Contribution margin

Contribution margin is revenue minus the costs directly caused by producing it. In project business that usually means the cost of the recorded hours and the external costs attributed to the project. What remains contributes towards fixed costs and, beyond those, to profit.

How is contribution margin calculated?

Revenue minus direct costs. A project invoiced at 40,000 euros with 280 recorded hours at a cost rate of 80 euros and 5,000 euros of external costs has direct costs of 27,400 euros and a contribution margin of 12,600 euros, or 31.5 per cent.

What counts as a direct cost?

The cost of the hours worked on the project and anything bought for it: freelancers, licences, travel, print, subcontractors. Rent, administration and management salaries do not, and that is exactly what separates contribution margin from profit. Direct costs are the costs caused by producing the work, and what remains after them contributes towards fixed costs.

What is the difference between contribution margin and gross margin?

The terms overlap and are used differently from one company to the next. The practical difference is which costs count as direct. Two figures are only comparable when both were calculated on the same basis, which inside one company is worth writing down once.

Why is contribution margin the useful figure in project business?

Because it can be calculated per project, per client and per service line, while profit cannot. It answers which work is worth taking on, and that decision is made far more often than the annual result is drawn up. What remains per project contributes towards fixed costs and, beyond those, to profit.

troi reports contribution per client, project and service line. See reporting and controlling.