Contractor Business Glossary
Plain-English definitions for the business, finance, and project management terms every trade contractor should know. Bookmark this page and come back whenever you hit a term you are not sure about.
A
Accounts Receivable
Money that customers owe you for work you have already completed. For contractors, this usually means invoices that have been sent but not yet paid. Healthy accounts receivable means collecting within 30 days. Once invoices age past 60 or 90 days, the odds of getting paid drop fast, which is why many contractors require deposits or progress payments on larger jobs.
B
Backlog
The total dollar value of contracted work that has been sold but not yet completed. A strong backlog means you have steady revenue ahead. Most trade contractors aim for 4 to 8 weeks of backlog to keep crews busy without overcommitting. Too little backlog creates cash gaps. Too much can mean you are underpriced or understaffed.
Bid Bond
A guarantee provided by a surety company that a contractor will honor their bid if awarded the project. Bid bonds protect the project owner from contractors who submit low bids and then walk away. They are most common in commercial and government work. The bond amount is typically 5% to 10% of the bid price.
Break-Even Point
The revenue level at which your total income exactly covers all your costs, meaning you make zero profit and take zero loss. For a solo contractor, this includes your truck payment, insurance, tools, licensing, and the minimum salary you need to survive. Every dollar above break-even is profit. Knowing this number helps you set pricing floors so you never take a job at a loss.
Burden Rate
The full cost of employing someone beyond their base hourly wage. Burden rate includes payroll taxes, workers comp insurance, health benefits, paid time off, and any other employer-paid costs. For trade contractors, burden rate typically adds 25% to 40% on top of an employee's hourly pay. If you pay a tech $30/hour and your burden rate is 35%, that tech actually costs you $40.50/hour.
C
Change Order
A written document that modifies the original scope, price, or timeline of a contract. Change orders happen when the customer requests extra work, when hidden conditions are discovered, or when materials need to be substituted. Getting change orders signed before doing the extra work protects you from disputes and ensures you get paid for the additional scope.
COGS (Cost of Goods Sold)
The direct costs you spend to complete a job, including labor, materials, equipment rental, and subcontractor payments. COGS does not include your office rent, truck payment, or other overhead. Tracking COGS per job tells you which types of work are actually profitable and which are eating your margins. A healthy contracting business keeps COGS below 60% to 70% of revenue.
Completion Bond
A surety bond that guarantees a project will be finished according to the contract terms, even if the original contractor fails. The surety company steps in to find another contractor to complete the work. These bonds are common on commercial projects and are required by most government contracts. The cost is typically 1% to 3% of the contract value.
Contract Labor
Workers you hire for specific jobs or time periods who are not permanent employees. Contract laborers (1099 workers) handle their own taxes, insurance, and tools. Using contract labor gives you flexibility to scale up for busy seasons without the fixed costs of full-time employees. However, the IRS has strict rules about who qualifies as a contractor vs. an employee. Misclassifying workers can lead to serious tax penalties. Read more →
D
Direct Costs
Expenses you can tie directly to a specific job. Materials you bought for that project, labor hours your crew spent on site, equipment you rented for the work, and subcontractor invoices tied to the job are all direct costs. Anything you would not have spent if you had not taken the job counts as a direct cost. Tracking direct costs per job is the foundation of job costing and profitable pricing.
Draw Schedule
A payment plan that breaks a large project into milestones, with a portion of the total price paid at each stage. A typical draw schedule for a residential remodel might be 30% deposit, 30% at rough-in, 30% at substantial completion, and 10% at final walkthrough. Draw schedules protect both sides: the customer pays for work completed, and the contractor avoids financing the entire project out of pocket.
E
Equipment Float
The cost of owning equipment that sits idle between jobs. When your mini-excavator or pipe threader is parked in the yard, it is still depreciating, still insured, and still costing you money. Understanding equipment float helps you decide whether to buy or rent gear. If a piece of equipment only runs 40% of the time, renting it job-by-job might be cheaper than owning it.
F
Field Overhead
Costs related to running jobs that are not tied to a single project. Examples include your project manager's salary, fuel for trucks driving between job sites, small tools and consumables your crews use daily, and safety equipment. Field overhead is different from general overhead (your office, accounting, marketing) and should be tracked separately so you know the real cost of keeping trucks on the road.
Flat Rate Pricing
A pricing model where you quote the customer a single fixed price for the entire job, regardless of how long it takes. Flat rate removes the customer's fear of a ticking clock and lets efficient contractors earn more per hour. The key is building your flat rate from solid cost data so you do not underprice. Most successful service companies use flat rate for standard tasks like water heater installs, drain cleaning, and panel upgrades. Read more →
Float
In project scheduling, float is the amount of time a task can be delayed without pushing back the project completion date. Tasks on the critical path have zero float, meaning any delay on them delays the whole project. Understanding float helps you prioritize which work to start first and where you have some breathing room in the schedule.
G
G&A (General and Administrative)
The costs of running your business that are not tied to any specific job. G&A includes your office rent, bookkeeping, phone bill, business insurance, licensing fees, and your own salary as the owner. These costs exist whether you run one job this month or twenty. G&A is part of your total overhead and needs to be baked into every job price so it gets covered.
Gross Margin
The percentage of revenue left over after subtracting direct job costs (COGS). If you charge $10,000 for a job and the direct costs are $6,500, your gross margin is 35%. Gross margin tells you how much of each dollar is available to cover overhead and profit. Trade contractors typically need a gross margin between 35% and 50% to run a sustainable business. Below 30% and it becomes very hard to cover overhead.
H
Hourly Rate
The dollar amount you charge per hour of labor. Your hourly rate is not the same as what you pay your techs. It must cover the technician's wage, burden costs, overhead allocation, and profit. A common mistake is pricing hourly rate at 2x the tech's wage when the real number should be 3x to 4x to cover all costs and leave a margin. Understanding your true hourly rate is the foundation of profitable pricing. Read more →
I
Indirect Costs
Expenses that support your business but cannot be charged to a single job. Your office lease, accounting software, marketing budget, truck payments, and general liability insurance are all indirect costs. These costs must be recovered through overhead allocation across all your jobs. If you only track direct costs, you will think jobs are more profitable than they actually are.
Invoice
A document you send to a customer requesting payment for completed work. A proper contractor invoice should include the job address, a description of work performed, itemized costs (if required by the contract), payment terms, and your license number. Sending invoices immediately after work is completed and following up on unpaid invoices within a week is one of the simplest ways to improve cash flow.
J
Job Costing
The process of tracking every cost on a job (labor, materials, equipment, subs) and comparing it against the price you charged. Job costing tells you which jobs made money and which lost money, which crews are efficient, and which types of work are worth pursuing. Without job costing, you are flying blind. Many contractors who think they are profitable discover through job costing that certain services are actually losing money.
L
Labor Burden
The total employer cost of a worker beyond their base wage. Labor burden includes FICA taxes (7.65%), federal and state unemployment taxes, workers compensation insurance, health insurance, retirement contributions, and paid time off. For trade contractors, labor burden is typically 25% to 40% of base wages. If you are not factoring labor burden into your job pricing, you are undercharging on every single job.
Lien
A legal claim placed on a property to secure payment for work performed or materials supplied. Mechanics liens (also called construction liens) give contractors the right to force the sale of a property to recover unpaid debts. Lien laws vary by state, with strict deadlines for filing. Knowing your state's lien rights is critical because missing the filing deadline means losing your most powerful collection tool.
Lien Waiver
A document signed by a contractor or subcontractor giving up their right to place a lien on a property. Property owners and general contractors typically require lien waivers with each progress payment. There are conditional waivers (effective only when the check clears) and unconditional waivers (effective immediately). Never sign an unconditional lien waiver until you have confirmed the payment has actually hit your bank account.
M
Markup vs. Margin
These two terms are often confused, but they are calculated differently and produce very different numbers. Markup is a percentage added on top of your cost: if a job costs $1,000 and you apply a 50% markup, you charge $1,500. Margin is the percentage of your selling price that is profit: in that same example, your margin is 33% ($500 profit / $1,500 price). A 20% markup gives you only a 16.7% margin. A 50% markup gives you a 33% margin. Always know which number you are using when pricing jobs, and make sure your accounting software and your field estimates use the same one. Read more →
Materials Markup
The percentage you add to the cost of materials before billing the customer. Materials markup covers your time sourcing, picking up, delivering, and storing materials, plus the risk of waste, damage, or returns. A standard materials markup for trade contractors is 15% to 30%. Some contractors charge materials at cost to win competitive bids, but this means labor and overhead must carry the entire profit, which is risky.
N
Net Profit
The money left over after all expenses are paid: direct costs, overhead, taxes, owner salary, and everything else. Net profit is what builds your business savings, funds new equipment, and provides a cushion for slow months. Healthy trade contracting businesses aim for 8% to 15% net profit. If your net profit is below 5%, one bad month or one disputed invoice can put you in the red.
O
Overhead
All the costs of running your business that are not directly tied to a job. Overhead includes rent, insurance, vehicle payments, office staff, marketing, licenses, accounting, and your own salary. Total overhead is usually expressed as a percentage of revenue or direct costs. Most trade contractors run between 25% and 45% overhead. If you do not know your overhead percentage, you cannot price jobs accurately.
Owner-Operator
A business owner who also works in the field doing billable labor. Most solo contractors start as owner-operators, handling sales, estimating, field work, invoicing, and bookkeeping themselves. The challenge is that every hour you spend doing field work is an hour you are not spending on sales, marketing, or managing the business. Understanding your true cost as an owner-operator is the first step toward deciding when to hire your first employee. Read more →
P
Performance Bond
A surety bond that guarantees a contractor will complete a project according to the contract specifications. If the contractor defaults, the surety company pays the project owner up to the bond amount to get the work finished. Performance bonds are common on commercial and government projects and are usually required alongside payment bonds. Getting bonded requires a track record, decent credit, and financial statements reviewed by the surety.
Prevailing Wage
The minimum hourly wage (plus benefits) that must be paid to workers on government-funded construction projects. Prevailing wage rates are set by the Department of Labor and vary by trade, location, and project type. They are typically higher than standard market wages. If you bid on public works projects, you must pay prevailing wage or face penalties, back-pay claims, and possible debarment from future government work.
Progress Billing
Invoicing the customer at regular intervals as work progresses rather than waiting until the job is complete. Progress billing improves cash flow by getting money in the door while you are still spending on labor and materials. On larger projects, it is common to bill monthly based on the percentage of work completed. Many contractors also use milestone-based billing tied to specific project stages.
Punch List
A list of minor items that need to be corrected or completed before a job is considered finished. The customer or general contractor walks the job and notes anything that does not meet the contract specifications, from a paint touch-up to a crooked outlet cover. Getting through the punch list quickly matters because final payment (and sometimes retainage release) is held until every item is resolved.
R
Retainage
A percentage of each progress payment (typically 5% to 10%) that the project owner holds back until the project is fully complete and the punch list is cleared. Retainage protects the owner by ensuring the contractor finishes the job. For contractors, retainage means a chunk of your earned revenue is locked up until the very end of the project. On large commercial jobs, retainage can represent tens of thousands of dollars, which creates real cash flow pressure.
RFI (Request for Information)
A formal question submitted by a contractor to the project designer or owner to clarify plans, specifications, or contract terms. RFIs create a paper trail that protects you if a design issue leads to extra work or delays. On commercial projects, there can be hundreds of RFIs over the course of construction. Responding to and tracking RFIs is a core part of project management.
S
Scope Creep
When a project gradually expands beyond the original agreement without a corresponding increase in price or timeline. Scope creep happens when the customer says "while you are here, can you also..." and you do the extra work without a change order. It is one of the most common profit killers in contracting. The fix is a clear written scope, and a consistent habit of writing change orders before doing any out-of-scope work.
Subcontractor Agreement
A contract between a general contractor and a subcontractor that defines the scope of work, payment terms, insurance requirements, and liability allocation. A solid subcontractor agreement protects you from disputes over who is responsible for what. Key clauses include indemnification, insurance minimums, lien waiver requirements, payment timing, and a clear description of the scope being subbed out.
T
T&M (Time and Materials)
A billing method where the customer pays for actual labor hours and materials used, plus a markup. T&M is common for repair work, diagnostic calls, and projects where the scope is uncertain at the start. The advantage is that you get paid for every hour you work and every dollar you spend on materials. The risk is that customers may push back if the final bill is higher than expected, which is why setting a "not to exceed" estimate can help. Read more →
U
Upsell
Offering additional services or upgrades to a customer during an existing job. For contractors, upselling might mean recommending a whole-house water filtration system while repairing a water heater, or offering a maintenance plan after an HVAC install. Effective upselling is not pushy; it is pointing out real issues or opportunities the customer was not aware of. Done well, it increases revenue per customer and provides genuine value.
W
Work in Progress (WIP)
Jobs that have been started but not yet completed and invoiced. WIP is an accounting concept that tracks how much revenue you have earned on open jobs vs. how much you have billed and collected. A WIP report compares the percentage of work completed on each active job against the percentage of the contract that has been billed. If you have completed 60% of the work but only billed 40%, you are over-earning and may face a cash crunch when costs catch up to revenue.
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