Every month starts in the hole. The truck payment, the insurance, the phone, the shop and your own pay come due whether you sell $5,000 of work or $50,000. Break-even is the sales figure that fills that hole exactly. The Small Business Administration defines it as the point at which total cost and total revenue are equal, with no loss or gain. Below it, each month costs you money; above it, the margin on each job is profit. Here is how to work it out in a contractor’s terms, and what moves it.
The formula, in contractor terms
The SBA gives two versions. In units: fixed costs divided by the price per unit minus the variable cost per unit. In sales dollars: fixed costs divided by the contribution margin, where the contribution margin is the price minus the variable cost, divided by the price.
For a contractor, a unit is a job, the variable costs are the job’s direct costs (materials, crew wages and their payroll taxes, subcontractors, dump fees, permits, equipment rented for that job), and the contribution margin is the gross margin: the share of each job’s price left after its direct costs. So:
If margin and markup still get mixed up in your shop, read Markup vs. Margin first; this formula uses margin, and using markup in its place makes the answer too low.
Step one: the fixed costs, by the month
The SBA describes fixed costs as costs that do not change as production goes up or down, and lists rent, salaries, property taxes, insurance, interest and depreciation as examples. Its calculator works by the month, so a bill paid quarterly or yearly goes in at its monthly share. Some costs are half and half: the SBA calls them semi-variable and names telephone service, repairs, fuel and power among them, and says to split each into its fixed part and its variable part where you can. A truck’s payment and insurance are fixed; the fuel it burns on a job is that job’s cost.
Two items get left out more than any others. The first is your own pay. A break-even that leaves out the owner’s salary is the point at which you work for free; put in what you need to take home, as The Owner’s Pay describes. The second is everything that is not on a monthly bill: the accountant, license renewals, the annual software plan. The SBA’s own tip is to add a little extra, say 10%, for expenses you cannot predict.
Step two: the gross margin on a typical job
Take your last ten or twenty finished jobs, add up their prices, add up their direct costs, and divide what is left by the prices. That is your real gross margin, which may differ from the one you price for. If you have no job-by-job records yet, Job Costing shows how to start, and the overhead side is worked out per hour in Overhead per Billable Hour.
Step three: divide
Say a painting contractor with one employee has these monthly fixed costs. Every figure is an example; put in your own.
| Monthly fixed costs (example) | Amount |
|---|---|
| Truck payment | $850 |
| Insurance, monthly share | $650 |
| Phone, software and website | $250 |
| Shop and storage rent | $800 |
| Accountant, licenses and bank fees, monthly share | $300 |
| Advertising | $600 |
| Owner’s pay | $5,500 |
| The SBA’s 10% cushion | $895 |
| Total | $9,845 |
Direct costs run 55% of the price, so the gross margin is 45%. Break-even sales are $9,845 ÷ 0.45 = about $21,878 a month, or about $5,049 a week (the monthly figure times 12, divided by 52), or about $262,500 a year. With an average job of $1,500, each job leaves $675 of margin, and $9,845 ÷ $675 = 14.6, so the fifteenth job of the month is the first one that makes a profit.
What moves the number
Run the same shop through three changes:
| Change (example) | Margin per job | Jobs to break even | Sales to break even |
|---|---|---|---|
| As above | $675 | 14.6 | $21,878 |
| Prices up 5%, same work | $750 | 13.1 | $20,675 |
| A 10% discount on every job | $525 | 18.8 | $25,316 |
| A second truck: $1,070 more a month, plus the 10% cushion | $675 | 16.3 | $24,493 |
The price lines are not mirror images. A 5% rise cuts the jobs needed by about 10%, because the whole $75 lands on the margin. A 10% discount takes $150 off a $675 margin, and the shop needs about 29% more jobs just to stand still. That is the arithmetic behind Raising Your Prices and against the habit of discounting to win work. The truck line is the test for any new fixed cost: it has to bring in close to two more jobs a month before it pays for itself, which is worth knowing before you sign (Buying or Leasing the Work Truck).
Break-even is a yearly number, too
Fixed costs run twelve months a year, but many trades sell in fewer. If the painter above sells exterior work for nine months, the year’s fixed costs of $118,140 still need about $262,500 of sales, which works out to about $29,170 in each working month instead of $21,878. The slow months are paid for by the busy ones, so the busy-season target has to carry them. How to hold the cash across that gap is in Seasonal Cash Flow and Cash Flow for Contractors.
A reality check from the Census Bureau
Compare your break-even with what businesses like yours really take in. The Census Bureau’s Nonemployer Statistics count businesses with no paid employees, drawn mainly from business income tax returns; outside construction they leave out businesses with less than $1,000 of receipts, but in construction they do not. The 2023 file shows:
An average mixes part-timers with full-time operators, so it is not a target. But it is a warning. The example shop’s break-even of about $262,500 a year is more than three times what the average specialty contractor without employees took in. That shop can carry those costs only because it has a crew producing the sales. A solo operator who signs up for the same truck, shop and advertising is betting on receipts few one-person businesses reach. Keep the fixed costs in line with the work you can actually produce, then check the number every week alongside the others in The Five Numbers to Look at Every Week.