Most contractors don’t typically struggle because they can’t build. They struggle and often fail because they don’t know their break-even number and their pricing is below break-even margins.  If you don’t know your break-even margin cold, you’re guessing on bids and pricing blind can be very costly.

Here’s how to calculate your break-even numbers:

Definition:

Your break-even is the point where your revenue equals your direct costs + overhead (Revenue = Direct Costs = Overhead). At this point, your profit equals zero.

An example of direct job costs (variable):

  • Labor
  • Materials
  • Equipment 
  • Subcontractors
  • Permits, specific to the job

An example of overhead (Fixed or semi-fixed):

  • Office rent
  • Administration costs
  • Insurance
  • Phones
  • Trucks
  • Accounting
  • Owner base salary (yes, your salary is included)

Calculating your overhead percentage:

This is simple math.  Overhead % = Overhead / Revenue.  

Let’s say a contractor has an annual overhead of $750,000 and projected annual revenue of $300,000. $750,000 / $300,000 = 25%.  

This means before job expenses, every job must carry 25% just to pay the overhead.  If the bid is 20%, the loss is 5% on the job. What’s dangerous is that the repercussions aren’t felt until months later. 

Calculating your target margin & aligning project bids to the margin:

If your break-even margin is 25% (the point where profit = 0), then it is realistic to set your target margin to 30% (minimum) to 35%+.  The most stable contractors work on a 35-45% gross margin depending on risk, warranty exposure and project difficulty.

Pricing a project requires working backward from margin to price.  Rather than “let’s add 20%” ask yourself what margin you require. 

The calculation is: 

Price = Cost / 1 – Target Margin. If your target margin is 35% and the job cost is $100,000: ($100,000 / 1 – .35) or $100,000 / .65. Your price to cover a 35% gross margin in this case is $153,846.

Resist the temptation to chase the low bidder:

Yes, there may be a need to “buy” a job to keep cash-flow running into the business but don’t make a practice of it.  Sooner or later, bidding below the break-even margin is a downward spiral to insolvency. 

A best practice is to support healthy margins by adding value in comparison to other lower bidding contractors:

  • Offering superior product technologies
  • Showing that products and installation are in line with proper building science
  • Mastering a particular niche in the industry (shows mastery)
  • Third-party validation (Mfr. certifications, case studies, industry associations, customer reviews)
  • Overall professionalism (returning phone calls, clean & organized proposals, jobsite organization)

Do you know your number?  Calculate it and operate by it today.