Contract profitability analysis

We cost each material contract by setting the terms signed against the revenue and expense it produces: rates, minimums, service levels, penalties, rebates, payment days and exclusivity. The output is the true contribution of the agreement and the cash it ties up.

Customer contracts, supplier agreements and carrier or fulfilment arrangements are read the same way, and your board sees which agreements carry the group and which it carries.

• A contract register showing term, rates, minimums, penalties, rebates, payment terms and notice dates.
• A contribution statement for each material contract over its life to date.
• A cash profile for each contract, including the working capital it holds.
• A renewal brief with the rate, volume and service changes the group should ask for.
• A walk-away analysis stating the point below which the contract costs the group more than it earns.

• Each material contract shows its contribution beside the margin assumed at signing.
• Penalties and rebates are added up as a share of contract revenue, instead of sitting in separate accounts.
• Days between delivery and cash are on the page for every material contract.
• The board knows how much contract revenue comes up for renewal in the year ahead.
• Renewals go out on repriced terms.

Contracts are signed on forecast volumes and priced on the cost known at the time. By year two the volumes, fuel, labour and service demands have moved, and the contract reads very differently. Penalties and rebates are applied in the ledger without being added up. The renewal arrives and the group negotiates from memory rather than from the contract's record.

• Your largest customer is also the one whose margin nobody can state.
• Service-level penalties and volume rebates are booked as small items in different accounts.
• A renewal is due and the commercial team is relying on the last deal's rate card.
• Carrier or supplier terms were agreed years ago and have never been compared with what the group now buys.
• A contract requires dedicated vehicles or staff that the group cannot redeploy.

Chief executives and chairmen of logistics operators, distributors, manufacturers and service groups whose income depends on a small number of large customer contracts, or whose cost depends on a few suppliers and carriers.

Qasim Abbas has answered for treasury above USD 50M at group level, and at that scale a contract is read by what it does to group cash. Each agreement you hold is measured by the margin it leaves after delivery.

We build the register and the costing from your ledger, invoicing system and operating data, and we put notice dates on the group calendar. See how fees work.

What if a contract is loss-making but strategic?

Then the board should know the size of the loss and decide to carry it. We state what the contract costs per year so the strategic case is made against a figure.

Can this cover leases and bank facilities?

Yes. Property leases go in as cost contracts, and bank facilities are costed through the working-capital and financing reviews.

Name the contract nearest to renewal. We describe what we measure first and what your board can then ask the counterparty for, in a private briefing.