Contractor Finance Glossary
What is Profit Fade?
Definition reviewed .
Also called: margin fade, fade
Profit fade is when a job's estimated profit shrinks as the job progresses, which can reflect an underestimated remaining cost or changes in the job's expected economics. A WIP schedule catches it early by tracking estimated cost at completion each period.
Fade is dangerous because it is invisible until the job closes unless you are watching for it. A job bid at a healthy margin can erode month over month as the real cost to complete climbs, and by the time it shows up in the final numbers, it is too late to reprice or re-scope.
The defense is a monthly WIP schedule that re-estimates cost at completion for every open job. When the estimated cost creeps up, the earned margin drops, and you see the fade while you can still act on it, tighten scope, control cost, or price change orders before the profit is gone.
Cost for extra scope may arrive before its change order is approved. Track pending changes separately to distinguish estimate deterioration from unpriced work. A stale estimate at completion can also overstate cost-to-cost progress and revenue; refresh both in the WIP review.
How it is calculated
Overall profit fade = original estimated job profit minus current estimated job profit (current transaction price minus current estimated cost at completion). Track across periods. Separately, base-scope fade = original estimated profit minus (original contract price minus current base-scope estimate at completion). Track approved-change profit separately because a profitable change can mask deterioration in the original scope.
Related reading
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