Contractor Finance Glossary
What is Contribution Margin?
Also called: variable margin
Contribution margin is revenue minus the variable costs directly tied to producing that revenue (labor, materials, and other direct costs), showing how much each job contributes toward covering overhead and profit.
Gross margin and contribution margin get used interchangeably, but the question contribution margin answers is specific: after the direct cost of doing this job, how many dollars are left to cover the fixed overhead that exists whether or not you take the job. That is the number that tells you if a job is worth doing at all.
It is the right lens for pricing decisions and slow-season work. A job priced below full cost can still be worth taking if it carries positive contribution margin, because those dollars offset overhead you are paying regardless. Confuse the two margins and you will either turn down profitable work or chase work that bleeds cash.
How it is calculated
Contribution margin = revenue minus variable (direct) costs such as direct labor, materials, and subcontractors. Contribution margin ratio = contribution margin divided by revenue. Fixed overhead is excluded, which is what separates it from net margin.
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