How to Price Sales Commission Correctly for Contract Wins
- Jones Financial Accounts
- Nov 20
- 4 min read
Introduction - Price Sales Commission Correctly for Contract Wins
Getting sales commission right is more than choosing a percentage. For construction and engineering SMEs, where contracts vary in length, complexity, margin and lifetime value, poorly calculated commission can wipe out profit before the job even starts.In this blog, we break down how to price sales commission correctly, how to calculate customer lifetime value, and which KPIs protect your margins.
This is essential for any business winning repeat service contracts, maintenance agreements, installation work or multi-year frameworks.
1. Understand the True Lifetime Value of a Customer Before Setting Commission
Commission should be based on value created, not just the contract won. But most SMEs calculate commission on the first invoice, not the full customer lifecycle.
In construction and engineering, a “simple contract win” often leads to:
Repeat installation or maintenance work
Ongoing repair visits
Extra project variations
Emergency callouts
Annual renewals
If you undervalue the long-term return but overpay the commission upfront, your sales budget collapses.
Done Right:
Commission reflects the contract’s lifetime value (LTV). Salespeople are motivated, margins protected, and cashflow stays predictable.
Done Wrong:
You pay too much commission too early and make a loss on year one, even if the customer becomes profitable later.
What to Review
Average customer lifetime (months or years)
Average annual spend
Customer retention rate
Gross margin per contract
Cost-to-serve (materials, labour, site visits, admin)
For help improving LTV analysis, use JFA’s free Contract Profitability Calculator:➡️ https://www.jonesfa.co.uk/resources
Strategy: Calculate Commission Using Lifetime Value
A simple formula (plain English):
Customer LTV = Average Annual Profit × Expected Contract Length
Example:
Annual spend: £15,000
Gross profit: 35%
Net profit after overhead: 20%
Contract length: 3 years
LTV Profit = £15,000 × 20% × 3 = £9,000
Now set commission based on what you can afford (normally 5–15% of LTV profit).
Real Example
A £2.4m engineering firm paid 10% commission on invoice value.A £40k contract meant a £4k commission, even though the real profit was only £3,200.They lost £800 instantly.
After switching to LTV-based commission, they saved £38k per year while still rewarding sales staff.
Misconception
“Higher commission means more sales.”False.Smart commission aligned to profit, not revenue, drives better long-term deals.
2. Use KPIs to Track Commission Performance and Prevent Overpaying
Sales teams typically focus on revenue, but revenue doesn’t mean profit.Without KPIs, you might celebrate a salesperson who is actually losing money for the business.
Done Right:
KPIs ensure commission only rewards profitable contracts.
Done Wrong:
Sales win deals that operations struggle to deliver, pricing is too low, or clients churn early making commission pointless.
What to Review (Essential KPIs)
Here are the KPIs every construction and engineering SME should monitor:
Cost-to-Acquire a Contract (CAC) - Total cost of sales including salary + commission.
Gross Margin per Contract - How profitable the work truly is.
Retention / Renewal Rate - One-year, two-year and three-year retention.
Contract Payback Period - How long until you recover the commission cost.
Churn Rate - If customers leave early, commission must reflect this.
Strategy to Track KPIs Successfully
Build a KPI dashboard inside your CRM or accounting software
Review KPIs with the sales team monthly
Introduce “margin protection rules” e.g., no commission if margin < 20%
Tie part of the commission to renewal or 12-month retention
Real Example
A contractor introduced a KPI where sales only got full commission if the customer stayed 12 months.Customer churn dropped from 28% to 9% saving £90k in lost revenue.
Misconception
“Commission should be paid at the point of sale. ”Not always.You should reward performance once the contract proves profitable.
3. Structure Commission to Avoid Cashflow Problems
Construction and engineering contracts often have long lead times, staged payments, retentions and variations. Paying full commission upfront can damage cashflow.
Done Right:
Commission is linked to invoice collection and margin, keeping cashflow stable.
Done Wrong:
You pay sales commission months before you receive the cash.
What to Review
Project payment schedule
Retention terms
Client payment history
Cashflow forecast
For cashflow guidance, use JFA’s free 13-Week Cashflow Template:➡️ https://www.jonesfa.co.uk/resources
Strategy to Protect Cashflow
Three common structures:
1. Split Commission
50% on contract signing
50% once first invoice or milestone is collected
2. Margin-Based Commission
Reward sales only when gross margin target is hit.
3. Pay Commission on Profit, Not Revenue
Commission % × actual project profit after completion.
Real Example
An HVAC contractor moved from 100% upfront commission to a 40/60 split tied to collected income.Cashflow improved by £120k in six months.
Misconception
“Commission delays demotivate sales teams.”Not when you explain the financial logic, and introduce bonuses linked to contract renewals.
4. Ensure Commission Aligns With Pricing and Operational Capability
One of the biggest reasons SMEs lose money is because sales sell work the business can’t deliver profitably. Commission should reward good contracts, not just “won contracts.
Done Right:
Sales, operations and finance all work together.Contracts won = contracts delivered profitably.
Done Wrong:
Sales discount heavily just to win deals, operations struggle, profit disappears.
What to Review
Does sales understand your cost base?
Does sales know your minimum viable margin?
Are they pricing based on accurate labour, material and subcontractor rates?
Strategy
Give sales teams a pricing calculator
Introduce a “minimum margin rule”
Review pricing monthly based on material/labour inflation
Train your sales team on cost drivers
Real Example
A £3m contractor’s sales team priced maintenance contracts with a 25% discount.After JFA introduced a minimum 30% gross margin rule, profit increased by £147k per year.
Misconception
“Sales needs full flexibility to win deals.”Not true.Sales needs aligned financial rules to win profitable deals.
Key Takeaways
Use lifetime value (LTV) to set commission, not the first invoice.
Track KPIs like margin, churn, CAC and payback to avoid overpaying.
Align commission with cashflow so you don’t reward losses.
Commission rules must match your pricing, capacity and delivery costs.
If you want commission structures that protect your margin, improve cashflow and drive profitable growth, download JFA’s free financial tools or book a review at www.jonesfa.co.uk/resources.
Wrapping up today's insights, tomorrow we simplify another accounting challenge
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