THE BALANCE NEVER MOVED FOR YEARS. IT WENT TO ZERO IN 60 DAYS.
He had mentally accepted the line of credit as a structural part of the business. Something you manage, not something you pay off.
A $6.7M civil subcontractor carried a $348,000 line of credit balance for years and cleared it to zero within 60 days of engagement, and no new revenue was involved. The cause was overhead running at 30 percent of revenue when the target for a civil sub at that level is closer to 15 to 20 percent, which meant every job had to produce a 30 cent on the dollar contribution before a dollar of profit was possible while most jobs were producing 28 to 32 percent gross margin. The 30 percent wasn't waste. It was equipment costs and other direct costs sitting in overhead instead of being allocated to the jobs that consumed them. Moving them to the job level and allocating them against equipment hours per project dropped overhead from 30 percent to 17 percent, a 13 point improvement worth $871,000 on $6.7M in revenue. At day 30 the business had $309,000 in the bank, at day 60 the line of credit was paid off, and at year end the owner paid $65,000 in Christmas bonuses to his crew.
None of that money was found. It was already being earned and already being spent in the right places. What changed is that the costs were charged to the jobs that caused them, which made the pricing correctable.
This story is what a corrected overhead rate did to one owner's balance sheet in 60 days. Read The Civil Contractor Operating System for the complete treatment, worked figures included.
THE BALANCE HAD STARTED TO FEEL PERMANENT.
A $6.7M civil subcontractor had been carrying a $348,000 balance on his line of credit for so long it had started to feel permanent. It wasn't a crisis. The line was there, the bank wasn't calling, and the business was operating. But the balance never moved.
Every time it started to come down, something else came up: a big material purchase, a slow payment month, payroll on a week when collections were behind. Then it went right back up. He had mentally accepted the line of credit as a structural part of the business, something you manage rather than something you pay off.
Within 60 days of engagement, the line of credit was at zero. The money to pay it off was already in the business, it just wasn't visible.
30% OVERHEAD ON A CIVIL SUBCONTRACTING COMPANY.
The first thing we looked at was overhead. His was running at 30% of revenue. For a civil sub at his revenue level, the target range is closer to 15% to 20%. At 30%, he needed every job to produce a 30-cent-on-the-dollar contribution just to cover overhead before a dollar of profit was possible, and most of his jobs were producing 28% to 32% gross margin. That meant overhead was consuming essentially everything.
The 30% wasn't because he was wasteful. It was because costs that should have been allocated directly to jobs were sitting in overhead instead. Equipment costs in particular were being treated as overhead line items rather than direct job costs, and when we moved them to the job level and allocated them against actual equipment hours per project, overhead dropped immediately.
Overhead came down from 30% to 17%. That 13-point improvement on $6.7M in revenue is $871,000 in costs that moved from overhead to correctly allocated job costs, jobs where those costs were now visible, trackable, and priceable.
At 30 percent overhead and a 30 percent gross margin, a busy year produces nothing.
THE $309,000 BANK BALANCE AT DAY 30.
At the 30-day mark, the business had $309,000 in the bank. That isn't a rescue number. It's what happens when a $6.7M civil subcontracting company has its financial system aligned correctly: costs go to the right places, billing goes out on time, collections are followed up systematically, and the owner can see his cash position with enough lead time to make decisions instead of react to surprises.
The line of credit got paid off at day 60 because the cash was there. It had always been capable of being there. The system just hadn't been producing that visibility before.
WHERE CIVIL SUBS GET IT WRONG: EQUIPMENT COST ALLOCATION.
The single biggest overhead distortion in most civil subcontracting companies is equipment. Most civil subs run equipment costs through overhead because it's easier. The excavator payment goes to equipment expense, fuel goes to fuel expense, maintenance goes to repairs, and none of it gets tied to specific jobs.
The problem is that different jobs use different equipment at different intensities. When equipment costs sit in overhead and get spread across all revenue equally, you're overcharging your light equipment jobs and undercharging your heavy equipment jobs. Your bids on heavy equipment work consistently win, because they're underpriced. Your bids on light work lose, because they're overpriced.
Building an equipment cost allocation system fixes this permanently, and even a simple one based on hours logged per machine per job will do it. The bids stop lying to you about which kind of work you're good at.
$65,000 IN CHRISTMAS BONUSES.
At the end of the year, the civil sub paid out $65,000 in Christmas bonuses to his crew. He had wanted to do this for years, and the business had been capable of supporting it for years. It just hadn't been visible until the financial system was built to show it.
The line of credit is gone. The overhead is right. The crew got taken care of. That's what a properly structured civil subcontracting business looks like when the numbers are finally working the way they're supposed to.
THE SHORT LIST.
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