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Contractor glossary

Break-even point

Updated

Definition

The break-even point is the revenue at which your business makes zero profit: gross profit from jobs exactly covers overhead. For a contractor, break-even revenue equals fixed overhead divided by gross margin, written as a decimal.

Also called: Break-even revenue, Breakeven

The formula

Every job leaves some gross profit after its direct costs. Overhead (rent, insurance, office wages, marketing, software, phones) has to be paid whether or not jobs come in. You break even when the gross profit from your jobs adds up to exactly your overhead.

  • Break-even revenue = Overhead ÷ Gross margin (as a decimal)
  • Break-even jobs = Overhead ÷ Average gross profit per job

Use the same period on both sides: monthly overhead gives monthly break-even revenue.

Example: A two-truck HVAC shop has $20,000 a month of overhead and runs a 40% gross margin. Break-even revenue is $20,000 ÷ 0.40 = $50,000 a month. If an average service call leaves $400 of gross profit, the shop needs 50 calls a month before it earns a dollar. At $60,000 of revenue it keeps $4,000 ($60,000 × 0.40, minus $20,000). At $45,000 it loses $2,000. The numbers are made up for illustration.

Why it's worth knowing

Break-even turns overhead into a target you can see on the schedule. It answers practical questions:

  • Can I afford this hire or this truck? Add the monthly cost to overhead and recompute. For example, a $5,000 a month office hire at a 40% gross margin raises break-even by $12,500 of revenue a month.
  • Is a price increase worth it? A higher gross margin lowers break-even without a single extra job.
  • How bad is the slow season? Compare break-even with what you booked in the same months last year. The gap is what you need in reserve or in off-season work. Cash flow planning starts here.

Common mistakes

  • Using markup instead of margin. For example, a 50% markup is only a 33.3% margin. Say you divide overhead by 0.50 instead of 0.333: you set the bar a third too low. Markup vs margin shows the conversion.
  • Leaving out your own pay. If you take draws instead of a wage, the break-even you calculate is the point where you work for free. Count a fair wage for your field hours in job costs and a fair wage for your office and sales time in overhead.
  • Leaving field labor in overhead. That inflates gross margin and overhead together, and the break-even it produces doesn't match how your costs actually move with volume. Field labor belongs in cost of goods sold.
  • Forgetting yearly bills. Insurance premiums, license renewals and vehicle replacement don't show up every month. Spread them across the year in your overhead figure.
  • Treating break-even as cash. Loan principal isn't an expense on the profit and loss statement, but you still have to pay it. To see the revenue that keeps the bank account steady, add monthly loan principal to overhead before you divide.

How it connects

Break-even sits between overhead and gross margin: lower one or raise the other and it moves down. Your P&L supplies both numbers each month, and how to read a profit and loss statement walks through a sample month where overhead and margin set the revenue the shop needs. When you set your hourly rate, the same overhead is spread over billable hours instead, as how to set your labor rate shows.

Go deeper

GuideHow to Read a Profit and Loss Statement for ContractorsRead a contractor P&L line by line: revenue, job costs, gross margin, overhead and net profit, plus cash vs accrual and a 30-minute monthly review.GuideHow to Set Your Labor RateBuild your labor rate from real costs: billable hours, payroll burden, overhead and profit, with worked examples from HVAC, roofing, plumbing and other trades.GuideMarkup vs Margin: The Difference That Costs Contractors MoneyMarkup divides profit by cost; margin divides it by price. The formulas, an exact conversion table, the costly mix-up and how to price to a target margin.Auto detailing guideAuto Detailing Seasonal PlaybookA season-by-season plan for auto detailers: spring salt and pollen cleanups, summer heat and shade, fall protection, winter work, gift cards and cash flow.
OverheadOverhead is the cost of running your business that isn't tied to a specific job: office and dispatch wages, rent, insurance, marketing, software, phones, accounting and similar costs you pay whether or not today's jobs happen. Your prices have to recover it.Gross marginGross margin is gross profit as a percentage of revenue: what's left of each sales dollar after direct job costs (materials, field labor, subcontractors, permits), before overhead. A $10,000 job that costs $6,000 to deliver has a 40% gross margin.Cost of goods soldCost of goods sold (COGS) is what the work you sold in a period cost to deliver. For a contractor, that means direct job costs: materials, field labor with its payroll costs, subcontractors, permits and equipment rented for jobs. Revenue minus COGS is gross profit.Profit and loss statementA profit and loss statement (P&L), also called an income statement, reports a business's revenue, costs and profit over a period such as a month, quarter or year. It shows whether the work you did made money, not how much cash you have.Cash flowCash flow is the money moving into and out of your business, and when it moves. Profit tells you whether your work makes money; cash flow tells you whether the money is in the bank when payroll, suppliers and taxes come due.MarkupMarkup is the amount you add on top of a cost to arrive at a selling price, expressed as a percentage of that cost. A $100 part sold for $150 carries a 50% markup.

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