Contribution margin for tradespeople: how to work it out (with an example)

Two jobs can look identical in the order book and still end up worlds apart on the bottom line. The difference almost always comes down to the contribution ratio - the number that shows how much of your revenue is actually left once materials, subcontractors and wages on the job have been paid. The good news is that it is easy to calculate, and it points straight at where the money is leaking.

The contribution margin (CM) is the revenue on a job minus the variable costs - that is, materials, subcontractors and the direct labour spent on the job. The formula is: CM = revenue - variable costs. The contribution ratio (CR) puts the contribution margin in relation to revenue: CR = CM / revenue x 100. The contribution margin has to cover all your fixed costs - workshop, vans, insurance and administration - and then deliver a profit. Always calculate in amounts excluding VAT. VAT is 25% and simply passes in and out of the business, so it has no place in the calculation.

Take a bathroom renovation with a quoted price of DKK 100,000 excluding VAT. The variable costs on the job are: materials of DKK 38,000, a subcontractor for the electrical work at DKK 12,000, and direct labour of 120 tradesman hours at DKK 250 in cost price, DKK 30,000 in total. The variable costs are therefore 38,000 + 12,000 + 30,000 = DKK 80,000. The contribution margin comes to 100,000 - 80,000 = DKK 20,000, and the contribution ratio is 20,000 / 100,000 x 100 = 20%. That DKK 20,000 is not profit - it first has to cover the job's share of your fixed costs.

Your annual accounts show your overall contribution ratio, but that is an average, and it hides more than it reveals. A job at 35% can easily mask another at 5% without you noticing until the year is over - and by then you can no longer see which jobs dragged you down. It is at job level that you can act: price better, choose the right types of work and stop the bleeding on the bad ones. If you know the contribution ratio per job, you can see which customers, job types and trades make money, and which ones actually cost you to carry out.

Very few jobs lose money on the big items. They lose it on the sum of small ones:

• Materials priced from memory - wholesaler prices have moved since you last checked
• Forgotten items: waste disposal, driving, consumables and equipment hire
• Wastage and shrinkage left out of the sums - some tiles, pipe and cable always go to waste
• The subcontractor ends up costing more than the verbal estimate
• Your own hours set too low because setup, covering up and clearing away are not counted

Take the example above: if the materials actually cost DKK 41,500 because of wastage and forgotten small items, the contribution margin falls to 100,000 - 41,500 - 12,000 - 30,000 = DKK 16,500, and the contribution ratio to 16.5%. That is DKK 3,500 disappearing on a single job - without anyone making a mistake on site.

Price is only one side of the fraction. Most trades businesses can gain several percentage points on the cost side. Replace guesswork with actual figures - the fewer items you estimate in the quote, the less the calculation drifts. Use current purchase prices from your wholesaler instead of list prices or memory. Do a post-job costing on every job so you know exactly where your quotes drift and can correct the next calculation. And build a standing checklist of the items that are typically forgotten, so they are included from the start instead of being discovered afterwards.

You do not need a new accounting system to get going. Take your last five jobs, dig out the revenue and the variable costs, and work out the contribution ratio per job. The pattern almost always shows itself straight away. If you want the numbers in place already at the quoting stage, a tool like Calco can calculate with real wholesaler prices and your actual hourly rate when you describe the job - so you know the contribution ratio before the quote goes out.