Stages
CM I = Project revenue − direct costs (billable project hours valued at direct labour cost rate, external services/subcontractors, travel expenses).
CM II = CM I − attributable departmental fixed costs (such as the specific project division's overheads, excluding general administrative overheads).
A profit is only generated once the sum of all contribution margins exceeds total fixed costs.
Per Hour Instead of Per Project
More informative than the absolute contribution margin is the contribution margin per hour worked. It makes projects of varying sizes directly comparable and reveals which type of engagement maximises the return on the scarce resource of time.
Decision Rule
In the short term, accepting an engagement can be economically viable as long as it generates a positive contribution margin and does not crowd out higher-paying work. In the long term, the contribution margin must cover proportionate fixed costs — otherwise, the business is effectively subsidising the project.
Prerequisite
Without comprehensive working time recording, the contribution margin cannot be calculated reliably. Unrecorded hours act like free labour, making projects appear significantly more profitable than they actually were. Furthermore, robust time records are vital to ensure compliance with the Working Time Regulations 1998 and National Minimum Wage regulations across all staff allocations.
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