Big Contract Offer? How to Evaluate It Before You Sign

The bigger the contract, the faster owners sign it. A large customer offers a volume that would lift revenue by a quarter, asks for a small discount and longer payment terms, and wants an answer this week. The factory has spare capacity, and the decision is made on the revenue line alone.

This is how to evaluate a big contract before you sign. My view after 25 years as a CFO is simple: a deal is good only if it earns more than the cash it consumes, under realistic assumptions, with risks you can survive. Revenue is the least informative number in the proposal. Margin at the real price, the cash tied up before the customer pays, and what happens when things go wrong decide whether the deal builds the company or quietly drains it.

Why the revenue line misleads on a big contract offer

Large contracts come with concessions that each look small: 5% off the price, 120 days to pay instead of 60, a dedicated account manager, extra stock. Together they can remove most of the profit, and the damage shows up months later as a cash shortage, not a visible loss.

This is not only a small-company problem. The International Federation of Accountants (IFAC), in its good practice guidance on project and investment appraisal, notes that in practice fundamental principles of corporate finance are often breached, leading to the destruction of value (IFAC, 2013). The principles are simple; they get skipped when the deal feels urgent.

How to evaluate a big contract before you sign: a CFO's six-point test

Run every material deal through the same six questions. Material means anything above roughly 10% of annual revenue, any deal with payment terms longer than your normal terms, or any deal that needs new capacity, people or stock.

1. What is the contribution margin at the real price?

Start from the price you will actually invoice after discounts, rebates, free delivery and volume bonuses, not from your list price. Subtract only the costs that rise with each unit sold: materials, direct labour paid per unit, packaging, freight, commissions. What remains is the contribution margin. A discount comes straight off this line, so a 5% price cut on a product with a 24% margin removes about a fifth of the profit per unit.

2. Which fixed costs does the deal add?

Ask operations, not sales. A second shift, a warehouse, a key account manager, a new truck, extra quality checks or a performance guarantee are all real costs of this deal even if they never appear in the quotation. If the deal needs them, charge them against it.

3. How much cash does the deal tie up, and for how long?

This is the step that turns a profitable deal into a cash problem. You buy materials and pay wages before the customer pays you. Long customer terms, buffer stock and short supplier terms all widen that gap. Calculate the extra working capital the deal needs: receivables at the agreed days, plus extra inventory, minus extra supplier credit. Then test what happens if the customer pays later than agreed.

For reference, the European Union's late payment directive sets 60 calendar days as the general limit for business-to-business payment periods, allowing longer terms only when expressly agreed and not grossly unfair to the supplier (Directive 2011/7/EU). Whatever your country's rules, a customer asking for 120 days or more is asking you to act as their bank. Price that.

4. What does that cash cost you?

Multiply the extra working capital by your real cost of funding: the interest rate on your overdraft, or the return the owners expect on their money if the business funds itself. A deal that earns less than the cost of the cash it consumes destroys value even when it shows a profit.

5. What happens in the downside?

Rerun the numbers with three changes: volume 30% below the customer's forecast, payment 60 days later than agreed, and input costs 5% higher with no price adjustment. If the deal still makes money and you can fund the cash in the worst case, it is robust. If one bad assumption turns it into a loss, you are betting the company on the customer's forecast.

6. Can you survive losing it, and can you get out?

Check customer concentration after signing. A single customer above about 20% of revenue gives that customer a great deal of power at every renewal. Then read the contract for the clauses that move money: price review or indexation, minimum volumes, penalties for late delivery, termination notice, who owns tooling and stock if the contract ends early, and the governing law for disputes.

Example: a 30 million contract that is worth far less

Example (illustrative, assumptions stated): a manufacturer with 120 million in annual revenue (in any currency) and a normal gross margin of 24%: list price 100, variable cost 76 per unit. A large customer offers a contract worth 30 million a year at the discounted price, on these terms:

• 5% discount, so the price is 95 and variable cost is 80% of contract revenue
• Payment at 120 days; your normal terms are 60
• Extra fixed costs of 1.5 million a year (second shift and a key account manager)
• 45 days of buffer stock at cost; suppliers give you 60 days
• Cost of funding 15% a year

The owner's first reading: 30 million of new revenue at the usual 24% margin, so 7.2 million of extra gross profit. Here is the CFO's reading.

Item	Base case	Customer pays at 180 days	180 days and 30% less volume
Contract revenue	30,000,000	30,000,000	21,000,000
Variable costs (80%)	24,000,000	24,000,000	16,800,000
Contribution margin (20%)	6,000,000	6,000,000	4,200,000
Extra fixed costs	1,500,000	1,500,000	1,500,000
Profit before financing	4,500,000	4,500,000	2,700,000
Receivables	9,863,014	14,794,521	10,356,164
Plus inventory (45 days of cost)	2,958,904	2,958,904	2,071,233
Less supplier credit (60 days of cost)	3,945,205	3,945,205	2,761,644
Working capital tied up	8,876,712	13,808,219	9,665,753
Financing cost at 15%	1,331,507	2,071,233	1,449,863
Profit after financing	3,168,493	2,428,767	1,250,137

Days are calculated on a 365-day year. The 7.2 million headline becomes about 3.2 million in the base case, 2.4 million if the customer pays 60 days late, and 1.25 million if volume also falls short. In every case the company has to find 9 to 14 million of cash before it sees the benefit, which for a 120 million business can be more than its entire overdraft line. The deal also makes this customer 20% of total revenue (30 million out of 150 million).

The conclusion is not "refuse". It is "negotiate with numbers": every 30 days of payment terms on this contract is worth about 2.5 million of receivables and roughly 370,000 a year of financing cost at 15%. That is a concrete figure to put on the table against the discount, or a reason to ask for a deposit, a letter of credit or a price indexation clause.

The decision test: sign, renegotiate or walk away

Result	Decision
Profit after financing is positive in the downside case, and you can fund the peak cash need from existing facilities	Sign
Profitable in the base case, but the downside case loses money or the cash need exceeds your facilities	Renegotiate terms: shorter payment, deposit, smaller discount, minimum volumes, price indexation
Profit after financing is negative in the base case	Walk away, or redesign the offer

Common mistakes when evaluating a large customer contract

• Using the average margin. The company's average gross margin includes products, customers and prices that this deal does not. Calculate the margin for this contract at this price.
• Ignoring payment terms. Profit on paper does not pay salaries. A profitable company can run out of cash because of one large customer on long terms.
• Treating spare capacity as free. Capacity is free only until the contract needs overtime, maintenance or a second shift.
• Trusting the customer's volume forecast. Forecasts in a proposal are a sales argument, not a commitment, unless the contract includes minimum volumes or take-or-pay terms.
• Letting sales sign off alone. Sales teams are measured on revenue. Someone measured on cash and margin, usually the CFO or finance manager, should sign off every material deal.

Many of these mistakes come from not having reliable numbers in time. If your margin by customer or product only arrives weeks after month end, read why your monthly report arrives after the decision. Building contract-level costing is the core of our cost management work.

Frequently asked questions

How do you evaluate whether a big contract is profitable?

Calculate the contribution margin at the actual invoiced price, subtract the fixed costs the deal adds, then deduct the cost of financing the extra working capital it ties up. If the result stays positive when volume is lower and payment is later than agreed, the contract is profitable on realistic assumptions, not only on the proposal's figures.

What should I check before signing a large contract with a customer?

Check the real price after all discounts, the extra fixed costs, the payment terms and the cash needed until the first collection, and the downside case. Then review the clauses that move money: price indexation, minimum volumes, delivery penalties, termination notice, ownership of stock and tooling, and how disputes are settled.

How long should payment terms be in a big B2B contract?

There is no universal number, but every extra day ties up cash you must finance. As one reference point, the EU late payment directive sets 60 calendar days as the general limit for business-to-business payments. Terms above your normal terms should be priced into the deal or offset by a deposit or guarantee.

How much revenue from one customer is too much?

A practical warning level is about 20% of revenue from a single customer, because losing that customer would hit both profit and fixed-cost coverage at once. The right limit depends on contract length, switching costs and how easily the capacity could be resold to other customers.

Where to start

Before your next material deal, fill in a one-page deal sheet with the six questions above and your own numbers, and require it before anyone signs. You can download our free Big Contract Deal Sheet (Excel): enter your price, costs, payment terms and funding rate, and it calculates the four scenarios in the example, the working capital tied up, the value of each 30 days of terms, and a sign, renegotiate or walk-away recommendation. The discussion with the customer changes once you know exactly what each day of payment terms and each point of discount costs.

If you want a senior finance professional to review a deal with you before you sign, that is a typical fractional CFO engagement. Book a free 30-minute consultation with Axcell Financial Consulting.

Sources

• International Federation of Accountants (IFAC), Project and Investment Appraisal for Sustainable Value Creation: Executive Summary (International Good Practice Guidance, 14 August 2013; accessed 4 November 2026).
• European Parliament and Council, Directive 2011/7/EU on combating late payment in commercial transactions (16 February 2011, recital 13 on the 60-calendar-day general limit; accessed 4 November 2026).

The worked example is illustrative, with its assumptions stated in the text; all figures are calculated from those assumptions. The six-point test and decision rules are Axcell's recommended approach.