Subcontracting Margin Calculator

Understanding the subcontracting margin calculator — concept and principle

When you win a project and hand some or all of the work to a subcontractor, your income is the difference between what the client pays you and what you pay the subcontractor. This calculator shows that margin as a percentage of the client price, the gross spread in money, and what is left after valuing your own management time. Agencies, consultants and contractors use it to check that a subcontracted job is still worth taking. It works with any currency.

How it is calculated

• Margin (%) = (client price − subcontractor cost) ÷ client price × 100
• Gross spread = client price − subcontractor cost
• Spread after your time = gross spread − your management hours × your hourly rate

Management time covers finding and briefing the subcontractor, reviewing work, client communication and fixing problems.

The principle

Margin is measured against the selling price, so it tells you what share of every sale you keep. This is different from markup, which is measured against cost. The same deal is a 30% margin but a 42.9% markup (3,000 ÷ 7,000). Subcontracting looks like easy money, but your coordination is real work; pricing it at your hourly rate shows the true reward for the risk you carry, since you are usually responsible to the client if the subcontractor fails.

Worked example

1. Client price = 10,000 USD, subcontractor = 7,000 USD.
2. Gross spread = 10,000 − 7,000 = 3,000.00 USD.
3. Margin = 3,000 ÷ 10,000 × 100 = 30%.
4. Your time = 10 hours × 60 USD = 600 USD.
5. Spread after your time = 3,000 − 600 = 2,400.00 USD, or 24% of the price.

How to read the result

The spread after your time is what compensates you for risk, overheads and profit. If it is close to zero or negative, you are effectively working for less than your own rate. A healthy margin depends on your industry, how much risk you take on, and how much value you add, so compare against your past projects rather than a fixed rule.

Common mistakes

• Confusing margin with markup when setting prices.
• Forgetting payment terms: you may pay the subcontractor before the client pays you.
• Leaving out rework, warranty or overhead costs.

Frequently asked questions

How do I convert a target margin into a price?

Price = subcontractor cost ÷ (1 − target margin). For a 30% margin on 7,000, that is 7,000 ÷ 0.7 = 10,000.

Should I tell the client I use a subcontractor?

That depends on your contract; some contracts require approval for subcontracting.

What hourly rate should I use for my time?

Use the rate you would charge a client for the same work, so you can see whether subcontracting beats doing it yourself.

Sources: Charles T. Horngren et al., Cost Accounting: A Managerial Emphasis (Pearson)