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Why the Correct Rate is Important / Value Added and Contribution Explained

Value Added and Contribution Explained


Value added is a figure widely used to calculate the profit in a job to your company after bought-in costs – i.e. “retained profit”. In literal terms it is the selling price less materials (paper, ink, film, plates), less the cost of outworkers. It is often expressed as a percentage to compare between differing jobs easily.

Value-added is the same as the gross profit (GP) figure you will see on your Profit & Loss statement form your accounts software. It can vary substantially from one type of work to another – and that is what you need to know.

Some companies gauge success based on purely turnover, however that is not an indicator of the profitability in work – as many have found out to their cost.

The formula looks like this:

VA£  = Selling price – Material costs – Outwork costs
VA% = VA£ / Selling price * 100 

Based on this formula we can see the higher our material & outwork costs are, the lower our value-added figure will be – i.e. less retained profit to pay our overheads: rent, rates, wages, telephone, light & heat. We have to pay our overheads whether we are producing 1 job or 100. Sounds logical enough – so our objective is to minimize our material and outwork costs on a job. The materials are relatively static, we may get a slightly better discount – but we can do something about the outwork costs we can:

  • Choose where we place the work - negotiate better prices
  • Consider purchasing the equipment ourselves, instead of sending it out
  • Target work that we DON’T need to send out at all (high VA work)

 Quite simply to maximise value-added we need to keep as much of the job in-house as possible. If this means targeting higher VA work, or potentially buying a new machine - that is a management decision

Example: We are asked to produce 2 jobs; both worth £1000 sales, the costs of that job are made up as follows:

Job 1:  Materials £300, Outwork £400, Labour £200
Job 2:  Materials £300, Outwork £0, Labour £200

If we look purely at turnover, both of these jobs are worth £1000 sales revenue to us (the sales-rep is happy – why should he care), but Job 2 has far more retained profit (Value-added) than Job 1. 

This is how it looks: 

Job 1: £1000 - £300 - £400 = £300 value-added  (30% VA)
Job 2: £1000 - £300 - £0     = £700 value-added  (70% VA) 

Given the choice, we take Job 2 in preference to Job 1, as there is more retained profit to pay our overheads.

Accura shows the projected Value-added in every estimate you do BEFORE you agree to take the job on. You can even target a value-added percentage that you want to achieve that ensures you cover your overheads.

You can also use Accura to show which types of work have the highest value-added return, or to justify the expense of new equipment, or to monitor the outwork & material prices you are paying with a view to reducing them. 

Contribution

Contribution is value-added broken down one stage further – by deducting production wages from the VA total. In other words, how much retained profit is there in the job after we have paid the wages (i.e. to go towards rent, rates, admin overheads etc.) 

The formula looks like this: 

Contrib.£  = Selling price – Material costs – Outwork costs – Production wages
Contrib.% = Contrib.£ / Selling price * 100 

Accura will calculate a contribution figure for you automatically for every estimate you do.

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