Last edited 09 May 2019

Profit

In accounting, the term ‘profit’ refers to the financial benefit that is achieved when the work done and the expenses incurred by a business are exceeded by the amount of revenue generated by the activities of the business.

Put simply, profit is calculated as: Total revenue – Total expenditure

The owners of a business are responsible for deciding what to do with profit, and may reinvest it in the business, pay off outstanding debts, reward employees with bonuses and pay-rises, make payments to shareholders, and so on.

There are different types of profit that can be measured:

Gross profit.
Operating profit.
Net profit.

Profit may also be referred to as a ‘profit margin’. Profit margin is the percentage of the gross revenue that represents profit.

For more information, see Profitability.

When contractors submit tenders for construction works, they will typically identify profit and overheads as separate items in addition to the cost of labour, materials, plant, and so on.

Profit may be calculated as a percentage, which will vary according to risk, workload and economic climate and so on. It can also relate to the turnover of capital employed for each project; the more times a contractor can turnover its capital on a project the more it can afford to cut margins.

Construction contracts will generally provide for the contractor to claim direct loss and expense as a result of the progress of the works being materially affected by relevant matters for which the client is responsible. Contracts generally allow direct losses to be recovered (such as the cost of labour and materials), but may exclude indirect or consequential losses (such as loss of profit).