Gross margin

Gross margin is revenue minus the cost of delivering it, expressed as a share of revenue. In a project business the cost of delivery is mostly people, so the figure depends entirely on which personnel and external costs are counted as delivery cost and which are treated as overhead.

How is gross margin calculated?

Revenue minus cost of delivery, divided by revenue. A firm with 2.4 million euros of revenue and 1.56 million euros of delivery cost has a gross margin of 35 per cent. In a project business the cost of delivery is mostly people, so the result depends on which personnel and external costs count as delivery cost.

What is the difference between gross margin and contribution margin?

In practice, scope. Gross margin is usually read at company or service-line level over a period, contribution margin per project or per client. Both subtract direct costs from revenue, so the difference is less about the formula than about what is being compared.

Why do two companies report very different gross margins?

Because they draw the line between delivery cost and overhead in different places. A firm that counts all delivery staff as cost of delivery reports a lower gross margin than one counting only billable hours, with the same underlying business.

What moves gross margin in project business?

Three things: the rate achieved, the share of recorded hours that actually get billed, and the cost of the hours themselves. Discounting affects the first, scope creep and write-downs the second, salary growth the third. All three act on the same figure: revenue minus the cost of delivering it, as a share of revenue.

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