Contractor Finance Glossary
What is Contribution Margin?
Definition reviewed .
Also called: variable margin
Contribution margin is revenue minus costs that vary with the activity or decision, showing the amount available for fixed costs and profit. Direct cost is not always variable cost.
Gross margin subtracts the costs classified as cost of revenue, which may include fixed truck depreciation or salaried field supervision. Contribution margin subtracts costs that actually change with the chosen decision. A guaranteed-hours employee's pay can be direct job cost without being avoidable for an extra slow-season job.
For a fictional $1,000 job with $600 incremental materials, labor and other variable cost, contribution is $400. If cost of revenue also includes $100 fixed field allocation, gross profit is $300. Both measures are useful, but answer different questions.
Positive contribution can support an extra job when idle capacity exists, cash and risk are acceptable, it does not displace better work, and a discount does not establish an unsustainable future price. Positive contribution alone is not an instruction to accept every job.
How it is calculated
Contribution margin = revenue minus relevant variable costs; ratio = contribution margin divided by revenue when revenue is positive. For an accept/decline decision, include only labor and other costs that change with that decision, and separately consider capacity/opportunity cost.
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