Contents:
How to calculate profit: key terms
Revenue is income from fulfilling obligations to customers during a period: completed services and work recognised under the agreed procedures. This article uses accrual-based management accounting; receiving an advance does not, by itself, create revenue. For a closer look at the management accounting logic behind revenue, see the 101 article “Revenue: What It Is and How to Calculate It”.
Expenses are usefully divided into variable costs, which depend on work or sales volume, and fixed costs, which continue even when projects pause. The variable/fixed distinction is used to calculate contribution profit. For gross profit, the function of costs also matters: production, selling or administration. Direct costs and variable costs are not always the same.
Types of profit: contribution, gross, operating and net
A business has several levels of profit. Each answers a different question: is the project worthwhile, does it cover the office, what remains before tax, and what remains after everything?
| Type of profit | Definition | Formula |
|---|---|---|
| Estimated profit (planned) | Profit included in an estimate before work starts: expected earnings under the contract after the project's direct costs. | Estimated profit = Planned contract revenue − Planned direct project costs |
| Contribution profit | The amount remaining after variable costs directly associated with selling or delivering a service, such as materials, piece-rate labour and logistics. | Contribution profit = Revenue − Variable costs |
| Gross profit | Revenue remaining after the cost of completed work or services delivered. That cost includes the related production costs; selling and administrative expenses are accounted for separately. | Gross profit = Revenue − Cost of completed work or services delivered |
| Operating profit | The amount remaining from the business before tax and financial expenses, after selling and administrative expenses. | Operating profit = Gross profit − Selling expenses − Administrative expenses + Other operating income − Other operating expenses |
| Profit before tax | The result after financial and other non-operating income and expenses, including interest on loans and fees classified in these categories. | Profit before tax = Operating profit − Financial expenses + Financial income + Other non-operating income − Other non-operating expenses |
| Net profit | The financial result after income tax. Payments to owners also require available cash and compliance with legal restrictions. | Net profit = Profit before tax − Income tax expense. Set out the treatment of applicable taxes in your accounting policies; do not deduct taxes already included in expenses a second time. |
The table sets out a management accounting calculation for the selected period. Define the composition of production costs, overhead allocation and the boundaries of operating items in company policies. If an income or expense category does not exist, its value in the formula is zero. Do not deduct the same costs twice. For guidance on production costs, consult the IFRS Foundation's IAS 2 overview: these include direct labour and production overheads, among other items. The overview is a guide to classification; the accounting policies of each individual company must be determined separately.
How should you apply these formulas?
Estimated and actual project profit serve different purposes. Estimated profit is needed during sales and planning. Actual profit matters once purchases, subcontracting and renegotiations produce real figures. The 101 Blog discusses this in detail in “Planned Project Margin: Estimate Profit Before You Accept a Job”.
Distinguish contribution profit and a profit margin ratio from markup. Markup measures how much the selling price exceeds cost, usually as a percentage of cost. A profit margin ratio measures the relevant profit as a share of revenue. If your team mixes these terms, pricing discussions go in circles. Keep this article handy: “Margin vs Markup: Formulas and a Construction Pricing Example”.
Step by step: calculating profit in management accounting
To calculate profit quickly without continually rebuilding the figures, you need a simple sequence. It works equally well for construction, renovation, agencies and IT projects.
The idea is to organise the facts first—revenue and expenses—then calculate the types of profit and draw conclusions. For the basics of management accounting terminology and reporting, see “Financial accounting for construction income and expenses: a practical guide”.
Step 1. Choose a period and a scope: a project, a business line or the whole company. For a project-based business, it helps to start with each project's profit and then consolidate the company result.
Step 2. Record revenue according to your policies. Your team needs a shared understanding of revenue, advances and debts. For a detailed explanation, see “Revenue: What It Is and How to Calculate It”.
Step 3. Gather variable costs: materials, piece-rate work, subcontracting, logistics and everything that grows with project volume. These form the basis for contribution profit.
Step 4. Determine the cost of completed work or services delivered: direct production costs and the related allocated production overheads. These may include production premises rent, production staff salaries, equipment operation and warehousing. Classify office and management staff costs as administrative expenses according to their function. Assign each item to one group to avoid deducting it twice.
Step 5. Account for selling and administrative expenses: sales, marketing, accounting, services and communications according to their function. Add other operating income and deduct other operating expenses where applicable. This gives operating profit, a measure for regular monitoring.
Step 6. Account for financial and other non-operating items, then income tax, to arrive at net profit. Compare it with the owner's goals for development, reserves and distribution. Before making payments, also assess available cash, obligations and applicable legal restrictions: profit and freely available cash are not the same.
Who needs which profit measure?
A common mistake is to demand one “correct profit” from everyone. The owner needs the company result, the project manager needs actual site figures, sales needs deal margins, and accounting needs the tax base and properly prepared source documents.
Here is a practical guide to which measures each role should focus on.
| Role | Profit measures needed | How to use them |
|---|---|---|
| Owner / director | Operating profit, net profit | Understand what remains after management expenses; make decisions about dividends, hiring and development |
| Project manager / site supervisor | Estimated profit, contribution profit, project profit | See budget-to-actual differences, spot overspending early, and manage subcontracting and procurement |
| Sales / commercial team | Estimated profit, contribution profit | Understand which work and specifications sell at adequate margins; avoid approving discounts blindly |
| Finance / accounting | Profit before tax, net profit | Plan taxes and payments; reconcile management reports with legal documents |
| Operations manager | Gross profit, operating profit | Keep fixed costs and the production structure under control; manage the cost of the office |
| Partner / investor | Operating profit, net profit | Assess the sustainability of the business model and its potential to scale |
How can you increase profit?
Once you have calculated the types of profit, the useful part begins: decisions. Link each measure to a management lever you can actually adjust.
Contribution profit answers “why are we doing this project?” If it is low, the business is working for turnover alone. This prompts decisions about pricing, the mix of work, discounts and contractors. In practice, these often come down to production costs and direct site costs, making this article relevant: “How to Calculate the Cost of a Service: Formula and Example”.
Gross profit shows what remains after production costs, from which selling and administrative expenses still need to be covered. In construction and renovation, compare it with office and management costs: a positive estimated project result does not establish that the whole company is profitable. The approach and meaning of gross profit are discussed in detail in the 101 article “What is gross profit (in Russian)”.
Operating profit supports regular company management. Review it monthly and ask direct questions: what does management cost, what percentage goes to sales and administration, and can you grow without inflating expenses? The 101 Blog regularly connects this idea with disciplined accounting and a single source of project data.
Net profit is about distribution: development, a safety cushion and dividends. There is no universal allocation ratio. What matters is that net profit becomes manageable only when the levels above it—revenue, direct costs and gross profit—are calculated consistently.
How to make profit calculations part of your business processes
To calculate profit regularly, start with three team agreements: who records income, who approves expenses, and when the period closes. From there, consistency is essential.
For project teams, the model “one project = one small business” helps: each project has its own income, expenses, documents and contractors. It lets you assess each project's result separately, then consolidate the company total.
When profit is calculated in spreadsheets, manual entry of actual figures and diverging file versions can cause errors. This may be manageable initially, but later consumes the manager's time. Decide early where your single source of project data will be and who will update the actual figures.
In the 101 App, the approach centres on projects: income and expenses are assigned to a site, and actual profit is compiled without manual formulas. For practical guidance on calculating site profit and working with estimates, see “Capsule renovation in the 101 App: how to calculate profit (in Russian)”.
