What is a Good Profit Margin for a Contracting Business

Over the past 3 years we’ve worked with a lot of contractors and helped them improve their profit margins. But when do we stop improving? At what point are we satisfied with their margins? The answer, while being super simple, almost always gets a big response from a lot of people. 

We are happy when the gross profit margin is above 60% and their net margins are above 30%. When you’re under these figures two things happen, the first one is that scaling feels absolutely impossible and you are in a constant loop of every year even if revenue goes up, you still have the same issues and at the end of the year you don’t make more money. Another thing you’ll feel is that money disappears quicker than it comes in. If you’re feeling this, it’s almost always that your gross profit margins are simply not enough. 

So let’s cover the bare minimums, 50% gross profit margins are the bare minimum. Under this, you won’t be able to afford leads, can’t pay employees competitively, and any unforeseen circumstance is completely unaffordable. 

On the net margins side, it depends, it’s harder to put a minimum because maybe you pay yourself a salary, or you reinvest everything so on your books the margin is 0 but it’s just because you did something with those profits. Additionally, if you want to improve your net margins, the easiest way is to just improve your gross margin. Small hops in gross margin make a massive difference on the net. So our recommendation is to just focus on your gross margin.

Another thing to keep in mind is that some businesses can live with a lower gross profit margin while others need a higher one to stay alive. So I’ll give you a couple of tips on how to identify which one is yours. The first thing is CAC (Customer Acquisition Cost), your average gross profits per customer need to be 3-6x higher than your CAC. Some businesses need to be at 80% gross profit margin to do this, others can do it at 40%. The key is seeing what yours needs to be and to hit that number. That is the most important ratio to scale your business. 

Secondly, if you have a lot of office staff, or really expensive insurance, software, or rent, you may need to have a higher gross profit margin than another business with less of those expenses. So if you do have really high expenses that don’t vary depending on the number of customers you service each month, make sure you aim for a higher gross profit margin. 

So a good gross profit margin is 60%+ while also being 3-6x higher than CAC, and on the net side, ideally anything over 30% is exceptional.