Gross Margin and Lead Cost for Contractors: How Much Can a Job Carry?

A job can carry as much lead cost as its gross profit allows after you decide how much profit to keep. Subtract direct costs from the price, pick the share of that profit you'll spend on acquiring the customer, and you have your maximum cost per job. Divide by the share of calls that become jobs for your maximum cost per call.

This page supports the contractor lead cost per job guide with a closer look at the margin side of the equation. If cost per job is the price you pay, gross profit is the money you pay it from. For turning this into a monthly plan, see marketing budget for home-service contractors.

Margin comes first, then lead cost

A lead price looks high or low only compared with what the job leaves behind. A $75 call on a $200 repair looks painful. A $75 call on a $12,000 replacement looks trivial. Neither judgment is useful until you add close rate and margin.

The order matters:

1. Find the gross profit on the job.
2. Decide how much of it you'll spend to win the customer.
3. Work backward through your funnel to a cost per call.

Most owners run this in the opposite direction, starting from what a vendor charges and hoping the job covers it.

Step 1: Find real gross profit

Gross profit per job is the price minus the direct costs of doing that job.

Include: - Materials, with waste and the trips to buy them. - Crew labor, including payroll taxes and benefits attached to those hours. - Your own field hours, at a fair wage. - Permits, disposal and equipment rental. - A warranty or callback set-aside. - Sales commissions, if any are paid on the job.

Leave out: - Rent, insurance, software, office staff and other overhead. - Lead and marketing spend. That's what you're about to size.

Then express it two ways. Gross profit is dollars. Gross margin is gross profit divided by price. You spend dollars, so the dollar figure drives the decision. The percentage helps when you compare jobs of different sizes.

A common mistake is using the quoted margin before discounts. If the average job closes after a 6% concession, the margin that matters is the one after it.

Step 2: Decide how much profit you'll spend on acquisition

This is your decision, not a law of nature. Think of it as how much of the first job's profit you'll hand to the lead source.

Three things push the number up or down:

• Overhead. If rent, insurance and office payroll already eat most of your gross profit, there's little room.
• Repeat value. If the customer is likely to buy again, the first job doesn't have to carry the whole cost.
• Cash and capacity. A busy shop with a full calendar has less reason to spend than one with open crews.

For a worked example, we'll keep half of first-job gross profit after acquisition. That's one setting, not a recommendation. Your own overhead may demand more.

Worked example 1: a replacement project (illustrative)

These numbers are hypothetical.

If you want to keep half of that profit after acquisition, you can spend the other half: $1,350 per job at most.

Now back out to a cost per call. Say 40% of calls become booked estimates and 30% of estimates close. That's a call-to-job rate of 0.40 x 0.30 = 12%.

Maximum cost per call = $1,350 x 0.12 = $162.

Check it. 100 calls at $162 costs $16,200. At 12%, that's 12 jobs. $16,200 / 12 = $1,350 per job. It works.

So a $162 call is the break-even line under your own rule. A $60 call gives a cost per job of $500 at the same 12% ($60 / 0.12), or 18.5% of the job's gross profit ($500 / $2,700). The extra room is yours to keep or use for testing weaker sources.

Worked example 2: a small repair (illustrative)

Also hypothetical.

Keeping half again leaves $90 per job for acquisition.

Repair calls often close on the phone, so assume 40% of calls become jobs.

Maximum cost per call = $90 x 0.40 = $36.

Check: 100 calls at $36 is $3,600. At 40%, that's 40 jobs. $3,600 / 40 = $90. It works.

Here's the lesson. The repair has the higher margin (40% against 30%), but the replacement can carry a much higher cost per call because each job leaves far more dollars. Margin percentage alone would have pointed you the wrong way.

Side by side

The repair business isn't doomed. It just can't pay for premium leads, and it has other levers: higher close rates, add-on sales at the visit, and customers who come back. Contractor lifetime value by trade covers that last one.

Step 3: Stress-test the assumptions

The max cost per call is only as good as the funnel rates behind it. Try these changes on your own numbers.

If close rate drops. In example 1, if the estimate close rate falls from 30% to 20%, the call-to-job rate becomes 0.40 x 0.20 = 8%. The max cost per call falls to $1,350 x 0.08 = $108. A $162 call would now lose money against your rule.

If you miss calls. If you only reach 80% of calls, multiply the call-to-job rate by 0.8. For example 1, 12% x 0.8 = 9.6%, so the max cost per call is $1,350 x 0.096 = $129.60. That's why answering matters; see speed to lead for contractors and what to do with missed calls.

If margin shrinks. If a material price jump adds $300 to direct costs, gross profit drops to $2,400, and half of that is $1,200. At 12%, max cost per call is $144.

Run these before you commit to a source. They show how much slack you actually have.

What the calculation leaves out

Gross profit ignores overhead and your acquisition costs beyond the lead fee: estimator drive time, office time, software, and return visits. Those belong in customer acquisition cost. A job that clears your gross-profit rule can still lose money after overhead. The share you keep, the "half" in the examples, is what pays for those costs.

It also leaves out how you price. If margins are thin because you underbid to win work, lead cost makes it worse. Pricing home service jobs without racing to the bottom covers that side.

Putting a call price in context

When you compare lead sources, use the same conversion. A source with a lower price per call but a lower call-to-job rate can cost more per job. The break-even close rate calculator takes a cost per call, your reach rate and your gross profit, and shows the close rate where the source stops losing money.

If you want to test a pay-per-call source against your own cap, pay-per-call at RankLocal means exclusive inbound calls from homeowners and you pay only for qualifying calls, which are those over 60 seconds. You can apply here and run the math above on your own jobs.

Frequently asked questions

How much of a job's gross profit should go to lead cost?

There's no universal share. Pick a cap you can live with, such as a quarter or a third of first-job gross profit, and test it against your overhead and the customer's value after job one.

What's the difference between gross margin and gross profit?

Gross profit is the dollar amount left after direct job costs. Gross margin is that amount as a percentage of the job price. For lead budgeting, the dollar figure is what you spend from.

Should I include my own labor in direct costs?

Include the labor that does the work, and pay yourself a wage for any hours you work in the field. If you leave it out, gross profit looks bigger than it is and you'll overpay for leads.

Can a low-margin job still justify paid leads?

Sometimes, if cost per job is low enough or the customer returns. Check the numbers before you buy, and compare against jobs with better margins.