Most Home Services Companies Are Leaving 500 Basis Points of Margin on the Table

McKinsey & Company recently published a study on the US home services market that included a finding most contractors will read right past: the average home services operator can achieve more than 500 basis points of margin improvement through targeted operational changes. That is five full percentage points of net margin hiding in the business, waiting to be captured. To put that in perspective, for a contractor running a 10 percent net margin — which is common in this industry — 500 basis points is literally a 50 percent increase in EBITDA. In a trade where 20 percent margins represent the top of the range, moving from 10 to 15 percent is not an incremental improvement. It is a fundamentally different business.

For a company doing $5 million in revenue at a 10 percent margin, that is $250,000 per year in additional profit without adding a single truck or technician. For a company doing $10 million, it is $500,000. And when you factor in what those margin improvements do to a business valuation in today’s market, the real number is much larger.

See what this means for your business. Run your numbers through our Exit Value Calculator to see how margin improvements translate into enterprise value at today’s market multiples.

This is not theoretical. We work with trades businesses in the $5 million to $30 million revenue range — established companies with real customer bases and experienced crews — who were running well below the 20 percent margin benchmark when we started working together. Within a year, we were able to get them there. These are not turnarounds or distressed businesses. They are good companies that simply did not have the financial visibility to see where margin was being left on the table. And they are not outliers — a vast majority of the potential clients we talk to, roughly 80 percent, are running below that 20 percent benchmark.

The problem is that most contractors have no idea where the margin is leaking. They know their top line. They know their bank balance. But the space between revenue and profit is a black box, and that is where the money lives.

And here is what makes even small improvements so powerful: in a home services business running at 20 percent margins — which is the benchmark, the ideal — 80 cents of every dollar you bring in is already spoken for. Cost of goods, labor, overhead, trucks, insurance, marketing — it all adds up to 80 percent of revenue before you see a dime of profit. That means every single percentage point you save on the cost side is not a one percent improvement to the business. It is a five percent improvement to your bottom line. One percent of costs on a $5 million company is $50,000 — and when your total profit is $1 million, that $50,000 is a five percent increase in what you actually take home. We have clients who have done exactly this. They save one percent here on fleet costs, half a percent there on supply house pricing, another percent on overtime management. None of it feels dramatic in isolation. But when you stack three or four of these together, you have moved the margin needle by two to three points — and at a 20 percent baseline, that is a 10 to 15 percent increase in actual profit dollars. That is the math that most operators never do, and it is the reason the gap between a 15 percent margin business and a 20 percent margin business is so much larger than five points.

For trade-specific guidance, explore our HVAC Fractional CFO Services, Roofing Fractional CFO Services, Plumbing Fractional CFO Services, and Electrical Fractional CFO Services. For a comprehensive approach, learn more about Fractional CFO for Contractors services.

Where the Industry Actually Sits on Margins

Talk to enough home services owners and a pattern emerges. Most HVAC, plumbing, and electrical companies are running somewhere between 5 and 15 percent net margins. A meaningful number are below 10 percent. A smaller group, the ones with real financial infrastructure in place, are consistently hitting 18 to 22 percent.

The gap between those two groups is not talent. It is not market. It is not even price. It is visibility. The operators running 20 percent margins know their cost per lead by channel, their gross profit by job type, their tech efficiency ratios, and their overhead allocation down to the department level. The operators running 8 percent margins know their total revenue and what is in the checking account.

McKinsey’s data confirms what we see across our client base every day. The margin is there. It is just buried in places that most operators are not measuring.

The Revenue Levers Most Operators Miss

McKinsey’s research identified several revenue-side improvements that top-performing operators are using to capture additional margin.

Dynamic pricing and revenue management. Most contractors set their pricebook once and revisit it when material costs force them to. The operators capturing outsize margin are updating pricing based on demand patterns, competitive positioning, and margin-by-service-type data. This does not mean gouging customers. It means knowing which jobs are margin-positive at your current rates and which ones are quietly losing money, then adjusting the mix accordingly.

Scheduling and dispatch optimization. McKinsey found that better scheduling combined with digital tools can increase bookings by 10 to 20 percent. For most contractors, that is not a technology problem. It is a process problem. When your dispatch is reactive rather than optimized, you are sending trucks on inefficient routes, leaving gaps in the schedule, and missing capacity that could be filled with maintenance visits or follow-up calls.

Customer retention and upselling. The data shows that a focus on customer satisfaction and service quality can improve retention and referrals by 10 to 20 percent and increase on-site upselling by 20 to 40 percent. In practical terms, that means your techs are not just fixing the unit in front of them. They are identifying the water heater that is 14 years old, the electrical panel that needs an upgrade, and the ductwork that has not been cleaned in a decade. Not as a high-pressure sales tactic, but as a service to the customer and a revenue driver for the business.

One company cited in the McKinsey study implemented a machine learning model to predict customer churn. The result: they doubled call center productivity, identified 65 percent of at-risk customers early enough to intervene, and generated roughly 15 percent EBITDA uplift from that single initiative. You do not need machine learning to start. You need a CRM, a follow-up process, and someone who actually calls your maintenance agreement customers before they lapse.

The Cost Levers That Move the Needle

The other half of the margin equation is cost, and McKinsey’s findings here are just as concrete.

Standardized service times and training. Implementing standard service times and structured training programs can reduce time to serve by 10 to 15 percent. That is not about rushing techs. It is about eliminating the variability that comes from having no documented process for common jobs. When every tech does a furnace tune-up differently, some take 45 minutes and some take 90. Standardizing the process to a target window improves throughput without sacrificing quality.

Supply house and procurement optimization. Consolidating suppliers and renegotiating contracts can save 5 to 10 percent on supply purchases. For a company spending $1.5 million a year on materials and parts, that is $75,000 to $150,000 in savings. Most contractors have never run a competitive bid process on their supply house relationships. They buy from whoever they have always bought from, at whatever price they are quoted.

G&A rightsizing. McKinsey found that rightsizing executive compensation, reevaluating professional service fees, and making strategic build-versus-buy decisions on things like software development can reduce G&A costs by 15 to 20 percent of that spend category. One company in the study realized $50 million in first-year savings through a structured sourcing and procurement overhaul.

You are not going to save $50 million. But the same methodology applied at a $5 million or $10 million company still moves the needle. When was the last time you competitively bid your insurance? Your fleet leases? Your IT services? Your uniform contract? Most owners set these up once and never revisit them.

The Math That Should Keep You Up at Night

Here is where it gets real. Take a home services company doing $5 million in revenue at a 10 percent net margin. That is $500,000 in profit. Respectable. Most owners would be happy with that.

Now apply McKinsey’s 500 basis point improvement. You are at 15 percent, or $750,000 in profit. That is an extra $250,000 per year in the owner’s pocket.

But here is the part that most people miss. In the current M&A environment, HVAC, plumbing, and electrical businesses are trading at 5 to 11 times EBITDA depending on size and quality. That $250,000 in additional annual profit is not just income. It is $1.25 million to $2.75 million in additional enterprise value.

Now run the same math for the contractor doing $5 million at 8 percent who could be doing 18 percent. The gap is $500,000 per year in profit, which translates to $2.5 million to $5.5 million in additional business value. That is not theoretical. That is the spread between a 5x and an 11x multiple, driven largely by the financial fundamentals that determine which bucket a buyer puts you in.

At $10 million in revenue, every point of margin is $100,000 in annual profit and potentially $500,000 to $1.1 million in enterprise value. Five points is $500,000 per year and $2.5 million to $5.5 million in value. The numbers get large fast.

Why Most Contractors Never Capture It

If the margin is there and the math is this clear, why do most contractors stay in the 8 to 12 percent range? Three reasons.

No financial visibility below the top line. If you cannot see gross profit by job type, cost per lead by channel, or overhead by department, you cannot identify where the leaks are. You are managing the business by bank balance, which is like driving by looking at the fuel gauge instead of the road.

No one is accountable for the numbers. In most home services companies under $10 million, the owner is the GM, the CFO, the head of sales, and sometimes still running calls. Financial management gets whatever time is left over, which is usually none. The bookkeeper enters transactions. Nobody is analyzing them.

The business was built to run, not to optimize. Most contractors built their companies by being great technicians, great salespeople, or both. They added trucks and techs as demand grew. But the financial infrastructure, the chart of accounts, the job costing, the KPI tracking, the margin analysis, never scaled with the revenue. The result is a $5 million or $10 million company running on the same financial framework it had at $1 million.

Not sure where your margins stand today? Our Margin Diagnostic Calculator can show you exactly where to start.

What It Takes to Close the Gap

Capturing 500 basis points of margin does not require a massive technology investment or a consulting army. It requires financial infrastructure that most contractors simply do not have in place.

Professional Bookkeeping Services establish the foundation for this infrastructure. That starts with a chart of accounts built for a trades business, not a generic QuickBooks template. It means job costing that shows you gross margin by service type, by technician, and by job. It means a KPI dashboard that tracks the 10 to 15 metrics that actually drive profitability, not a 40-page report that nobody reads. It means someone reviewing the numbers every month and translating them into decisions: which services to push, which costs to renegotiate, which marketing channels to scale, and which ones to cut.

That is exactly what we do at Profitability Partners. We work exclusively with home services companies, and our entire focus is building the financial infrastructure that drives margin improvement and business value. Not tax prep. Not basic bookkeeping. The operational finance layer that sits between your books and your decisions.

If you are running a home services business doing $3 million or more and you know your margins should be higher but you cannot pinpoint where the money is going, book a free consultation. We will walk through your numbers, show you where the margin is hiding, and lay out a roadmap to capture it.

For a complete breakdown of the financial metrics and reporting that drive profitability in home services, read our Complete Guide to Financial Management for Home Services Companies.

Go deeper: Read our cornerstone guide on how to read your home services P&L like a PE buyer.

Related: HVAC profit margins (detailed) | Plumbing profit margins | Electrical contractor profit margins | Roofing profit margins | Home services overhead benchmarks

About the Author

Raymond Gong

Raymond Gong is the founder and managing partner of Profitability Partners, a fractional CFO and bookkeeping firm serving small to mid-sized businesses nationwide. With expertise spanning financial reporting, cash flow management, tax planning, and ServiceTitan accounting integration, Raymond helps home services companies, startups, and growing businesses build the financial infrastructure they need to scale confidently. He specializes in translating complex financial data into clear, actionable insights — so owners can make smarter decisions about growth, profitability, and exit planning. Based in Tampa, FL, Raymond works with clients across HVAC, plumbing, electrical, and roofing to optimize their books, streamline reporting, and prepare for what's next.

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Raymond Gong

Raymond Gong is the founder and managing partner of Profitability Partners, a fractional CFO and bookkeeping firm serving small to mid-sized businesses nationwide. With expertise spanning financial reporting, cash flow management, tax planning, and ServiceTitan accounting integration, Raymond helps home services companies, startups, and growing businesses build the financial infrastructure they need to scale confidently. He specializes in translating complex financial data into clear, actionable insights — so owners can make smarter decisions about growth, profitability, and exit planning. Based in Tampa, FL, Raymond works with clients across HVAC, plumbing, electrical, and roofing to optimize their books, streamline reporting, and prepare for what's next.