Stop Bleeding Money: Why Your ‘Industry Standard’ Overhead Rate Is Probably Wrong
A construction company that’s been around since Eisenhower was president. Three generations of hard-working contractors. Trucks with their name painted on the side rolling through town for 70 years. You’d think they’d have their act together, right?
Wrong. Dead wrong.
I just worked with exactly this kind of company—and they were hemorrhaging cash like a busted water main. No job costing. Books that looked like they’d been reconciled with a dartboard. And here’s the kicker: they were winning every bid in town because their prices were so low they might as well have been doing charity work.
If this sounds familiar, buckle up. We’re about to take a sledgehammer to the myths that are bleeding your business dry.
The Wake-Up Call: When Legacy Becomes Liability
Here’s a hard truth that’ll sting: family legacy doesn’t equal financial literacy. I’ve seen companies older than my grandfather still pricing jobs like it’s 1950. They pass down trade skills from father to son, but somehow the books stay messier than a demo site.
The biggest red flag? Winning every bid you submit.
Think about that for a second. If you’re consistently the lowest bidder in town, you’re not a pricing genius—you’re pricing yourself into bankruptcy. It’s like bragging about being the fastest runner in a marathon while heading in the wrong direction.
And don’t get me started on commission structures that reward salespeople for volume instead of profit. That’s like paying your crew based on how much concrete they can pour, regardless of whether it’s level. You’re literally incentivizing people to race to the bottom of your profit margin.
Then there’s the subcontractor markup trap. Too many contractors add subs to jobs without adjusting their pricing model. You go from self-performing 70% of the work to subbing out 90%, but you keep pricing like you’re still swinging hammers on every job. That’s a recipe for disaster.
The 90% Materials Reality Check: When Math Meets Reality
Let me hit you with some construction-grade honesty: industry standards are fairy tales. Every contractor who bases their overhead rate on “what everyone else does” might as well be using a Magic 8-Ball for job costing.
I worked with a contractor who swore up and down that materials were 70% of his costs. His pricing was built around this “industry standard” he’d heard at some conference. Want to know what his actual numbers showed over five years? Materials were running 90% of job costs.
That 20% gap killed his business.
Historical records don’t lie—but contractors sure do, especially to themselves. Using Profit First-style cash flow buckets reveals the brutal truth about where your money actually goes. When you physically separate your materials and subs money from everything else, reality hits harder than a nail gun misfire.
Here’s the thing: whether you’re self-performing or subbing out completely changes your pricing game. A GC managing trades has totally different overhead than a contractor with 15 guys on payroll. Yet both use the same “industry standard” markup? That’s like using the same blueprint for a ranch house and a skyscraper.
The Monthly Nut: What Overhead Really Costs You
Working from your kitchen table doesn’t mean you have no overhead—it just means you’re not tracking it properly. Even the smallest operation has real costs that must be covered: insurance, licenses, phone bills, that truck payment, your accountant’s fee.
But here’s what most contractors miss: debt payments are overhead too. Your equipment loan doesn’t magically disappear from job pricing just because it’s not listed under “operating expenses” in QuickBooks.
I’ve watched contractors scale from $2 million to $7 million and wonder why they’re making less money. Simple math: overhead often grows at 115-120% of revenue growth. You add office space, administrative staff, better trucks, more insurance coverage—but forget to adjust your markup accordingly.
The solution? Constraint. Using the Profit First method, you limit overhead spending to a fixed percentage of revenue. It’s like putting a governor on an engine—it prevents the lifestyle creep that kills profitability.
The Profit First Construction Blueprint: Your Financial Gut Check
Here’s where we separate the contractors from the construction hobbyists. Materials and subs money isn’t your money—it’s other people’s money passing through your business. Carve it out first, put it in its own account, and never, ever touch it for anything else.
Self-performing contractors need payroll in its own bucket. Labor costs must be separated from everything else, or you’ll never know if your crew pricing covers reality.
Operating expenses get their own constrained account. This forces real decision-making. When your overhead account is running low, you can’t just “borrow” from job funds to cover that shiny new tool you don’t actually need.
And here’s the big one: owner compensation isn’t optional. If you’re not paying yourself properly, you’re subsidizing bad pricing with your own labor. That’s not business ownership—that’s buying yourself a job with terrible benefits.
Job Costing Every Shovel: The Million-Dollar Mindset Shift
Everything—and I mean everything—that touches a job should be priced into that job. Workers’ comp scales with payroll, so it belongs on job costs, not buried in overhead. General liability varies by job type and size—track it accordingly.
I call it the “shovel principle”: if it touches the job, it goes in the job cost. Hand tools, safety equipment, even the gas money to drive to the site. Modern software often can’t handle proper construction job costing automatically, so you’ll need to get manual with your tracking.
The contractors who master this mindset shift see their profitability transform almost overnight. Instead of wondering where their money went, they know exactly what every job really cost—and they price the next one accordingly.
Breaking the Loss Cycle: When You Can’t Get Your Price
Sometimes the problem isn’t your pricing—it’s your market. If your markup seems too high compared to competitors, you might be in the wrong market segment entirely. Specialization beats commoditization every single time.
Historical data is worthless without follow-up. Bidding based on past jobs means nothing if you don’t track actual results. I’ve seen contractors bid the same way for years, never realizing they were losing money on 60% of their jobs.
More moving parts equal more ways to lose profit. Complex jobs with multiple phases, difficult access, or picky clients need higher margins. Risk assessment costs money—price accordingly.
And sometimes? Sometimes you need to fire your market. If customers consistently won’t pay profitable prices, find different customers. It’s better to do three profitable jobs than ten break-even ones.
The Bottom Line: Reality vs. Wishful Thinking
Most contractors are pricing jobs using outdated rules of thumb while bleeding cash through untracked overhead. But here’s the beautiful thing about the Profit First approach: it instantly reveals whether your pricing covers reality or just wishful thinking.
When you separate your money into specific buckets—materials/subs, payroll, overhead, profit—the math either works or it doesn’t. No more guessing. No more “industry standards” that don’t match your business. Just cold, hard numbers that force you to price for profit instead of hope.
Stop bleeding money on outdated assumptions. Your business deserves better than industry fairy tales and wishful thinking. It deserves pricing that reflects the true cost of doing business—and delivers the profit you’ve earned.
Ready to stop the cash bleed and start pricing for profit? Listen to the full episode of the Contractor Success Forum at https://contractorsuccessforum.com/ or subscribe on YouTube, Spotify, or Apple Podcasts. For personalized help implementing Profit First in your construction business, contact Wade Carpenter, CPA at https://carpentercpas.com.