Contract gross profit calculator

How the gross profit is worked out

Gross profit on a contract is the gap between what you charge and what you pay, multiplied by the time worked. The calculator takes the charge rate minus the pay rate for the margin per day or per hour, divides it by the charge rate for the margin per cent, multiplies it by the days or hours worked in a week for the gross profit a week, and multiplies that by the weeks in the term. The sums are the same as on the contract margin calculator, run over two periods instead of one.

An extension is a second period with its own rates. Its gross profit is the extension charge rate minus the extension pay rate, times the units a week, times the extension weeks. If you leave the extension rates blank, the initial rates carry on. A one-off cost, such as a placement bonus paid to the contractor or a referral fee, is taken off once, at the start. Total gross profit is the initial term, plus the extension, less the one-off cost.

The worked example

The calculator opens on a contract charged at £550 a day and paid at £450, five days a week, for 12 weeks, extended by 12 weeks at £560 charge and £455 pay. The margin is £100 a day, 18.2 per cent of the charge rate, and the initial term earns £6,000. The extension rates have both gone up, but the pay rate by less than the charge rate, so the margin widens to £105 a day, and 12 more weeks earn £6,300. The total is £12,300, more than double what the initial term alone earned.

Add a £750 one-off cost and the total becomes £11,550. In the week-by-week table the running total starts at minus £750, reaches £5,250 by the end of week 12, and shows the first and last weeks of the extension, so you can see when the one-off is earned back: in this case during week 2.

When to use it

Use it when a client asks for an extension and you need to know what it is worth before you agree rates, when you are deciding whether a bonus or referral fee still leaves a contract worth taking, or when you are quoting a longer commitment in return for a lower margin. The answer on contract extensions covers the paperwork that goes with a rate change, and how a timesheet becomes an invoice shows where the margin is actually booked each week.

What the number leaves out

VAT is outside the sums. Charge and pay rates are compared net of VAT, because VAT charged to the client and VAT charged by a VAT-registered contractor's company pass through rather than adding to or taking from your gross profit. Gross profit is also before funding costs, bad debt, holiday pay or employer costs where the contractor is paid through payroll, and your own overheads. Weeks are whole weeks: bank holidays, part weeks and gaps are not modelled, so reduce the units a week or the number of weeks if the contractor will not work every one.

Common questions

How do I calculate gross profit on a contract?

Subtract the pay rate from the charge rate, multiply by the days or hours worked in a week, and multiply by the number of weeks. If the contract is extended at new rates, do the same sum for the extension and add the two. The calculator does this and shows the weekly build-up.

Does an extension change the margin?

It can. Clients and contractors often agree a new rate at renewal, and the two rates rarely move by the same amount. Enter the new charge and pay rate and the calculator shows the margin on the extension separately from the initial term.

Is the one-off cost spread across the contract?

No. It is taken off the total once, and shown at the top of the week-by-week table so you can see how long the contract takes to earn it back. If your accounts spread it, the total is the same.

Does the calculator include VAT?

No. Everything is net of VAT. Gross profit is the difference between two net amounts, so VAT does not change it.