644: Five Hidden Ways Contractors Lose Profits (And How To Stop It)

This Podcast Is Episode 644, And It's About Five Hidden Ways Contractors Lose Profits (And How To Stop It)

Where did the money go?

If you've ever looked at your bank account at the end of a busy month and thought, "I did all that work—so where did the money go?", you're not alone.

This is one of the most common frustrations we hear from small business owners in the construction industry. You're booking jobs, staying busy, and delivering great work—but the profit doesn't seem to match the effort.

As construction bookkeeping specialists, we've seen behind the numbers of dozens of small contractors. And time and again, we find the same hidden leaks draining their profits. The good news? Once you know what to look for, you can fix them—and finally start keeping more of what you earn.

Here are five common ways contractors lose profits (without even realizing it)—and what you can do to stop the leaks.

1. Untracked Labor Hours: Working More Than You Billed

Labor is often your most considerable cost. But for many small contractors, labor tracking is one of the weakest parts of their system.

If you (or your crew) aren't logging actual hours worked on each job, you're likely underestimating how much time the project really took. That means you're effectively working for free on those "extra" hours.

Real example: A contractor estimated a bathroom remodel at 40 hours of labor. The job actually took 55 hours. At $50/hour, that's $750 of lost profit—just from labor under-tracking. Multiply that across several jobs, and you can see how the profits evaporate.

How to fix it:

• Use a simple time-tracking tool (like QuickBooks Time, or even a shared spreadsheet).
• Log hours daily—not at the end of the week when details are fuzzy.
• Compare estimated vs. actual hours after each job. This helps you improve future bids and spot inefficiencies.

Bookkeeper's tip: If you track hours properly, I can show you job profitability in real time—and you'll see exactly which jobs (or crew members) are eating into your margin.

2. Unapproved Change Orders: Giving Away Work for Free

Scope creep is the silent profit killer. A client asks, "Can you just add this?" and you say yes because it seems like a minor request. But those "little extras" add up quickly—and suddenly your margins are gone.

Real example: A deck project initially included a standard railing. Midway through, the client asked for an upgraded design. The contractor agreed but never adjusted the invoice. The upgrade cost him $500 in materials and 10 extra labor hours—completely unpaid.

How to fix it:

• Create a straightforward change order process.
• Stop work when clients request something new until the change is approved in writing.
• Even if it feels awkward, remember: change orders protect both you and the client by keeping expectations clear.

Bookkeeper's tip: Keep a change order log for each job. We can help track approved vs. pending changes—so nothing slips through the cracks.

3. Material Waste and Overruns: Small Leaks, Big Losses

Materials are another common leak. If you're not reconciling receipts against your estimates, you may be spending far more than you realize.

It's not always theft or big mistakes—it's the little things: over-ordering, miscuts, lost supplies, or last-minute runs to the hardware store.

Real example: A contractor estimated $5,000 in materials for a kitchen remodel. By the end, he had spent $5,800. That $800 didn't seem huge—but on a project with a $2,000 expected profit, it wiped out nearly half.

How to fix it:

• Match every material receipt to the job.
• Track waste (e.g., lumber offcuts, unused drywall sheets).
• Build a small buffer into estimates (5–10%) to account for inevitable overruns.
• Do weekly check-ins: Are material costs still aligned with the budget?

Bookkeeper's tip: If you send us your receipts consistently, we can flag when a job is trending over budget before it's too late.

4. Late Invoicing and Slow Collections: Cash Flow Gaps

Many contractors do the work first and think about invoicing later. The problem is that late invoices result in late payments. And late payments can create cash flow crunches that force you to dip into savings, use credit, or delay your own bills.

Worse, some clients "forget" to pay unless reminded. If you're not consistent about invoicing and follow-ups, you might never collect everything you've earned.

Real example: A contractor finished a $10,000 basement project but didn't invoice until six weeks later. The client delayed payment for another four weeks. That's 10 weeks without income—while the contractor was already paying subs and suppliers.

How to fix it:

• Invoice immediately at milestones—not weeks later.
• Use progress billing: collect deposits upfront, then bill at set phases.
• Set clear payment terms (Net 15, Net 30) in your contracts.
• Automate reminders using software like QuickBooks, Joist, or FreshBooks.

Bookkeeper's tip: We can set up a system where invoices go out automatically and overdue payments are flagged—so you never have to chase clients down again.

5. Forgetting Overhead: Missing the True Cost of Running Your Business

This is one of the biggest mistakes we see: contractors price jobs based only on direct costs (labor + materials) and forget to include overhead.

Overhead is everything it takes to keep your business running, like:

• Truck payments and fuel
• Insurance and licenses
• Office supplies and software
• Marketing and advertising
• Your own salary!

If you don't factor in overhead, you might think you made a profit—but really, you just broke even.

Real example: A contractor charged $15,000 for a renovation. Materials and labor cost $11,000, so it looked like a $4,000 profit. However, once overhead was factored in (including fuel, insurance, phone, bookkeeping, etc.), the actual profit was closer to $1,200.

How to fix it:

• Calculate your monthly overhead.
• Divide that into your billable hours or projects.
• Add it to every estimate.

Bookkeeper's tip: We can calculate your overhead burden per job, so you'll know exactly how much to add to every quote to stay profitable.

Recap: 5 Hidden Profit Leaks

• Untracked labor hours
• Unapproved change orders
• Material waste and overruns
• Late invoicing and slow collections
• Forgetting overhead

Each of these may seem small, but together they can drain thousands of dollars from your business every year.

The Bottom Line: You Don't Have to Keep Losing Money

The difference between "busy and broke" and "busy and profitable" isn't more jobs—it's better control of your numbers.

When you track your labor, materials, change orders, invoices, and overhead, you stop the leaks and keep more of the money you've already earned.

And you don't have to do it alone.

As construction bookkeeping specialists, we help small contractors:

• Track job profitability in real time
• Catch hidden leaks before they get worse
• Set up systems that save time and reduce stress

Contact us today and get the help you need.

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About The Author:

Norhalma Verzosa is a Certified Construction Marketing Professional and serves as the Web Administrator of Fast Easy Accounting, located in Lynnwood, WA. She holds a Bachelor's Degree in Psychology and is a Certified Internet Web Professional, with certifications in Site Development Associate, Google AdWords Search Advertising, and HubSpot Academy. She manages the entire web presence of Fast Easy Accounting using a variety of SaaS tools, including HubSpot, Teachable, Shopify, and WordPress.