OVERHEAD DOESN'T STOP
WHEN JOBS ARE SLOW.
THAT'S THE PROBLEM.
Overhead absorption is the mechanism by which fixed costs are recovered through project revenue. When revenue is high, overhead absorbs easily and net profit looks good. When revenue drops — slow season, project delays, lost bids — overhead still runs at full cost and net profit collapses. Most subcontractors don't model this until they're living it.
Your rent, your office staff, your insurance, your software — these costs run every month regardless of whether you're billing $800K or $80K. The overhead rate in your estimate is calculated on projected revenue. When actual revenue drops below projection, the math breaks. Overhead that was supposed to be 12% of revenue suddenly represents 22%. That delta goes directly against net profit.
THE MATH BEHIND
OVERHEAD ABSORPTION.
If your monthly overhead is $80K and your projected monthly revenue is $667K ($8M annually), your overhead rate is 12%. That 12% goes into every estimate. Every job contributes 12% toward overhead recovery.
Now a major project gets delayed and revenue drops to $400K for three months. Your overhead is still $80K/month — but now it represents 20% of actual revenue. The 8% gap — $32K per month — comes directly out of net profit.
The insight: Overhead absorption is not a constant — it varies with revenue. A subcontractor who models their break-even revenue point knows exactly how slow they can get before overhead absorbs all gross margin. Most don't know this number.
HOW TO MANAGE
OVERHEAD IN SLOW PERIODS.
Calculate the Revenue Floor
Break-even revenue is the point where gross profit exactly covers overhead — zero net profit, zero net loss. For a contractor with $80K monthly overhead and 25% gross margin, break-even is $320K monthly revenue. Below that, you're burning cash. Know your number.
Cash Reserves Offset Under-Absorption
A $650K cash floor — the CFOS target — exists precisely for slow periods. When revenue drops and overhead under-absorbs, the reserve covers the gap without forcing emergency borrowing. Building the reserve during high-revenue months is the plan.
Reduce When You Can
Some overhead is truly fixed — rent, core staff. Some is variable in practice — discretionary software, contractors, subscriptions. A quarterly overhead review identifies cuts available during slow periods that don't damage long-term capacity.
