Profit Fade: Why Your 20% Margin Turns Into 5%

You bid the kitchen remodel at $85,000 with a comfortable 20% gross margin on the contract value. Sixteen weeks later, you invoice the final draw and realize you made $4,200 on a job that should have netted you $17,000 in gross profit. The client is happy. Your crew did good work. And you just worked four months for basically nothing.

This is profit fade. And it is killing contractors who think they are running profitable businesses.

The Real Cost of Margin Erosion

Many contractors lose a significant portion of their projected profit margin between bid and completion, often half or more of what they planned to make. On a $500,000 annual revenue, that could be the difference between a $100,000 gross profit year and a $50,000 gross profit year. Same work. Same stress. Half the reward.

Construction companies are widely recognized as operating on thinner margins than most other industries. When profit fade compounds across multiple projects, it does not just hurt. It threatens your survival. And if you're already booked solid but still struggling financially, profit fade is often the hidden culprit.

Here is where the money typically goes:

Unbilled change orders: Often tens of thousands annually for mid-size contractors (those in the $2-10M revenue range) Scope creep: Commonly in the high single digits as a percentage of project value Material cost increases: Variable, but often several percentage points above original estimates depending on market conditions Labor overruns: Frequently 5-15% beyond projected hours, depending on project complexity

When these issues compound, a healthy 20% margin can compress dramatically, often into the mid-single digits before you even account for callbacks or warranty work.

Why This Happens to Good Contractors

You are not bad at estimating. You are bad at tracking. There is a difference.

The problem starts on day one of the project. Your superintendent makes a verbal agreement with the homeowner to add an outlet. Your framing crew fixes rot they discovered behind the drywall. The plumber reroutes a line because the plans did not match reality.

All of that is extra work. All of that costs money. And none of it gets documented until someone asks why the job went over budget.

The construction industry runs on trust and handshakes. That works great for relationships. It is terrible for profitability. By the time you sit down to reconcile the job, you cannot remember which changes were billable, which were your problem, and which ones you just absorbed because it was easier than having a conversation.

Your office staff does not know what happened in the field. Your field crew does not know what was in the contract. And you are stuck in the middle trying to piece together three months of decisions from memory and text messages.

The Manual Fix That Actually Works

Before you buy any software or hire any consultants, here is a system you can implement this week:

1. Create a Change Order Log for Every Job

Print this template and keep one in every job folder:

Change Order Log

Job Name: ________________

For each change, record:

• Date the change was requested
• Description of what changed
• Requested by (client name or "field discovery")
• Estimated cost for labor and materials
• Approved (yes/no and date)
• Billed (yes/no and invoice number)

Every time anything changes from the original scope, it goes on this sheet. No exceptions. A good rule of thumb: if it takes more than 10 minutes of labor or $50 in materials, it gets logged. Adjust these thresholds based on your company size and typical project scope.

2. Establish a Weekly Job Cost Review

Pick a day. Tuesday mornings work well because you have Monday data and time to course-correct. For each active job, answer these questions:

• What did we spend on labor this week?
• What materials did we purchase?
• Are we ahead or behind the original estimate?
• What changes happened that are not yet billed?

This often takes 15-30 minutes per job. If you have 5 active projects, that is roughly 2 hours a week to prevent thousands in profit fade.

3. Get It in Writing Before the Work Happens

Your crews need a simple rule. If the client asks for something different, the answer is always the same:

"I can definitely do that. Let me get you a price and written approval before we start."

This should be consistent with your contract requirements, as some contracts allow time-and-materials tickets or field directives, but getting written documentation protects everyone. Note that some states have specific requirements for residential change orders, so check your local home-improvement contract laws.

Train your subs and employees to text you immediately when scope changes come up. You can approve verbally to keep the job moving, but the written documentation has to happen the same day.

4. Compare Budget to Actual Monthly

General business guidance recommends reviewing your financial position monthly at minimum. For contractors, this often means pulling each project's budget versus actual spending.

Set up a simple spreadsheet:

Original Estimate: $85,000 Costs to Date: $62,000 Percentage Complete: 70% Projected Final Cost: $88,571 Variance: -$3,571

That variance column is your early warning system. If you are 70% done but have spent 75% of your budget, you have a problem. Catching it now gives you options. Catching it at final invoice gives you regrets.

Note that percent-complete estimates are subjective. Many contractors prefer cost-based percent complete (cost-to-cost method) to reduce bias in their projections.

Documenting Changes in Real-Time

Here is the thing about profit fade. It is not one big mistake. It is a hundred small ones that you did not track.

Documenting scope changes in real-time preserves far more billable work than trying to audit everything at the end of a project. Your memory is not that good. Neither is your client's. And fighting over who said what three months ago damages relationships and rarely recovers the money.

The contractors who maintain their margins have systems that capture information when it happens. Not when it is convenient. Not when the project is over. Right now, while everyone still remembers.

This is why accurate initial pricing matters so much. The tighter your original estimate, the easier it is to identify when something falls outside that scope. Vague proposals create vague expectations, and vague expectations create unbillable work.

A Better Way to Stop the Bleed

Manual tracking works. But it requires discipline that most job sites do not have. Your foreman is focused on the work, not the paperwork. Your subs want to get paid and get to the next job. Nobody wakes up excited to fill out change order logs. The same one-touch admin methods that eliminate evening paperwork can help you capture this information without the burden.

This is where automation can make a real difference. Not the kind that replaces your judgment, but the kind that captures information automatically so you do not have to rely on memory and manual entry.

Modern job management systems can be set up so that texts from clients requesting additional work get flagged for review as potential change orders. Material receipts can automatically import into your job cost tracking with suggested coding, though you will want to verify the job and cost code assignments. Weekly budget alerts can tell you which projects appear on track and which need attention, assuming your cost data is entered timely and your percent-complete estimates are current.

The same principles that help other trades stop missing client communications apply here. When information flows from the field to your accounting with less manual re-entry, profit fade becomes visible before it becomes permanent.

Automation does not replace the weekly review or the change order conversation. It makes sure you have more accurate data when you sit down to do that work.

The Conversation That Saves Your Margin

Most contractors avoid scope conversations because they feel awkward. But here is the thing. Clients respect clear communication about costs. What they hate is being surprised at the end.

When a change comes up, try this approach:

"That is a great idea, and we can definitely make it happen. This was not in our original scope, so let me get you a quick price. I will have something for you by end of day, and once you approve it, we can start right away."

No drama. No awkwardness. Just professional clarity about what costs money. Your good clients will appreciate it. The ones who push back on everything were always going to be problems anyway.

The goal is not to nickel and dime people. It is to make sure the work you do gets paid for at a rate that keeps your business healthy.

Protecting Your Business Starts With Visibility

Profit fade thrives in the dark. When you do not know your job costs until the project is over, you cannot make adjustments. You just absorb the loss and hope the next one goes better.

The contractors who consistently maintain their margins are not lucky. They are informed. They know where every dollar goes on every job, and they catch problems early enough to do something about them.

Whether you use paper logs, spreadsheets, or automated systems, the principle is the same. Track everything. Review regularly. Bill for the work you do.

Your 20% margin is not disappearing because you are bad at construction. It is disappearing because you are not watching it closely enough. Fix the visibility problem, and the profit problem fixes itself.

If you want help building a system that tracks job costs and change orders automatically, let's talk. Sometimes the right automation pays for itself on a single project.