BIDS SAID 10 PERCENT. 16.4 IS WHAT IT RAN.
A commercial general contractor doing $5M in tenant improvement buildouts was pricing every job with a 10 percent overhead rate in it. The trailing quarter said 16.4. Tenant improvement work is feast and famine, so the assumption had been set once and never flexed with the volume it was supposed to track. Every bid left the office 6 points light before a crew mobilised, and the shortfall got funded by whatever job started next. Net profit moved from 6.7 percent to 11.2 percent in 120 days, and most of that came from taking 4 points out of overhead, not from winning better work.
The owner described it himself: using income from new projects to finish and close projects already underway. That's what an underpriced backlog feels like from the inside, and it doesn't resolve by selling harder. Each new job carries the last one's shortfall, so volume makes it worse.
A $5M INTERIOR SUB. A TWO WEEK VIEW.
A commercial general contractor self performing tenant improvement buildouts, $5M for the year with revenue that had swung between $3M and $8M and a $9M year projected. Cash was reactive and the visibility window was about two weeks. If a job started trending tight, he found out when it hit, and not sixty days ahead of it.
EVERY JOB UNDERPRICED BEFORE MOBILISATION.
Three things were wrong at once and each one made the others harder to see. Estimates weren't capturing all the cost, so markup was doing double duty as a contingency for scope nobody had priced. Overhead went into bids at 10 percent while the trailing quarter ran 16.4. And there was no job costing, so nothing reported the difference back.
The job costing absence had a specific cost. Project manager and superintendent time was being charged into estimates at roughly half of what those people cost the business. On a buildout where supervision is a large share of the work, half is not a rounding error.
Collections were slow on top of all of it, which is what turned a pricing problem into a cash problem. The business was carrying two merchant cash advances by the time we started, one at $4,200 a week and one at $14,200 a month.
AN ASSUMPTION THAT NEVER FLEXED.
The overhead rate was the whole argument. 10 percent is the number contractors inherit, and on a business with level volume a stale rate is survivable because the error is small and constant. Tenant improvement work is neither level nor constant. Revenue moving between $3M and $8M means the same overhead dollars sit over a different denominator every year, so a rate set once is wrong in a different direction every quarter.
16.4 percent was the real figure for the trailing quarter. Bids carried 10. That 6.4 point difference is what the next job funded, and it explains the owner's own description of the business better than any cash flow statement did.
The estimating omissions compounded it. Supervision priced at half cost, no line for carrying material and subcontractors for thirty days before payment, and markup absorbing scope that should have been priced. Every one of those makes the bid look competitive and the job unprofitable.
WHAT CHANGED, WEEK BY WEEK.
THE NUMBERS, NOT THE FEELING.
120 days from first call to a net margin of 11.2 percent, a swing of 4.5 points worth roughly $225,000 a year at this volume. Most of it is the overhead cut, because that hits the month you make it. The rebuilt estimating template had not fully shown up at the 120 day mark, since jobs bid under the old pricing were still working through the backlog. That gain is still coming.
DOES THIS SOUND FAMILIAR?
Contractors carrying this failure describe it the same way. New work is funding the completion of old work. The visibility window is a fortnight. Overhead in the bid is a number somebody chose years ago and nobody has recalculated since, usually 10 percent, because that's the figure the industry repeats.
The tell is a business whose revenue swings. A contractor moving between $3M and $8M cannot carry a fixed overhead percentage, because the same overhead dollars divided by a different revenue produce a different rate every single year. If your volume moves and your rate does not, one of them is lying to the other.
The second tell is supervision. Ask what a superintendent hour costs the business fully burdened, then ask what an estimate charges for it. If the second number is smaller, every bid with supervision in it is light by the difference.
See how CFOS applies to interior buildout subcontractors specifically on theInterior Operating System page, or book a 20 minute call and bring your own numbers.
FREQUENTLY ASKED.
