Problem: the construction entrepreneur considers profit as "what's left at the end" and doesn't know how much they need to sell to earn what they want.
Solution: tip the formula upside down. Start from the desired profit and work backwards to calculate the necessary turnover.
Result: a clear number to aim for and a method to make better decisions about what to sell and to whom.
"Profit is what's left at the end"
I hear this phrase in almost every consulting session with entrepreneurs operating in the construction industry, in Northern Italy as elsewhere. It sounds sensible, but it is the wrong way to think. If profit is "what's left", you are not deciding it. Chance, the market, unforeseen events decide it for you.
The right way is the exact opposite: you decide how much you want to earn, and then you calculate how much you need to sell to get it. It seems like a detail, but it changes everything.
The formula that changes your perspective
Everybody knows the classic formula:
Profit = Revenue - Costs
But if we rewrite it like this, it becomes a planning tool:
Revenue = Fixed Costs + Variable Costs + Desired Profit
From here we extract the number that really counts: the contribution margin.
Contribution margin = Revenue - Variable costs
Or, looked at from the other side:
Contribution margin = Fixed costs + Desired profit
This margin is the part of every job that remains after paying the costs directly linked to that job site (materials, labour, sub-contracts). It must be enough to cover the company's fixed costs and generate the profit you have set.
How to use it in practice
Let's do a concrete example.
| Item | Amount |
|---|---|
| Annual fixed costs (rent, fixed salaries, insurance, amortisation) | 200.000 € |
| Desired profit | 100.000 € |
| Necessary contribution margin | 300.000 € |
| Average margin per job | 35% |
| Necessary turnover (450,000 / 0.35) | 857.000 € |
Now you have a clear number. You know that to take home the profit you want, you have to turn over about 857.000 € with an average margin of 35%.
If today your average margin is 28%, you know that you have to work on two fronts: either you increase the turnover, or you increase the margin percentage. Better still, you work on both.
Second example: smaller company
Let's look at the same calculation for a window and door company with 4 employees.
| Item | Amount |
|---|---|
| Annual fixed costs | 120.000 € |
| Desired profit | 60.000 € |
| Necessary contribution margin | 180.000 € |
| Average margin per job | 30% |
| Necessary turnover (270,000 / 0.30) | 600.000 € |
In this case 600.000 € turnover is needed. If the average value of a project is 10.000 €, that means 60 jobs a year. Five a month. At that point the question becomes very concrete: are you closing five jobs a month with a 30% margin? If the answer is no, you know exactly where to intervene.
The most common mistakes in the calculation
The formula is simple, but I always see the same mistakes when it is applied for the first time.
Forgetting hidden fixed costs. Rent and salaries, everyone includes those. But what about severance pay provisions? Mandatory insurance? Van depreciation? These items disappear from the calculation and then eat up the profit at the end of the year.
Using the "gross" margin instead of the real one. Saying "I'm making a 40% margin on this job" and then failing to count the extra hours, wasted material, the extra trip for the variation requested by the customer. The margin must be calculated retrospectively, not at the quoting stage.
Mixing up fixed and variable costs. The salary of a permanent worker is a fixed cost, not a variable. Whether there is a job site or not, you still pay them. Putting it among variable costs inflates the apparent margin and makes you believe you are earning more than you actually are.
Not updating the numbers. Fixed costs change every year: insurance goes up, contracts expire, expenses are added. Doing the calculation once a year is not enough. Every quarter is the minimum.
Two levers to increase the contribution margin
Lever 1: improve the profitability of every job
This means reducing variable costs without cutting quality. In practice:
- Negotiate better with suppliers (or change suppliers)
- Reduce material waste on the job site
- Optimise labour hours with better planning
- Stop giving discounts out of fear of losing the customer
- Cut out complimentary extras ("while you're here, could you also...")
Every extra point of margin multiplies across the entire turnover. On 700.000 € of turnover, an extra point of margin is an extra 7000 € in profit.
Lever 2: generate more turnover
Not necessarily by working harder. You can generate more turnover in three ways:
More requests. Through marketing. Expensive advertising is not needed: customer reactivation campaigns, collecting testimonials, package deals are almost zero-cost actions that can generate additional work.
More contracts closed. If today you close 25% of quotes, going up to 35% means 40% more turnover. Without a single extra request. To do this you need a structured sales process, not the talent of the salesperson.
Let's do the maths. If you receive 20 requests a month with an average value of 10.000 €, at 25% you close 5 jobs for 50.000 € a month. At 35% you close 7 for 70.000 €. Over a year that is 240.000 € more in turnover. And the cost to achieve this result is zero, because you already had the requests. What changes is how you manage the quote, the follow-up and the negotiation.
Higher-margin jobs. If you have two types of work and one makes double the margin of the other, shifting the mix towards the more profitable one increases the contribution margin without increasing the workload.
Monitor your contribution margin with BAU Gest
BAU Gest automatically calculates the contribution margin by type of job, by customer and by period. You always know where you stand regarding your profit target.
See how it worksMade
The entrepreneur's true role
A phrase I often repeat during consulting: the entrepreneur's true role is not going on site, not writing quotes, not answering the phone. Their true role is thinking about how to make the company work better.
Deciding in advance how much profit you want to take home comes under this role. Thinking in terms of contribution margin instead of turnover helps you focus on the actions that really count.
At first it seems like a theoretical exercise. After a couple of months it becomes the natural way to make decisions. "Does this job improve my contribution margin or worsen it?" Answering this question before accepting a job changes the way you run the company.
The step that few people take
The formula only works if you know your real numbers. Real fixed costs, not estimated ones. Average margin by job type, not "about 30%". Quote conversion rate, not "I think I close a third".
If you don't have these numbers, the first step is not applying the formula. It's collecting the data. Even simply, on an Excel sheet. The important thing is to start from real numbers, not from gut feelings.
If you want to do this exercise on your company
Book 30 minutes with us. Together we will calculate the contribution margin required to reach the profit you want. If you have the numbers, we'll use them. If you don't have them, we will help you understand where to start collecting them. No obligation, no costs.
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