Most contract businesses I work with tell me the same thing. They've taken on work in the past that looked profitable on paper, only to discover months in that it was costing them money to deliver.
The mistake usually isn't the price. What's missing is a model that captures what the contract will actually do to the business once it starts running.
This article covers why a contract that looks profitable in the spreadsheet can be unprofitable in practice, what's missing from most tender models, and how to model contracts in a way that gives you a reliable answer before you commit.
A typical tender model looks at the value of the contract, the direct costs of delivery, and the difference between them. If the difference is positive and meets a target margin, the tender goes in.
The problem is that contracts don't deliver themselves. They consume cash, attention, and operational capacity. The cost of those things doesn't always show up in a basic margin calculation.
Three things are usually missing. The first is cash flow timing. The second is the hidden costs that don't make the model. The third is operational reality.
P&L profit is not the same as cash. A contract that delivers a 15% margin over its full duration can squeeze cash flow significantly during delivery, especially if the customer pays late or holds back retentions.
Take a £200,000 contract delivered over six months at a 15% margin on paper. The materials and labour costs of £170,000 hit your bank account fairly evenly through the delivery period. The contract value of £200,000 might only land in your bank ninety days after invoice, or might be split into a 50% interim payment and a 50% final payment, with retentions sitting unpaid for another year.
For the duration of delivery, you might be funding £150,000 of working capital. If you don't have that capacity available, you'll either need to draw on invoice finance (eating your margin) or borrow against your facility (also eating your margin) or delay payment to your own suppliers (damaging your relationships and potentially affecting future supply).
A contract that looks profitable can become unprofitable purely through the cost of funding it.
There's more on the specific issue of retention payments in the retention payments article.
Beyond cash timing, several costs often don't make it into a tender model.
Operational distraction. A complex contract diverts management time. The owner stops being able to bring in new business because they're firefighting on the existing contract. The opportunity cost of that lost business growth is real but rarely captured.
Quality and rework. First contracts with new customers often involve rework as both sides learn each other's expectations. The rework is unbillable but takes labour hours that aren't in the tender.
Retention exposure. Retention isn't just a cash flow issue. It's an exposure issue. If something goes wrong during the defects period, you're either fixing it on your own time or losing the retention. Build a contingency for this into the tender if you don't already.
End-of-job clean-up. Final account negotiations, snagging visits, dispute resolution. All of this happens after the main delivery is complete and is rarely budgeted properly.
Variations and scope creep. Customers ask for things that weren't in the original specification. Contractors often deliver them without billing properly. Each individual concession is small. Across a contract, the cumulative effect can be significant.
A contract business I work with came to me with a tender they were considering. The headline numbers looked workable. The customer was reputable. The delivery period was reasonable. On paper the contract delivered a margin they'd be pleased with.
We sat down together and ran the numbers properly. We modelled the cash flow under the contract's standard payment terms. We added a realistic allowance for retention release timing based on the customer's history. We estimated the operational time the contract would absorb at the senior level and assigned it a cost. We ran the same numbers under a worst-case scenario where the customer pushed back on final invoices for a few months.
Under the standard scenario the contract was still profitable, but the margin was about a third of what the headline numbers suggested.
Under the worst-case scenario the contract was loss-making, mainly because of the cost of funding the working capital gap.
We talked through it. The owner decided not to bid. The work would have looked great on the books but would have squeezed the business at exactly the point in the year when she needed cash for the contracts she already had running.
That decision saved her business probably six months of stress for nothing.
A proper tender model includes:
The headline margin calculation. Revenue minus direct costs.
The cash flow profile. Money in, money out, by month, under realistic payment terms. Not the customer's stated terms but the terms they actually pay on.
The cost of working capital. What it would cost you to fund the gap between paying for delivery and being paid.
A retention exposure line. The proportion of contract value held back, and the realistic timing of release.
A management time allocation. The time the contract will absorb at the senior level, costed honestly.
A worst-case scenario. What happens if the customer is slow or the timing slips.
That gives you a number you can trust. The contract is profitable in the real world if it's still profitable after all of that. There's more on the broader cash flow challenges of contract work in the cash flow for subcontractors article.
If a tender doesn't survive proper modelling, the right answer is usually to walk away. Either renegotiate the price, renegotiate the terms, or pass on the work.
This is harder than it sounds, especially when work is scarce or when the customer is one you want to build a relationship with. The temptation is to take the contract and hope you'll make it work, or that the next contract with the same customer will be more profitable.
In practice, customers who push hard on price and terms tend to push hard on everything else too. A bad first contract usually leads to a bad second contract. Walking away is discipline, and that discipline is what protects the business.
If you'd like to think through whether a tender on your desk right now is actually profitable, that's exactly the kind of conversation a financial controller should be having with you. Have a look at the contracts page for more on how I work with contract and trade businesses, or drop me a message.
There's no hard sell here, just a conversation about where you are now and whether I can help.
Let's talkOr call 07899 296 552 · leigh.cooke@virtufin.co.uk