Jump to content
The Wifcon Forums and Blogs
Clatch

Important financial indicators on large proposals?

Recommended Posts

I'm a pricing analyst for a large business, although a relatively small one. In a recent green team my COO stated that he wanted to start seeing contribution margin in our meetings. His statement was that even though we are coming it at a minimal net profit margin, adding x amount of people will increase our base and lower the wrap. I'm fully following at this point. He then stated he wanted to see contribution margin because that's what really matters in this situation. That's where he lost me. I've asked multiple people within my company, and google, and cant seem to figure out how contribution margin is any different than gross margin on a service-based contract. Ultimately I may have to just ask him what he's looking for, which is fine, but would like to try to figure this out on my own if possible. Any insight on how to calculate this will help me, thank you! 

Share this post


Link to post
Share on other sites

My interpretation is that the COO is looking for how much profit will be generated on your other contracts (which I assume are FFP or FPI) by winning work that results in more labor base, which results in lower rates being applied to that other work. Multiply the rate delta (amount the rate is lowered by the winning of new work) by the base associated with the other contracts.

One note of caution: this is fine if you didn't know you were going to win this new work when you bid the other contracts. But if you planned on bidding then the impact of the additional base (factored by PWin) might be considered to be a fact -- i.e., cost or pricing data that should have been disclosed at the time the other contracts were negotiated. You don't want to be accused of defective pricing for failing to disclose that the bid rates might be lower if the additional work came in.

Share this post


Link to post
Share on other sites

The only reason I can surmise that the COO would want to talk Contribution Margin is that you're currently heavy on indirect (fixed) costs.  If you have had a sudden downturn in business or if you missed winning a large contract that was already figured into annual revenue, then the COO is going to be very concerned with covering that shortfall.  H2H is correct in the defective pricing comment, but based on what you're saying, I'd guess (and yes, it's a complete guess) that your COO is covering shortfall rather than building a windfall.

As for the difference in Gross versus Contribution, this site does a good job of explaining it:  https://www.investopedia.com/ask/answers/122314/what-difference-between-gross-margin-and-contribution-margin.asp

An excerpt:  "In comparison with gross profit margin, [contribution margin] is a per-item profit metric, as opposed to the total profit metric given by gross margin." 

Share this post


Link to post
Share on other sites

Join the conversation

You can post now and register later. If you have an account, sign in now to post with your account.

Guest
Reply to this topic...

×   Pasted as rich text.   Paste as plain text instead

  Only 75 emoji are allowed.

×   Your link has been automatically embedded.   Display as a link instead

×   Your previous content has been restored.   Clear editor

×   You cannot paste images directly. Upload or insert images from URL.


×
×
  • Create New...