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Margin Erosion Calculator

Your P&L says you made money. Your bank account disagrees. That gap has a name: margin erosion.

This calculator shows you the three numbers that matter: Gross Margin, Operating Margin, and Cash Margin. Most people only track one. Enter your recent jobs and see where your margin is actually going.

Rent, insurance, office staff, vehicles, utilities—everything that isn't tied to a specific job.

Enter Your Jobs

Revenue

Direct Costs (Labor, Materials, Subs)

Overhead Allocation

Use the "Distribute to Jobs" button above to auto-allocate based on revenue, or enter manually.

The Math They Don't Teach You

Three numbers matter. Most people only look at one.

  • Gross margin: Revenue minus direct costs (labor, materials, subs). This tells you if your pricing covers the work.
  • Operating margin: Gross profit minus overhead. This tells you if your pricing covers the business.
  • Cash margin: What actually lands in your bank account after everything. This is the only number that pays your mortgage.

You can have positive gross margin and negative cash margin. It happens all the time. That's what this calculator shows you.

Why This Matters

The average contractor operates on 5% net margins. Some industry experts say 1.5% to 2% is the new normal.

At 5% margin, if your costs run 6% over estimate, you didn't make less money. You lost money. The job that was supposed to pay you actually cost you.

Only 36% of construction businesses survive to their fifth year. The usual explanation is "it's a tough business." The real explanation is margin erosion—businesses that look busy go broke because they never see the bleed until it's too late.

Industry Benchmarks

According to the CFMA 2025 Construction Financial Benchmarker, the median net income before tax margin for construction companies is 6.7%. Gross profit margins typically range from 20-35% depending on trade and project type.

The Autodesk Construction Cloud research shows that only 36% of construction businesses survive to year five, with margin erosion being a primary factor.

Where Margin Goes to Die

1. Scope Creep

You quoted a job. The customer asked for "one small thing." Then another. None of it got billed. The gap between Quoted and Billed is where this shows up.

2. Labor Leakage

Industry data shows 40% of contractors underestimate labor by at least 10%. That eats directly into your gross margin.

3. Ghost Costs

Drill bits. Blades. Fasteners. Each one trivial. Together, they're a truck payment that never shows up in job costing.

4. Overhead Hiding

Most contractors know their overhead number. Few allocate it to jobs. That's the gap between gross margin and operating margin.

5. Collection Issues

The gap between Billed and Received. Slow payers, disputes, write-offs. This is why cash margin is the only number that matters.

Sources

Frequently Asked Questions

What is margin erosion?

Margin erosion is the gap between what you expected to earn on a job and what actually landed in your bank account. It happens in stages: scope creep reduces what you bill, overhead eats into gross profit, and collection issues reduce what you receive. A job can look profitable on paper while losing money in cash terms.

What is the difference between gross margin and cash margin?

Gross margin is revenue minus direct costs (labor, materials, subcontractors). Cash margin is what you actually received minus all costs including overhead. You can have positive gross margin and negative cash margin at the same time, which means you are losing money despite appearing profitable on a per-job basis.

What is a good gross margin for a contractor?

According to the CFMA Construction Financial Benchmarker, gross profit margins for construction companies typically range from 20-35% depending on trade and project type. The median net income before tax is 6.7%. If your gross margin is below 20%, your pricing likely does not cover your costs adequately.

Why do profitable-looking businesses run out of cash?

Three common causes: unbilled work from scope creep (you did more than you charged for), overhead that is not allocated to jobs (making each job look more profitable than it is), and collection issues (billing $50,000 but only receiving $47,000). These small leaks compound across every job.

How do I allocate overhead to individual jobs?

The most common method is revenue-based allocation: divide total monthly overhead by total monthly revenue, then multiply by each job's revenue. If your overhead is $15,000/month and a job is 20% of your revenue, allocate $3,000 of overhead to that job. This gives you a realistic operating margin per job.

What percentage of contractors fail within five years?

Bureau of Labor Statistics data shows that only about 36% of construction businesses survive to their fifth year. The primary cause is not lack of work but margin erosion: businesses that look busy go broke because the gap between expected and actual profit compounds over time until cash runs out.

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