Margin Expansion for Trade Businesses

PE firms don’t cut costs — they pursue margin expansion through restructuring how costs work.

That distinction sounds subtle, but it’s the difference between a struggling business and a scalable one. Cost cutting is what desperate business owners do when they’re already in trouble. Cost restructuring is what sophisticated operators do to build a more profitable business architecture.

Here’s the uncomfortable truth about trades: HVAC contractors average 6-12% net margins. Many operate at less than 2%. When one project goes sideways, they lose money for the month — or the quarter.

This chapter is about changing that math. Not through desperation cuts, but through structural improvements to how your business operates.

The Margin Collapse Problem

Here’s something counterintuitive: as your business grows, your profit margins are likely to shrink.

Most contractors assume the opposite. More revenue should mean more profit. Economies of scale. Leverage. Efficiency.

In reality, the opposite happens. Small specialty contractors often maintain 10-15%+ net margins. Grow that business to $50M+ and margins typically collapse to 2-6%.

Why?

Diseconomies of Scale

As you grow, several forces work against you:

1. Management Complexity

At $500K, you know every job. At $5M, you need managers to know the jobs. Those managers need systems, communication channels, and their own overhead. Every layer adds cost without directly generating revenue.

2. Bureaucracy

Small businesses move fast. As you grow, you add procedures, approvals, compliance requirements. Each one is “necessary” but each one adds friction and cost.

3. Overhead Creep

Your office grows. You add administrative staff. You get bigger trucks. You invest in systems. Each addition seems reasonable, but collectively your overhead grows faster than revenue.

4. Coordination Cost

More projects mean more scheduling conflicts, more communication breakdowns, more things falling through cracks. Fixing these problems takes time and money.

The math is brutal: a business with 15% net margins at $1M often has 8% margins at $3M and 5% margins at $5M — even as revenue triples.

This is why revenue growth without margin management is a trap. You’re working harder to make less per dollar.

Fixed to Variable: The PE Principle

PE firms obsess over cost structure. Specifically, they look at the ratio of fixed costs to variable costs.

Fixed costs don’t change with volume. You pay them whether you do one job or a hundred:

• Office rent
• Salaried staff
• Insurance
• Vehicle payments
• Software subscriptions
• Marketing retainers

Variable costs scale with activity. More work, more cost; less work, less cost:

• Materials
• Hourly labor
• Subcontractors
• Fuel
• Equipment rentals
• Per-job supplies

Why This Matters

When your fixed costs are high, slow periods destroy your profits. You’re paying for an office, trucks, and staff whether you have work or not.

When your variable costs are high, slow periods hurt less. You’re only paying for work as you do it.

PE firms systematically convert fixed costs to variable costs. This creates operational flexibility — the business can scale up and down without massive profit swings.

How to Apply This

1. Outsource non-core functions

Do you need a full-time bookkeeper, or could you use a service that charges by transaction? Do you need a dedicated marketing person, or could you use an agency?

Ask: does this function need to exist in-house full-time?

2. Rent before you buy

Equipment that sits idle 50% of the time is a fixed cost producing no value. Consider renting equipment for specific jobs rather than owning everything.

3. Flexible labor models

Full-time W-2 employees are fixed costs (you pay them whether there’s work or not). Part-time, seasonal, or subcontracted labor is variable.

I’m not saying fire your employees. I’m saying build flexibility into your labor model for volume fluctuations.

4. Renegotiate contracts

Look at every recurring expense. Can your software be usage-based instead of flat monthly? Can your marketing be performance-based instead of retainer?

5. Right-size your overhead

Do you need that office? Do you need that many trucks? Challenge every fixed expense.

Labor Productivity: The Real Metric

Labor is the biggest cost in most trade businesses. It’s also where the biggest margin improvements hide.

Most contractors measure labor wrong. They think about hours worked or hourly rate. PE firms think about revenue per technician.

The Benchmarks

Here’s the brutal question: if your technicians are generating $150,000/year and the benchmark is $350,000, what’s happening to the other $200,000?

The answer is usually some combination of:

• Low utilization (not enough billable hours)
• Low average ticket (underselling)
• Poor scheduling (too much drive time)
• Inefficiency (jobs taking too long)

Utilization: The Hidden Lever

Technician utilization is the percentage of paid hours that are actually billable to customers.

That 15-point gap is enormous. It’s the difference between a technician generating $200K and $280K.

Where does the non-billable time go?

• Driving between jobs (route optimization)
• Waiting for parts
• Callbacks and re-dos
• Paperwork and admin
• Training and meetings
• Idle time between jobs

Every percentage point of utilization you recover is pure margin improvement.

The Wage-to-Revenue Ratio

Here’s a useful rule: labor cost should be 14-20% of the revenue that labor generates.

If you’re paying technicians more than 20% of what they generate, either productivity needs improvement or your pricing is too low.

Example:

A technician earns $70,000/year (wages, benefits, taxes).

At 20% ratio, they should generate: $70,000 ÷ 0.20 = $350,000/year

If they’re only generating $200,000/year, something is broken.

Process Elimination

Here’s a mindset shift that PE firms bring:

Stop optimizing broken processes. Eliminate them.

Contractors often spend enormous energy making inefficient processes slightly less inefficient. They don’t ask: should we be doing this at all?

The Elimination Questions

Before optimizing any process, ask:

1. What happens if we stop doing this? Sometimes the answer is “nothing bad.”

2. Who is this serving? If it’s not serving customers or improving operations, why does it exist?

3. Is this a workaround for another problem? Often processes exist to compensate for broken systems elsewhere.

4. What would a business 10x our size do? They certainly wouldn’t do it this way.

Examples

Manual data entry between systems

Many contractors enter the same information into multiple systems (dispatch, invoicing, CRM). This isn’t “how business works” — it’s a symptom of disconnected tools.

Excessive approvals

Does every decision really need your sign-off? If you’ve hired people, trust them. Most approval processes slow things down without adding value.

Custom everything

Every customer gets a unique proposal, unique pricing, unique approach. This feels personal, but it’s enormously inefficient. Standardize what you can.

Complexity Reduction

Every service you offer has a cost:

• Training requirements
• Inventory and parts
• Marketing spend
• Management attention
• Systems and processes

The more services you offer, the higher your complexity cost.

PE firms ruthlessly simplify. They ask: what are we best at, what’s most profitable, and what should we stop doing?

The Complexity Audit

Go through your services and ask:

1. What’s the gross margin on this service? If it’s below 40%, question why you’re offering it.

2. How often do we do this? Services you rarely perform require disproportionate training and inventory.

3. Does this serve our core customer? Services that attract different customer types create marketing and operational complexity.

4. Would we start offering this today? If you had to add it now, would you?

The 80/20 Reality

In most trade businesses, 20% of services generate 80% of profit. The other 80% of services either break even or lose money once you account for complexity cost.

What if you stopped offering the unprofitable 80%?

Yes, you’d lose some revenue. But you’d free up:

• Training time
• Inventory investment
• Marketing dollars
• Management attention
• Operational complexity

That’s often worth more than the marginal revenue.

Founder Dependency as Cost

Your time has a dollar value.

If you’re the $3M CEO doing tasks that should be done by a $50K employee, you’re destroying value. Every hour you spend on operational tasks is an hour not spent on strategy, sales, or leadership.

This connects directly to Chapter 3 (People in Roles). When you’re doing everything, you’re the most expensive person doing the cheapest work.

Additionally, every time you intervene, you are training people to rely on you. This creates a dependency that can be hard to break.

This is why PE firms immediately hire operators — and why Office OS exists. We take over the operational tasks so you can focus on the high-value work that actually grows the business.

The Calculation

What’s your business worth in future earnings? Let’s say it’s $2M.

What could you do to increase that value? Probably things like:

• Landing a major commercial account
• Implementing systems that increase efficiency
• Building relationships that generate referrals
• Coaching your team to perform better

If you spend your time answering phones, scheduling, and dispatching instead, you’re trading strategic value creation for $20/hour tasks.

This is why PE firms immediately hire operators for the businesses they acquire. Founder time on operations is value destruction.

The Job Costing Imperative

You cannot expand margins if you don’t know your true costs.

Most contractors know their material costs and labor hours. They don’t know their fully loaded job cost, which includes:

• Direct labor (wages, benefits, taxes, workers comp)
• Materials
• Truck/equipment allocation
• Tool wear and consumables
• Overhead allocation (office, admin, marketing, etc.)

The True Hourly Rate

Your technician’s wage is $30/hour. But that’s not what they cost you.

Add:

• Benefits (health, retirement): $5-8/hour
• Payroll taxes: $3-4/hour
• Workers comp: $2-4/hour
• Training and certification: $1-2/hour
• Truck and equipment: $5-10/hour
• Overhead allocation: $8-15/hour

Your true loaded rate might be $55-75/hour — nearly double the wage.

If you’re pricing jobs based on $30/hour labor, you’re underpricing.

Know Your Profitable Services

Once you know true job cost, you can identify:

• Which services make money
• Which services lose money
• Which customers are profitable
• Which job types to pursue or avoid

This information is gold. It lets you optimize your mix toward higher-margin work.

Putting It Together

Margin expansion isn’t about cutting costs. It’s about:

1. Restructuring costs — Shift fixed to variable where possible
2. Improving productivity — Revenue per technician, not hours worked
3. Eliminating waste — Stop optimizing broken processes
4. Reducing complexity — Every service has a cost
5. Freeing founder time — Your time is too valuable for low-value tasks
6. Knowing your numbers — True job cost reveals where margin lives

The goal isn’t to be cheap. It’s to build a business architecture that naturally produces healthy margins — whether you’re at $1M or $10M.

Margin expansion is where Office OS creates the most immediate impact for our clients. By taking over office operations, we convert your fixed overhead costs (full-time staff, office space, benefits) into a variable cost that scales with your business. You get the professional back-office without the fixed expense burden.