Understanding the Business You're Really In — Part 1
- Eric McQuiston, PLA
- 12 hours ago
- 5 min read
Where Did All the Money Go?
By Eric R. McQuiston, PLA
A few years back, I sat down with a contractor to walk through a project I'd designed for one of his clients. We got through the plans in about twenty minutes. The conversation that followed lasted closer to two hours, because somewhere around the second cup of coffee, the topic drifted from planting beds to his books — and he looked exhausted before we'd even started talking numbers. He'd had a good year, or so he thought. His crews had been slammed since March. The phone never stopped ringing. He'd barely taken a weekend off since spring.
He pulled up his year-end statement like it owed him money — which, in a sense, it did — and said the same thing I've heard from dozens of contractors over thirty years in this business:
"We stayed busy all year. We had work on the books. Money was coming in every week. So... where did it all go?"
It's one of the most honest questions a contractor can ask, and it deserves an honest answer.
Here's the good news: the answer isn't complicated. In fact, it's one of the simplest ideas in this entire industry. But most people just never sit down long enough to learn it, usually because sitting down is the one thing a slammed contractor never has time to do.
Every dollar that comes into your business can only go to one of three places. Direct Costs. Indirect Costs. Profit.
That's the whole list. Nothing hides. Nothing sneaks out the back door. Every dollar you earn eventually lands in one of these three buckets. Once you understand that, a lot of the mystery around "where the money went" starts to disappear.
Let's walk through them one at a time.
Direct Costs: The Cost of Building the Work
Picture a typical residential install. Your crew is on site for three days. The skid steer sits in the driveway. A pallet of pavers gets delivered Tuesday morning. Your fencing sub shows up Thursday to hang a gate.
Every one of those costs belongs to that job, and only that job.
That's the test I always give young contractors: if the project didn't exist, would this expense exist either? If the answer is no, you're looking at a direct cost. In our industry, direct costs almost always fall into four categories: labor, equipment, materials, and subcontractors. Simple to define, but easy to underestimate — which is exactly why so many contractors come up short at year-end and act genuinely surprised, like the skid steer snuck onto the job site and rented itself.
Indirect Costs (Overhead): The Cost of Operating the Business
Now step back from the job site for a minute and think about everything else that has to happen for that project to exist at all.
Someone answers the phone when a prospective client calls. Someone builds the estimate. Someone pays the insurance bill. Someone renews the software subscription that runs your scheduling, and that you swore you'd cancel after the free trial. Someone meets the homeowner at 8am to walk the property before a bid even goes out. None of those people are installing a single plant or setting a single paver, but without them, there's no company capable of doing the work in the first place.
That's overhead. It's real, it's necessary, and here's the part that trips a lot of contractors up: it doesn't apply to just one job. It exists whether you're building one landscape this month or fifty. It's the cost of the company existing at all, not the cost of any single project.
I'll be honest with you: overhead is where I see the most confusion in this trade. Contractors either ignore it completely when pricing a job, or they lump it in so loosely that it quietly eats their margin all year without ever showing up on a single invoice. Overhead is very good at being invisible right up until it isn't. We'll dig much deeper into that problem, and how to fix it, in the next article. For now, just remember this: overhead doesn't pay for itself. Every dollar of it has to be recovered somewhere, by someone, on some job.
Profit: The Reward for Ownership and Risk
This is where I think most contractors — even sharp, experienced ones — unintentionally get it wrong, usually with total confidence.
Profit is not another line item in your operating expenses. It's not payroll. It's not the number you pay yourself every other Friday. I've sat with owners who told me proudly that they "took a good salary this year," while their actual business earned nothing. Those are two very different things, and confusing them is one of the quiet ways contractors run themselves into trouble.
Profit is what's left standing after every direct cost has been paid and every dollar of overhead has been recovered. It's the reward for the risk you took when you signed your name on a business loan, or a lease, or a line of credit that nobody else in your family was willing to co-sign.
Profit is what buys the next skid steer without a loan. It's what gets you through a slow, rainy spring without panicking. It's what lets you finally give your lead foreman a raise instead of just a "thank you." Healthy companies don't just earn a profit; they reinvest a piece of it, year after year, back into the business.
That's not luck. That's how a company actually grows instead of just staying busy.
Everything Fits Somewhere
So the next time you're staring at a bank statement wondering where a good, successful-looking year went, come back to this:
Direct Costs — the cost of building the work.
Indirect Costs (Overhead) — the cost of operating the business.
Profit — the reward for ownership, investment, and risk.
Every dollar fits somewhere. There's no fourth category, no mystery bucket, no gremlin living in your checking account. Once you start seeing your business through this lens, a lot of the questions that used to feel complicated get a lot simpler. Is the time you spend in the field labor, or is it something else? Where do estimating hours really belong? How do you actually justify raising your prices without feeling like you're gouging a customer?
Those questions all have clear answers, once you understand which of the three buckets you're really talking about.
Looking Ahead
In the next article, we're going to tackle one of the least understood — and most expensive — concepts in this trade: overhead recovery.
Office salaries. Estimating. Sales calls. Insurance. Software. Management. None of it installs a single shrub or sets one square foot of paving. And yet every dollar of it has to be paid for somehow, by somebody, out of somewhere.
Understanding exactly how that happens might be the single most important thing you ever learn about pricing your work correctly.
~ Eric
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