RHACOVA

Financial fundamentals

Contractor Break-Even: What Your Business Must Earn

Break-even is the revenue where gross profit exactly covers overhead and profit is zero. Below it, being busy costs you money.

The short answer

Your break-even is the revenue at which gross profit exactly covers overhead, leaving zero profit. Total your annual overhead, work out the gross margin your jobs actually produce, and divide: break-even revenue = annual overhead ÷ gross margin. Everything below that number is a loss no matter how busy the crew is.

Definitions

Gross profit
Revenue minus direct job cost. It is the money left to pay for the business itself — it is not your profit.
Overhead
The cost of being in business whether or not you sold a job this week: rent, insurance, office wages, software, vehicles not charged to a job. Covered in detail in how to calculate construction overhead.
Break-even revenue
The revenue level where gross profit equals overhead and net profit is exactly zero.

The formulas

Gross profit = revenue − direct job cost

Gross margin = gross profit ÷ revenue

Break-even revenue = annual overhead ÷ gross margin

Net profit = gross profit − overhead

Worked example

Overhead of $8,000 a month annualizes to $96,000.00. Suppose the work you sell runs at a 30% gross margin. At $224,000.00 of direct job cost, that margin produces:

  • Revenue: $320,000.00
  • Direct job cost: $224,000.00
  • Gross profit: $96,000.00
  • Gross margin: 30.00%
  • Overhead to cover: $96,000.00 — the same figure

So $320,000.00 of revenue at a 30% gross margin is exactly break-even: zero profit. Sell the same work at a 25% gross margin and the same overhead needs materially more revenue; sell at 35% and it needs less. Break-even is not one number you compute once — it moves with your margin.

Turning it into a weekly or monthly target

An annual break-even is hard to act on. Divide it by the number of weeks you actually sell in — not 52, unless you really do sell every week of the year — and you get a revenue target you can compare against your pipeline. The same arithmetic converts break-even into productive hours: divide break-even revenue by your billable hourly rate, and you have the number of hours the business must sell before the first dollar of profit exists.

Break-even is a floor, not a plan

Break-even tells you when you stop losing money. It is not a target. Your target is break-even plus the profit the business needs for taxes, equipment replacement, reserves and the owner. RHACOVA deliberately does not publish a “correct” profit figure for that: the number depends on your debt, your risk and your plans, and any published average would be a guess dressed up as guidance.

Common mistakes

  • Using net margin instead of gross margin in the division — it double-counts overhead.
  • Leaving the owner's own pay out of overhead, which lowers break-even on paper only.
  • Treating last year's overhead as this year's when insurance, rent or a new hire have already changed it.
  • Assuming a gross margin you have never measured. Compare estimated and actual cost first — see estimate vs actual.

Quick answers

Do I use gross margin or net margin for break-even?
Gross margin — revenue minus direct job cost, divided by revenue. Net margin already has overhead subtracted, so using it would count overhead twice.
Does break-even change during the year?
Yes. It moves whenever overhead changes (a hire, a truck, an insurance renewal) or whenever the gross margin of the work you sell changes.
Is break-even a target?
No. It is the floor. Your target is break-even plus the profit the business needs for taxes, reserves and replacing equipment.

Run the numbers

Total annual overhead, the recovery basis you chose, overhead per productive hour and overhead as a percentage of direct cost.

Open the Overhead Recovery Calculator

Free, no account, and the answer stays on the page.

Keep overhead in one place

Your Numbers stores your overhead and target margin with their provenance, so break-even is recalculated from figures you can point at rather than remembered ones.

Open Your Numbers

How RHACOVA defines these terms

Every calculator, estimate and job in RHACOVA uses one set of financial definitions, and they are written down rather than implied. Read the RHACOVA methodology for the full list of definitions this article relies on.

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