The short answer. Model the customer standalone. Start with what they pay, subtract direct cost, then subtract the change orders you ate, the rework, the extra trips, and the cash their payment terms tie up. If the gross margin left runs below your Intended Gross Margin, that customer is being subsidized by the rest of your book.
The Biggest Customer Problem
Owners protect big customers. They are the name on the truck, the reference on the website, the account that makes payroll feel safe. And they are frequently the account that negotiated the thinnest price, demands the most service, and pays the slowest.
None of that shows up when the P&L reports one gross margin number for the whole business. The blend hides the account that is dragging it down.
The Standalone Model
Run each large customer as if it were its own small business.
- Revenue. What they actually paid in the last twelve months, after credits and concessions.
- Direct cost. Labor and materials on their work, including the hours nobody billed.
- Service drag. Change orders you absorbed, rework, rush scheduling, extra trips, the project manager who spends half his week on their calls.
- Cash drag. The difference between their payment speed and the rest of your book, multiplied by the daily cost of their work.
A Worked Example
Customer A pays $600,000 a year, 18 percent of revenue. The quote was built at 40 percent gross margin. After absorbed change orders, rework, and extra trips, the work delivered 29 percent. That is $174,000 of gross margin dollars. At the Intended 40 percent, it would have been $240,000. The gap is $66,000 a year.
Then the cash. The rest of the book pays in 40 days. Customer A pays in 75. The direct cost of their work runs about $1,170 a day. Thirty-five extra days ties up roughly $41,000 of working capital, all year, every year. If that gap is carried on a line at 10 percent, it costs about $4,100 a year in interest on top of the margin gap.
The owner thought this was the best account in the business. It is the most expensive one.
The Signals
- Every job runs over the estimate and the overage never gets billed.
- They pay last, and you are afraid to ask.
- Your best people dread working their jobs.
- Their share of revenue has grown while overall margin has slipped.
- They have not accepted a price increase in years.
The Decision
There are three moves. Reprice the account to Intended Gross Margin. Restructure the terms: deposits, milestone billing, a change order policy you enforce. Or release the customer.
If the account contributes above Intended Gross Margin after the standalone model, keep it and protect it. If it contributes below, and it will not accept a reprice or new terms, losing it is a portfolio improvement, not a loss. The capacity it frees can be sold to customers who pay for it.
Watch concentration either way. Any single customer above a large share of revenue is a risk to the floor, because one decision on their side changes your Minimum Mandatory Profit coverage overnight.
Frequently Asked Questions
Should I fire my biggest customer?
Not as a first move. Reprice and restructure terms first. Release only if they refuse both and the standalone model shows they deliver below Intended Gross Margin.
How do I measure service drag if I do not track it?
Estimate it for one month. Ask your project leads how many hours went to that account that were never billed. Even a rough number usually tells the story.
What if losing them means laying people off?
Then model the transition. Freed capacity has to be resold at a better margin. Plan the replacement work before you release the account, and size the timeline to your working capital.
Does this apply to small customers too?
Yes, but in aggregate. A long tail of tiny accounts with high service costs can drag margin as much as one big account. Group them and run the same model.