On the Path To Growth? Prevent Margin Erosion

Picture closing out what seems on the surface like a successful year. Crews were busy from March through November, the bid calendar never slowed down, and revenue hit a company record. Then the year-end numbers come in, and the profit is thinner than it should be. Nothing went catastrophically wrong. A lot of small things did. That’s actually quite common on the path to growth. Read on for pointers on protecting your margins. 

How Much Did You Really Make? 

In a recent Buildertrend article on profitability, Meghan Townley points out that revenue shows how much money passes through a business, not how much of it the business keeps. As she puts it, a company can have “a full pipeline and still finish the year with less profit than expected.” Growth brings more chances to make money, but it also creates more places for money to slip away–and margin erosion is especially dangerous now, with this year’s cost environment making even small leaks more expensive. 

According to the Associated General Contractors of America, the producer price index for inputs to new nonresidential construction climbed 8.9% from August 2025 to August 2026, driven by global conflicts and steep tariffs on key materials. Labor is costing more too: average hourly earnings for production and nonsupervisory employees rose 5.0% over the same period. AGC officials say these combined increases are making it harder for many projects to “pencil out.” For contractors on fixed-price contracts, especially public bids priced months before materials are ordered, every unexpected increase comes straight out of profit.

Where Are The Profits Going?

Margin erosion rarely shows up as one bad job. Townley describes it instead as the buildup of many small misses that become significant across a larger business. Most of those misses come from oversights like these:

• Unbilled change orders. The owner asks for extra work, the crew handles it on a handshake, and the paperwork never catches up. Work that isn’t documented and priced before it starts is hard to collect on afterward.
• Job costing that lags behind. If costs are only reviewed at closeout, a job may lose money for months before anyone notices.
• Subcontractor scope creep. Extra labor, added scope, and surprise charges can push sub costs past what the estimate allowed.
• Estimates that miss. Underestimated labor hours or material quantities lock in a loss before work begins. Our blog Bid Less, Win More? looks at the risk of pricing work too low just to win it.
• Price escalation. Materials quoted in the spring may cost more by the time you order them. (Helpful hint: Keep supplier quotes current, and where the contract allows, discuss escalation provisions before you sign.)

Townley notes that each of these problems grows more expensive as a company takes on more active projects. Her conclusion: your visibility into job costs has to grow at the same pace as your revenue.

Consider The Math on One “Small” Miss

Say you win a $400,000 school renovation bid priced for a 22% gross margin. That budgets $312,000 for direct costs and leaves $88,000 in gross profit.

During the job, a $4,000 change order goes unbilled, a subcontractor runs $5,000 over, and material prices add $3,000. That’s $12,000 in extra cost. Gross profit falls to $76,000, and the margin slips to 19%.

Three points may not sound like much. Repeat that miss on 15 jobs, though, and $180,000 is gone. That money could have gone to equipment, a new hire, or working capital that strengthens your bonding capacity.

Catch Losses While the Job Is Still Open

A closeout report tells you what happened. Job costing during the project gives you a chance to change the outcome. Townley recommends comparing committed and actual costs against the original budget while the job is still active, so variances surface in time to fix them. In practice, that means reviewing costs at least monthly, and more often on larger jobs. Go over variances with your project managers, flag any job trending below its target margin, and require written change orders before extra work begins.

Remember too, as Townley points out, the goal is not to produce more reports. The point is for leadership to have the information needed to take action in real time. Software can help, but habits matter most. When Killowen Construction grew from a one-person shop into a $40 million to $50 million custom builder, founder Tyler Farrell focused on turning what he knew into systems his team could use. The same principle applies to your numbers. What lives only in the owner’s head can’t protect margins across 20 active jobs.

Why Your Surety Cares About Your Margins

Townley observes that as a company grows, the key question changes. It’s no longer just about winning work. It’s about how reliably that work delivers the return you planned for. Essentially, your surety asks the same question.

Underwriters review your work-in-progress schedule closely. When a job’s projected profit keeps shrinking as work progresses, a pattern often called “profit fade,” underwriters want to know why. Contractors with steady margins, accurate WIP reports, and year-end results that match their projections build the kind of track record that supports larger bonding limits.

Good To Know: Your Numbers

Gross margin is what remains after direct job costs such as labor, materials, subcontractors, and equipment.
Gross margin = (Revenue − Direct costs) ÷ Revenue

Net margin is what remains after overhead is also paid, including office staff, rent, insurance, software, and marketing.
Net margin = Net profit ÷ Revenue

Markup is not margin. This common mix-up leads to underpricing. If a job costs $100,000 and you add a 25% markup, the price is $125,000, but your gross margin is 20%, not 25%.

Small, Medium, Large? What’s On Your List?

Every construction business has its own path to growth. That’s why Colonial Surety Company offers bonding programs to fit a range of needs.

For bonds up to $500K: The Hometown Bonding Program is a credit-based option for contractors who are newer to bonds or who need them occasionally. Qualified contractors can get bid and performance bonds as needed for upcoming projects, without a traditional surety line of credit.

For larger bonds: Get single and aggregate bonding limits in writing, and even issue your own instant bid bonds, through The Partnership Account® for Contractors. Once qualified, you can get a surety line of credit of up to $20 million single and $40 million aggregate. You’ll also receive free financial scores just for completing our easy pre-qual.

Put your business on a strategic growth path, starting right here:
Bonding Programs at Colonial Surety Company

In business since 1930, Colonial Surety Company is a leading direct seller and writer of surety bonds and insurance products across the USA. Colonial Surety Company is rated “A Excellent” by A.M. Best Company and U.S. Treasury listed.