I wrote about the revenue ghosts haunting contractors. Then a business owner pointed out the one I'd missed.
To celebrate Halloween, I published an article this week about the ghosts haunting home-service businesses. Missed calls. Dead estimates. Customers who disappear after the first job. All the little ways revenue slips through the cracks.
A business owner read it and offered some feedback.
He's spent years owning and operating businesses, including in the trades. He liked the article, but thought I'd overlooked something.
"The scariest number could also be the number you don't understand."
He brought up the true cost of labor, overhead, and customer acquisition. Expenses that can quietly eat away at profitability when business owners don't fully understand or account for them.
Fair point. And an important one.
A contractor can answer every phone call, close every estimate, and keep crews booked solid while still losing money on the work.
That's what happens when you don't know what a job actually costs to complete.
The $5,000 Job That Wasn't Nearly as Profitable as It Looked
Let's say you're a contractor who just finished a $5,000 job.
You spent $1,500 on materials and paid your crew $1,200 in wages.
Pretty good, right?
You brought in $5,000 and spent $2,700. That leaves $2,300, or 46% of the invoice.
Except you haven't accounted for payroll taxes, workers' compensation, insurance, vehicles, equipment, software, office expenses, or what it cost to get that customer in the first place.
Let's put some hypothetical numbers to it.
The $5,000 Job
Where the money actually goes
That $2,300 is now $800, or a 16% margin, assuming we've accounted for all the costs associated with the job.
And that margin can shrink quickly. A callback, another trip for materials, or a few unexpected labor hours could eat into what's left.
Now imagine pricing every job using the original math.
You might be winning bids and keeping your crews busy, all while consistently undercharging for the work.
That's a much bigger problem than a slow week.
Five Numbers Every Contractor Should Know
You don't need an accounting degree to understand whether your jobs are making money. But you do need to know what goes into the numbers.
Here are five I'd start with.
1. Your True Cost of Labor
If you pay a technician $30 an hour, that technician doesn't cost your business $30 an hour.
There's employer payroll tax, workers' compensation, benefits, paid time off, training, and other employment expenses.
Then there's the time you're paying for that doesn't get billed to a customer.
Driving between jobs. Loading the truck. Picking up materials. Attending meetings. Cleaning up the shop.
Let's say you pay someone for 40 hours in a week, but only 30 of those hours are billable.
Even before adding payroll burden, your $30-per-hour employee costs you $40 per billable hour in wages alone.
Add the employment expenses, and the cost climbs further.
What to calculate: Total labor cost, including employer-paid expenses, divided by actual billable hours.
That number should inform how you price labor—not just the hourly wage on someone's paycheck.
2. Your Overhead
Rent, utilities, insurance, trucks, office staff, software, phones, accounting, marketing, and all the other expenses required to keep the business operating.
These bills don't disappear because you had a slow Tuesday.
And they don't magically get covered because you sold a big job.
A contractor might know exactly what materials cost but have only a vague idea how much overhead needs to be recovered through each job.
Start by adding up your annual overhead. Then look at your realistic annual production capacity or revenue target.
For example, if your business has $240,000 in annual overhead and expects to generate $1.2 million in revenue, overhead represents 20% of that revenue target.
That's not necessarily the percentage you should add to every estimate. Different jobs consume resources differently, and overhead allocation methods vary.
But it's a useful reality check.
What to calculate: Annual overhead, the revenue or billable capacity available to cover it, and a consistent method for allocating those costs.
If you can't explain how your pricing recovers overhead, there's a good chance some jobs aren't carrying their share.
3. Your Customer Acquisition Cost
How much does it actually cost to get a new paying customer?
Not a lead. Not a phone call. A customer who books and pays for work.
Suppose you spend $3,000 on advertising in a month and acquire 15 new customers.
Your advertising cost per acquired customer is $200.
But that doesn't necessarily include the agency managing your ads, the software you're paying for, or the employee time spent following up.
And if you bought 100 leads to get those 15 customers, your cost per lead tells only part of the story.
What to calculate: Total sales and marketing acquisition costs divided by the number of new customers acquired during the same period.
You'll want to consider timing differences, especially when leads take weeks or months to become customers.
Also, compare acquisition cost against the value of the customer. Spending $300 to acquire a customer might make sense for a profitable system replacement. It may be harder to justify for a one-time $150 service call unless there's meaningful repeat business.
This is why I spend so much time talking about missed calls and unbooked estimates. You can spend a fortune generating demand and then waste the investment by failing to convert it.
4. Your Markup Versus Your Margin
These two numbers get confused all the time, and the difference matters.
Let's say a job costs you $1,000 and you add a 30% markup.
You charge $1,300.
Your profit is $300, but your margin is approximately 23%, not 30%.
To earn a 30% margin on a job with $1,000 in fully accounted costs, you'd need to charge about $1,428.57.
That's a meaningful difference, especially across hundreds of jobs.
What to calculate:
Markup: Profit divided by cost.
Margin: Profit divided by selling price.
And remember, those calculations are only as good as the costs you include. If you've left out overhead or labor burden, your apparent profit isn't telling the whole story.
5. The Cost of Staying Busy
This one is harder to find on a financial statement, but I've seen how it plays out in businesses.
An owner takes a low-margin job to keep the crew working.
That job runs long, ties up a truck, and prevents the company from accepting something more profitable.
Or the company keeps adding work without accounting for the overtime, scheduling headaches, callbacks, and administrative burden that come with it.
More revenue doesn't automatically mean more profit.
Sometimes a job is worth taking at a lower margin because it fills otherwise unused capacity, supports a valuable relationship, or leads to future work. That's a business decision.
The problem is when you're making that decision without knowing the tradeoff.
What to calculate: Expected contribution from a job after its incremental costs, the capacity it will consume, and what other work you may be turning away.
A full schedule is encouraging. It isn't proof that the business is healthy.
A Quick Gut Check
Before you quote your next job, see how confidently you can answer these questions:
What does one billable hour of labor actually cost my business?
How much overhead do I need to recover each month?
What am I spending to acquire a new paying customer?
Do I know the difference between the markup I charge and the margin I earn?
Which types of jobs are consistently the most profitable?
If you're guessing at several of these, that's worth investigating.
You don't necessarily need a complicated financial model. Start with your actual expenses, payroll records, job costs, and sales data. Work with your bookkeeper or accountant to make sure you're classifying costs consistently.
The goal is to get better information into your pricing decisions.
You Can't Automate Your Way Out of Bad Math
I spend a lot of time helping contractors use marketing and AI to capture more opportunities.
Answer missed calls. Follow up on estimates. Reactivate past customers. Get more jobs on the calendar.
I believe in all of that.
But the business owner's feedback was a good reminder that capturing more revenue only helps if the work is profitable.
If you're underpricing jobs because you don't understand your labor costs, automating your estimate follow-up could simply help you sell more underpriced jobs.
If you don't know your customer acquisition cost, increasing your advertising budget might make the problem worse.
And if you're consistently confusing markup with margin, a packed schedule can give you a false sense of security.
Good systems help a business run better. They can't compensate for pricing built on incomplete information.
In fact, one of the best uses of AI might be helping an owner organize existing financial data, spot patterns in job costs, and identify questions worth taking to an accountant.
Not replacing financial expertise. Making it easier to ask better questions.
Just be thoughtful about what financial or customer information you upload into AI tools.
The Scariest Ghost Is the One You Can't See
The original article was about revenue that disappears before it reaches your business.
The phone call you missed. The estimate nobody followed up on. The customer who never heard from you again.
Those are real problems, and they're worth fixing.
But there's another kind of revenue leak: money you think you're making that never actually becomes profit.
That one can be harder to spot because everything looks fine from the outside.
The trucks are moving. The crews are working. The invoices are going out.
Meanwhile, the owner is wondering why there's never as much money left in the bank as there should be.
That's the point the business owner made when he read my first article, and I'm glad he did.
Before you spend more money generating leads, take a closer look at what happens to the revenue you already have.
And before you celebrate winning another big job, make sure you understand what it will actually cost to deliver it.
The scariest number in your business might be the one you haven't bothered to calculate.
At Raise the Trades, I help home-service contractors find the gaps between generating leads, booking jobs, and building a profitable business. If you're not sure where revenue is slipping through the cracks, start with a closer look at your numbers and the systems behind them.