In short
In the teaching example bids priced 2% higher lift operating profit from €15,000 to €25,000 a month if the volume of work holds, and to €18,000 if it drops by 10%. The rise stops paying off when the volume falls by about 14%. That limit depends on the contribution share of revenue: the higher it is, the less work you can afford to lose.
What this does not cover. Taxes, interest, depreciation and payment timing. The clients’ reaction here is an assumption, so check it first on private clients or on one type of project.
Why price is the strongest lever. On paper
A teaching example: a general contractor with about six million euros of revenue a year. An average month looks like this: revenue €500,000, variable costs €440,000, fixed costs €45,000. Variable costs are subcontractors, materials, plant hire and site costs. Fixed costs are the office, the estimator, salaried site managers, the yard and your own pay. Operating profit is €15,000, a 3% margin. Price your bids 2% higher while the volume of work and the cost of each project stay the same, and revenue grows by €10,000 and profit grows by the same €10,000. From €15,000 to €25,000, two thirds more.
For simplicity, every project here is already at the new price. In reality the price comes in gradually, with new contracts, and so does the profit.
That works under three conditions: the same number of clients, the same cost per project, and no costs that grow with the contract price. Construction has some: a performance bond and the project insurance are usually priced on the contract value. If they apply, part of the rise goes to them.
Now add the clients’ reaction
If you win fewer tenders at the new price, revenue falls. The variable costs of those projects fall with it: subcontractors, materials, plant. Fixed costs stay: the office and the people on salary do not go anywhere.
| Volume change | Revenue, € | Variable costs, € | Operating profit, € |
|---|---|---|---|
| 0% | 510,000 | 440,000 | 25,000 |
| −5% | 484,500 | 418,000 | 21,500 |
| −10% | 459,000 | 396,000 | 18,000 |
| −15% | 433,500 | 374,000 | 14,500 |
| −20% | 408,000 | 352,000 | 11,000 |
In every row the price is 2% higher. Today’s profit is €15,000, so the rise keeps paying off as long as the volume of work falls by no more than about 14%. Roughly, you can lose one in seven of the projects you would have won at the old price.
How much volume can you lose?
Contribution is revenue minus variable costs. In the example it is €60,000, which is 12% of revenue. That is roughly the margin a general contractor sees in the estimate. After the price rise each remaining project brings more contribution, and profit holds until the total contribution falls back to where it was.
Hence the formula. The allowed volume drop equals the price rise divided by the sum of the contribution share and the price rise. In the example: 2% ÷ (12% + 2%) ≈ 14.3%.
| Contribution share of revenue | Allowed volume drop at a 2% price rise |
|---|---|
| 8% | 20.0% |
| 12% | 14.3% |
| 15% | 11.8% |
| 20% | 9.1% |
| 30% | 6.3% |
So the higher your contribution share, the less work can leave before the rise stops paying off. With a thin margin, as is common in general contracting, the same price rise adds relatively more to each project, so you can absorb a bigger loss of volume. The numbers in both tables come from the same model as the calculator.
What to check before changing the price
- Which clients award on price alone, and what share of revenue they bring.
- Who else bids in their tenders, and at what price the winner usually comes in.
- Whether you can try the new price on private clients or on one type of project first.
- What you will tell the clients you have worked with for years, and who tells them.
- How you will measure the reaction: how many tenders you win out of how many you bid, and on which day you decide to keep the price or roll it back.
DecideWrite the pricing decision down: the segment, the expected reaction and the review date