When to Turn Down Work That Keeps You Busy

Most advice about profitability points at the books. Track the costs, close the month, read the reports. All of that is necessary, and none of it fixes the problem this article is about, because by the time a thin job shows up in a report the money is already committed.

The decision that sets a job's profit is made before any of that: when you decide whether to bid it, and at what number. A business can keep clean books, review them on schedule, and still lose money every year — because it accepts work that was never going to pay.

Evaluate margin alongside revenue

Revenue is the number owners quote to each other, and it is the least informative number in the business. It says how much work passed through, not how much stayed.

Two numbers do the real work:

• Gross profit — revenue minus the direct costs of doing that work: labor, materials, subcontractors, equipment on the job. Divided by revenue, that is your gross margin.
• Overhead — what the business costs to exist whether or not a single job runs: rent, insurance, office staff, vehicles, software, your own time when you are not producing.

Gross profit is not profit. It is the pool that overhead gets paid out of. Whatever survives that is net profit. A business can grow revenue every year, hold a respectable-looking gross margin, and still net nothing — because the margin was never sized against what the overhead actually costs.

How a low-margin job uses cash

Here is the arithmetic, with round numbers.

Say your overhead runs $480,000 a year, and your crews can produce about $2,000,000 of work in that year. Every dollar of revenue therefore has to carry 24 cents of overhead — $480,000 divided by $2,000,000.

That gives you one number worth more than most of the reporting in the business:

Break-even gross margin = annual overhead ÷ annual capacity. In this example, $480,000 ÷ $2,000,000 = 24%.

A job at exactly 24% gross margin carries its own share of overhead and produces zero profit. Above it, the job contributes. Below it, the job is subsidized by the rest of your work.

Now take a $250,000 job at 10% gross margin. It produces $25,000 of gross profit. Its share of overhead, at 12.5% of your annual capacity, is $60,000. The job is $35,000 short — and it looked fine the whole time it was running, because $25,000 of gross profit is a positive number and the crew was busy.

Run a schedule full of those and you get the exact condition the phrase describes: constant activity, no money. Nothing in the monthly reports flags it as a mistake, because it was not a mistake in execution. It was a mistake in acceptance.

What a Low-Margin Job Actually Costs You

The $35,000 is only half of it. The other half is the slot.

Capacity is finite. That $250,000 job consumed one-eighth of your production year. If the schedule would have filled anyway — with work at, say, 25% margin — that slot could have produced $62,500 of gross profit instead of $25,000. Taking the thin job cost you the $37,500 difference, on top of failing to carry its overhead.

That is the case for turning it down. But it depends entirely on one condition, and this is where most advice on the subject goes wrong.

If the slot would otherwise sit empty, the arithmetic reverses. Overhead is being paid either way. An empty crew produces $0 of gross profit and still costs you rent, insurance and payroll. The same $250,000 job at 10% margin produces $25,000 that would not otherwise exist. It does not carry its full share of overhead — but $25,000 toward overhead beats $0 toward overhead.

So the rule is not "never take low-margin work." The rule is:

• Is this slot contested? If accepting means declining, or crowding out, better work — the thin job has to clear your break-even margin, because you are paying the difference to take it.
• Is this slot empty? If nothing else is coming and the crew is idle, take anything that clears its direct costs with room to spare, and be honest that it is a contribution toward overhead, not a profit.
• Would taking it make the slot contested? A schedule filled early with thin work is the trap. Cheap jobs book first because they are easy to win, and they consume the capacity that the good work needed in the same season.

Most owners never make this call explicitly. The schedule fills in the order the phone rings, which quietly answers it as "always take it."

Price From Cost and Target Profit, Not From the Competitor

A bid built by looking at what the last guy charged inherits his cost structure, his overhead, and his mistakes. Build it from your own numbers instead:

• Estimate direct cost honestly — labor at loaded rates, materials at today's prices, subcontractors at quoted numbers, equipment, and a real contingency for the parts of the job you cannot see yet.
• Add your overhead share. Using the example above, at 24% break-even the direct costs have to be marked up enough that overhead is covered before profit starts.
• Add target profit on top of that — not instead of it. Profit is a line in the bid, not what happens to be left over.
• Compare that to the market. If your number is well above what the work goes for, that is information: either your overhead is too heavy for that kind of job, or that kind of job is not yours to bid.

Step four is the one owners skip, and it is the most useful. A bid you lose at the right price tells you more than a bid you win at the wrong one.

One piece of arithmetic to be careful with: markup and margin are not the same number. Adding 24% to your costs does not produce a 24% margin. To land on a 24% gross margin, divide direct cost by 0.76 — a $100,000 job costs you $100,000 and bids at $131,579, which is a 31.6% markup. Marking up 24% instead gives you $124,000, a 19.4% margin — under break-even, on a job you thought you priced correctly.

The Bid Is Where Profit Is Decided

Everything after the signature is damage control. Good job tracking tells you a job is going sideways in time to react, which is genuinely valuable — that is the subject of tracking job profitability while the job is still running. A monthly close tells you where the business landed; the schedule for that is in your monthly financial review. And knowing whether the cash will be there when the bills are is cash flow forecasting.

None of those can rescue a job that was underpriced at the bid. They can only tell you how much it is costing you, and how soon.

The two numbers that make the decision possible are ones most contractors have never calculated: what your overhead actually is, and what your realistic annual capacity actually is. Divide the first by the second and you have your break-even margin. It is one number. It changes what you bid.

Start With Your Last Ten Jobs

Pull the last ten jobs you completed. For each one, write down the contract value and the direct costs, and work out the gross margin. Then calculate your break-even margin — overhead divided by capacity — and draw a line at it.

Count how many of the ten fall below the line, and how much of your year they consumed. For most contractors doing this the first time, the answer explains the gap between how hard the year felt and what it produced.