One illustrative formula is matter revenue minus direct labor cost minus direct matter expenses. Document the methodology: firms may use different revenue measures and include additional costs.
Formula input | Definition to agree before comparing matters |
Matter revenue | Choose a consistent basis, such as billed or collected fees. |
Direct labor cost | Combine recorded effort with the firm's selected internal cost method. |
Direct matter expenses | Identify vendor and other matter costs absorbed by the firm. |
Additional costs, if included | State explicitly which other costs the methodology includes. |
The result is only comparable when the underlying definitions are consistent.
Revenue Basis
Possible revenue measures include billed fees, collected fees, net fees after discounts, flat-fee revenue, or contingency revenue. Collection-based analysis may differ materially from billing-based analysis.
Direct Labor Cost
Time data can be linked to a standard internal cost rate, compensation-based cost, role-based cost, or salary-and-benefits allocation. The method should be consistent across comparable matters.
Role Mix
Matter labor cost depends on who performs the work. Partner-heavy work may cost more than associate or paralegal work even when total hours are similar.
Direct Expenses
Possible direct expenses include experts, court reporters, travel, e-discovery, local counsel, translation, filing fees, and other vendor costs absorbed by the firm.
Contribution vs Full Profit
Contribution margin and full profitability answer different questions. Neither term should be used without explaining the costs included.
Measure | Treatment of costs |
Contribution margin | Typically focuses on revenue less direct labor and direct matter expenses; the firm's methodology may include additional costs. |
Full profitability | May also allocate office rent, central technology, insurance, finance, marketing, and management costs. |
Do not use the terms interchangeably or compare results calculated on different bases.
Missing Time Distorts Cost
If client-related effort is not recorded, direct labor cost can be understated. This is particularly important for flat-fee matters, no-charge work, internal client support, and short tasks.
Write-Downs and Collection
A matter can look strong at standard value but weaker after internal write-downs, client adjustments, discounts, write-offs, or collection losses. Use the revenue stage that matches the purpose of the analysis.
Matter Comparison
Compare matters with similar scope, type, complexity, fee arrangement, and staffing. Avoid treating margin as a universal individual performance score.
Use for Pricing
Historical contribution can inform fee design, staffing, scope assumptions, client negotiation, and alternative fee arrangements. It should not replace strategic judgment.
Use for Process Improvement
Low contribution may result from scope creep, rework, wrong staffing, poor delegation, pricing, write-downs, collections, or client behavior. Identify the cause before changing the process.
How MIRA Fits
MIRA improves the time and activity side of matter economics. A complete contribution-margin model requires revenue, cost, expense, and accounting data from other systems.
Frequently Asked Questions
What is contribution margin?
It is a management measure comparing matter revenue with defined direct delivery costs.
Is contribution margin the same as profit?
No. It may exclude allocated overhead.
Why is accurate time important?
Incomplete effort data can understate labor cost.
Can MIRA calculate contribution margin?
MIRA can improve time data, but the calculation requires finance and cost information outside MIRA.
