Break-even Algorithm

From Dr. Matt Stevens the Author of "The Construction MBA" (McGraw-Hill, 512 pages) and "Managing a Construction Firm on Just 24 Hours a Day" (McGraw-Hill, 416 pages) is a critical app for all construction contractors to use.

Break even volume is a critical number for every contractor to know and manage by. Since there are both fixed and variable costs in the construction business, it is a complex but, critical equation to calculate. We have created and now offer a contractor centric iPad and iPhone application for the construction industry.

It is critical to calculate each year. When a contractor reaches the breakeven volume, this assures the contractor of no loss in his P & L. It is a fundamental practice.

Reviewing “What ifs” in the planning of each year is a “good operating practice” so, the contractor is familiar with each scenario if the market changes. He or she can act quickly.
One word of caution: once you reach your breakeven amount for the year, do not start cutting your price on future work. This is a dangerous tactic and only works for short cycle businesses such as wholesale suppliers and not for construction contracting. In our industry, projects tend to start later than planned, thereby lowering your contribution margin into the next fiscal year.

Importantly for profitability planning, if we want to know what revenue level is needed to achieve a certain amount of profit we simply add that amount to “miscellaneous income” before dividing by the contribution margin.