Margin Estimated (Adjusted) - Full Explanation
What’s This All About?
When we create a work order for a contractor, we estimate how much profit (margin) we expect to make. But in reality, contractors don’t always work the exact number of hours we expect. That’s where Adjusted Margin comes in, it helps us make smarter forecasts by correcting for patterns we’ve seen in the past.
Why Do We Adjust?
People take vacations, holidays happen, and different types of contracts behave differently. For example, someone on a W2 might work fewer hours in December than expected. So we look at past data to see how much we usually over- or under-estimate, and we apply a correction.
How Does It Work?
We start with the Estimated Margin, which is based on:
- How much we bill per hour
- How much we pay the contractor
- Extra costs like discounts, rebates, and fees
- How many days they’re expected to work Then we apply an Adjustment % based on the month and type of contract. This gives us the Adjusted Margin, which is a more realistic forecast.
Example
Let’s say:
- We bill the client $100/hour
- We pay the contractor $70/hour
- Extra costs (like fees) are $2/hour
- The contractor works 8 hours/day for 22 days
- They’re on a W2 contract in December We calculate the margin, then apply a small adjustment (in this case, -0.2%) to reflect what usually happens in December for W2 workers. That gives us a better idea of what we’ll actually earn.
How We Calculate Margin
To figure out how much profit we expect to make from a contractor, we use a simple formula: ** Estimated Margin = ** What we charge the client per hour minus what we pay the contractor per hour minus employer costs (called “burden”) minus any discounts, rebates, or platform fees → Then we multiply that by how many hours the contractor is expected to work. Once we have that, we apply a small adjustment based on past trends to get a more realistic number: ** Adjusted Margin = Estimated Margin × (1 + Adjustment %) ** If the adjustment is positive, it means we usually earn more than expected. If it’s negative, we usually earn less.
How We Count Time
We estimate how long a contractor will work using two things:
- Work Days: The number of weekdays between the start and end of the contract.
- Work Hours: We multiply the number of work days by the expected hours per day (usually 8, but it can vary). This gives us the total number of hours we expect the contractor to work, which we use to calculate the margin.
What Are Burden Costs and Adjustment Rates?
Burden Costs (Employer Costs by Contractor Type)
When we hire a contractor, we don’t just pay their hourly rate we also have to cover extra costs like payroll taxes, benefits, and admin fees. These are called burden costs, and they vary depending on the type of contractor. Here’s a quick cheat sheet:
| Engagement Type | Employer Burden |
|---|---|
| Inc | 0% |
| Sole Proprietor | 10% |
| Temp/T4 | 19.50% |
| W2 (U.S.) | 16% |
We apply these percentages to the contractor’s pay rate to estimate the total cost to us.
Adjustment Rates (Month-by-Month Corrections)
We’ve noticed that contractors don’t always work the exact hours we expect, especially around holidays or depending on their contract type. So we use adjustment rates to fine-tune our margin estimates based on historical patterns. Below is a simplified version of the adjustment matrix. It shows how much we typically need to adjust our margin estimates based on the month and contractor type:
| Month | Canadian SP | Inc Worker | Subvendor Worker | T4 Worker | US Inc Worker | W2 Worker |
|---|---|---|---|---|---|---|
| Jan | -27.3% | 21.1% | 24.8% | 19.2% | 11.8% | -20.9% |
| Feb | -33.1% | 11.5% | 7.3% | 14.2% | 11.5% | -32.1% |
| Mar | -35.1% | 11.4% | 10.2% | 8.0% | 11.9% | -35.7% |
| Apr | -37.9% | 14.6% | 16.4% | 17.0% | 10.9% | -35.2% |
| May | -34.4% | 13.6% | 11.7% | 16.3% | 15.9% | -32.6% |
| Jun | -35.3% | 13.5% | 15.4% | 14.2% | 21.8% | -31.4% |
| Jul | -27.5% | 23.9% | 20.1% | 19.2% | 25.3% | -36.4% |
| Aug | -34.3% | 21.6% | 12.6% | 12.5% | 24.7% | -39.4% |
| Sep | -29.2% | 19.3% | 12.0% | 20.6% | 33.9% | -36.9% |
| Oct | -26.6% | 17.1% | 6.6% | 17.5% | 15.4% | -36.4% |
| Nov | -31.2% | 12.9% | 11.8% | 2.9% | 22.3% | -33.7% |
| Dec | -6.1% | 44.5% | 50.2% | 47.4% | 32.4% | -22.9% |
What Should you use this for?
Great For:
- Forecasting revenue
- Looking at trends across months or groups of contractors
Not Meant for:
- Tracking individual performance
- Calculating commission This metric is designed to help us see the big picture, not the details of the one Person’s work.
A Few Things to Keep in Mind
- We only use this for hourly or daily contracts.
- All rates are converted to hourly to keep things consistent.
- The adjustment rates are updated every few months.
- Right now, we use one adjustment matrix for everyone, but we can add more specific ones later.