The Importance of Gain/Fade Analyses
By Roger Gingerich, Partner, Tax & Business Services
Contractors can learn a lot about their own jobs and business by doing a gain/fade analysis. A gain/fade analysis compares gross profit margins at the completion of a job to estimated gross profit margins at an interim period of time (like December 31, 2008). For example, an individual job has a gain if the gross profit margin upon completion in March 2009 was 10% and the estimated gross profit margin at the time of the financial statements (December 31, 2008) was 5%. Since profits were higher when the job completed in March, this job had a gain of 5%. A fade is calculated if the opposite is true – the job’s gross profit margins upon completion were lower than estimated gross profit margins at December 31, 2008.
The analysis can be done to compare gross profit margins at any time in the job. For example, the analysis can be performed to compare the margins at the time the job was bid versus various stages of completion (25%, 50%, etc) and ultimately when the job is completed. Performing the analysis multiple times for a job can help contractors figure out either operational issues, estimating problems or both.
There can be many reasons for a particular job to have a gain or a fade. Some of the most common reasons are unclear/impossible blueprints, good/bad project management, weather, good/bad estimating skills, change in raw material prices and change in labor costs from estimates.
A gain/fade analysis is one tool contractors can use to help determine the success of a single job or the Company as a whole.