• Net Profit: $75,000

Time Figures:

• Billable hours: 1,200 hours (60% utilization, 40-hour weeks)
• Non-billable hours: 800 hours (business dev, admin, training)
• Total hours worked: 2,000 hours
• PTO: 80 hours (2 weeks vacation)

True Hourly Rate = $75,000 ÷ 2,000 = $37.50/hour

Even though you might bill clients at $150/hour, your true economic value from each hour worked (including non-billable time) is $37.50.

Why This Matters

Understanding your true hourly rate helps you:

Evaluate new opportunities
That $5,000 project seems attractive. But if it will take 200 hours including proposals, meetings, and deliverables, you’re earning $25/hour—below your true rate. Pass.

Make pricing decisions
You want to earn $100/hour true rate. Working backwards:

• Need 2,000 annual hours capacity
• 65% utilization = 1,300 billable hours
• Target $75K net profit
• Plus $175K expenses = $250K revenue needed
• $250K ÷ 1,300 hours = $192/hour billing rate minimum

Assess profitability improvements
Where can you improve?

• Increase utilization (more billable hours)
• Reduce expenses (lower cost per hour)
• Increase billing rates (more revenue per hour)
• Improve efficiency (less time per deliverable)

When to Fire Unprofitable Clients

Here’s the uncomfortable truth: some clients will never be profitable, no matter how you optimize. Sometimes the best business decision is letting them go.

Red Flags of Unprofitable Clients

Watch for these warning signs in your project profitability reports:

Consistent Scope Creep
Every project with this client runs 30-50% over estimated hours. They’re getting $30K worth of work for $20K because you keep saying yes to “small additions.”

Low-Margin/High-Maintenance Combination
They negotiate hard on price AND consume disproportionate partner time with urgent requests and hand-holding.

Payment Issues
Slow to pay, disputes invoices, requires excessive follow-up. Even if the project itself is profitable, the cash flow impact and admin burden kill overall profitability.

Misaligned Expectations
They expect enterprise-level service at small business prices. You’ll never make them happy without losing money.

Opportunity Cost
Their work fills your calendar with low-margin projects, preventing you from pursuing higher-value opportunities.

How to Fire a Client Professionally

When project profitability tracking reveals a client should go:

1. Finish Current Commitments
Don’t leave them hanging mid-project. Complete work professionally.

2. Provide Notice
For retainer clients: “We’re making changes to our service model and won’t be able to continue the current arrangement after [date].”

3. Offer Transition Support
Help them find a replacement provider. Maintain goodwill; burning bridges benefits no one.

4. Learn and Improve
Why was this client unprofitable? Poor scoping? Wrong services? Mismatched expectations? Apply lessons to future client selection.

Alternative: Repricing

Sometimes clients are worth keeping if pricing adjusts. Based on your profitability data:

“Based on the actual scope of work over the past six months, we need to adjust pricing to [new rate/structure] to continue the engagement sustainably.”

Many clients will accept realistic pricing when presented with data. Those who won’t? They weren’t going to be profitable anyway.

Common Mistakes to Avoid

As we help consulting firms implement project tracking, we see these mistakes repeatedly:

1. Tracking Revenue but Not Costs

Many firms track which projects generated revenue but not what those projects cost to deliver. You know Project A billed $50K—but did it require $30K or $60K in costs? Without cost tracking, you’re guessing.

FIX: Tag ALL expenses (labor, travel, subcontractors, overhead) to projects, not just income.

2. Ignoring Non-Billable Time

Only tracking billable hours makes your effective hourly rate look much higher than reality. Those 300 hours spent on proposals, internal meetings, and training are real costs.

FIX: Track 100% of time, categorized as billable or non-billable. Include both in profitability calculations.

3. Forgetting Overhead Allocation

Direct costs (consultant time, project travel) are obvious. But rent, software, admin staff, and marketing are real costs that must be allocated to projects.

FIX: Choose an overhead allocation method (% of revenue, hours-based, or loaded rates) and apply it consistently.

4. Inconsistent Project Classification

Some projects get tagged, others don’t. Team members forget to select projects when logging time or expenses. Your reports are incomplete.

FIX: Make project selection mandatory in QuickBooks. Set up approval workflows that catch untagged entries. Train team on importance of proper coding.

5. Setting It Up but Never Reviewing

You implement perfect project tracking, then never look at the reports. Project profitability insights only create value when they inform decisions.

FIX: Schedule monthly project review meetings. Examine profitability trends. Adjust pricing, processes, or client mix based on data.

Conclusion

Project profitability tracking isn’t optional for consulting firms—it’s essential for survival and growth. QuickBooks Online provides the tools you need, but only if you set them up correctly and actually use the data.

Here’s what proper project tracking enables:

✅ Know which clients and projects truly make money
✅ Price new work based on real costs, not guesses
✅ Identify scope creep before it kills profitability
✅ Make confident decisions about which work to pursue
✅ Calculate true hourly rates including all costs
✅ Allocate resources to highest-value activities
✅ Scale your firm profitably, not just bigger

The consultants who implement these systems gain competitive advantage. While competitors guess about profitability, you’ll know with certainty. While they wonder why revenue is up but profit is down, you’ll have the data to optimize your service mix.

Most importantly, you’ll stop subsidizing unprofitable work with profits from good projects. Every project will earn its keep, or you’ll know exactly why you’re choosing to keep it anyway.

Ready to Get Your Consulting Firm’s Books in Order?

At New Flow Bookkeeping, we specialize in helping professional services firms—including consultants, engineers, architects, and other knowledge workers—implement robust project profitability tracking in QuickBooks Online.

We’ll help you:

• Set up QuickBooks Projects or Classes correctly for your business model
• Configure time tracking and expense allocation systems
• Create custom profitability reports that answer your specific questions
• Train your team on proper coding and categorization
• Provide monthly insights on project and client profitability trends

Whether you need comprehensive monthly bookkeeping or one-time QuickBooks setup and training, we offer flexible services with no long-term contracts.

Schedule your free consultation today and discover how proper bookkeeping transforms consulting profitability from mystery to measurable science.

Check out our other blogs:

• What Is Bookkeeping? A Beginner’s Guide for Small Business Owners
• What to Expect When Working with an Independent Bookkeeper