How to measure a job

Feb 9, 2023 7:38 PM

How to measure a job

In its crudest terms the measure of a job could be as simple as allocating a proportion of a contract to labour and dividing that value by the average salary value for that industry or the average salary for your region.

€1,000,000 * 0.8 -- where the amount of the contract allocated to labour is 80%
€800,000 / 4 -- where the duration of the contract is four years
€200,000 / €25,000 -- where the average salary for the region is €25,000

This example indicates that the relevant contract would likely sustain eight jobs during the period that it is in effect. The problem with this approach is that it doesn’t take into account the status of the company that is receiving the money. If you give that money to a firm with six employees you can confidently assert that a contract award has created at least two new jobs, but firms aren’t that simplistic, they serve multiple customers and have different ways of handling expanded demand.

A better way to understand the relationship between jobs and contract awards you should look to have a baseline understanding of the status of a company before the contract is awarded. So you need suppliers to provide information about their finances and employees, so that you can determine the amount of revenue that each company requires for each employee.

revenue = €10,000,000
gross profit = €2,000,000 -- assumes labour costs are within cost of sales
employees = 200

-- To calculate revenue per employee
(€10,000,000 - €2,000,000) / 200

-- To calcualate the gross profit ratio as a percentage
(€2,000,000 / €10,000,000) * 100
= 20%

Why do we use the gross profit and the gross profit ratio? Usually gross profit is the money left after a firm has counted the cost of creating a product, including the salaries used to create that product. So gross profit doesn’t include non-production costs such as the corporate office, instead it measures how well a company generates profit from their direct labour and direct materials.

This makes it a suitable metric to establish whether money spent with a firm can be directed to employment.

contract value = €3,000,000
contract years = 3
contract spend per year = €1,000,000

To calculate gross profits per annum, where gross profit ratio is 20% 
€1,000,000 * 0.2
= €200,000

Cost of servicing the contract per annum 
€1,000,000 - €200,000
= €800,000

employees required to service the contract where revenue per employee is €40,000
€800,000 / €40,000
= 20

In this scenario, a three year contract worth €3m awarded to a supplier with a gross profit ratio of 20% and a revenue per employee of €40,000 would support 20 new jobs over the period of the contract.

You should note that we don’t call these jobs ‘new’ or ‘created’ jobs, that’s because this analysis makes a number of assumptions about whether money spent with a company will result in new jobs. For example, this analysis can’t determine if the business’ current revenue of €10,000,000 per year is going to remain in place so that the new contract can be counted as additional revenue, which would be equivalent to €11,000,000 per year. Additionally it assumed that profits aren’t going to be reinvested in the business and used to add still more staff or that the profit ratio doesn’t change.

Clearly there are variety of factors to consider when conducting this sort of analysis, but we hope that the above example is enough to help buyers to understand how to link spend with a company to jobs.