How profitable is an independent contracting business?

Data provided here comes from our team of experts who have been working on business plan for an independent contracting business. Furthermore, an industry specialist has reviewed and approved the final article.

independent contractor profitabilityHow profitable are independent contracting businesses, and what is the typical monthly income for contractors?

Let's check together.

Revenue metrics of an independent contracting business

How does an independent contracting business makes money?

An independent contractor makes money by providing services or goods to clients in exchange for a fee.

What do independent contracting businesses sell?

Independent contracting businesses sell specialized services across diverse industries, ranging from construction and home improvement to IT, event planning, writing, and more.

Independent contractors offer their expertise on a project basis, addressing specific needs of clients without the commitment of long-term employment. These businesses provide customized solutions and skills that align with their clients' requirements, ensuring timely completion of tasks or projects.

Independent contractors often collaborate with multiple clients, allowing them to showcase their versatility and adaptability while meeting the unique demands of different projects.

What about the prices?

An independent contracting business offers a variety of services with corresponding price ranges.

For instance, simple tasks like lawn mowing, basic home repairs, or pet sitting might fall within the $20 to $50 range, depending on factors like the complexity and time required.

More specialized services, such as electrical work, plumbing, or computer repairs, often start around $50 to $100 per hour due to their technical expertise and potential equipment costs.

Moving services might range from $100 to $200 or more, depending on the size of the job and distance traveled. Creative services like graphic design, writing, or photography may vary widely, from $50 to $150 per hour based on skill level and the project's complexity.

Home improvement projects such as painting, remodeling, or landscaping could span $500 to several thousand dollars, depending on project scope.

Service Price Range ($)
Lawn Mowing $20 - $50
Basic Home Repairs $20 - $50
Pet Sitting $20 - $50
Electrical Work $50 - $100 per hour
Plumbing $50 - $100 per hour
Computer Repairs $50 - $100 per hour
Moving Services $100 - $200+
Graphic Design $50 - $150 per hour
Writing $50 - $150 per hour
Photography $50 - $150 per hour
Painting $500 - Several Thousand
Remodeling $500 - Several Thousand
Landscaping $500 - Several Thousand

What else can an independent contracting business sell?

In addition to regular services and offering products, independent contracting businesses can also generate additional income streams by:

  • Conducting specialized workshops or training sessions
  • Renting out their workspace to other professionals
  • Providing consultation and support for clients' projects
  • Creating engaging challenges or competitions related to their field
  • Offering space rental for private events or filming projects
  • Collaborating with local enterprises for exclusive partnership opportunities
  • Delivering online training and consultation for remote clients

business plan freelancerWho are the customers of an independent contracting business?

Independent contracting businesses typically serve a wide range of customers, from homeowners and small businesses to large corporations.

Which segments?

We've made many business plans for projects like this. These are the groups of customers we usually see.

Customer Segment Description Preferences How to Find Them
Homeowners Individuals who own residential properties. Value quality, reliability, and personalized service. Local advertisements, referrals, social media targeting.
Small Businesses Local businesses needing specialized services. Efficiency, competitive pricing, flexibility. Networking events, B2B directories, local Chamber of Commerce.
Real Estate Agents Professionals involved in property transactions. Quick turnaround, clear communication. Real estate seminars, online platforms for real estate professionals.
Property Managers Managers responsible for multiple rental units. Consistent service, bulk pricing options. Property management associations, online property management forums.

How much they spend?

In our detailed analysis of the financial aspects of running an independent contracting business, we find that clients generally spend between $500 to $3,000 per project, depending on the complexity, duration, and resources required for the service provided.

Research within the industry indicates that a client typically requires contracting services from 1 to 3 times per year. Some clients seek contractors for one-off, specialized projects, while others maintain a more consistent, ongoing need for services throughout the year.

Given these factors, the estimated lifetime value of an average customer of an independent contracting business, assuming they need services for about 5 years, would be from $2,500 (1x500x5) to $45,000 (3x3,000x5). This calculation takes into account both one-time clients and those who engage in repeated contracts.

With these considerations, it's reasonable to conclude that the average customer would bring around $15,000 in revenue to an independent contractor over a five-year period. This figure is an average, accounting for various types of projects and frequencies of contracting needs.

(Disclaimer: the numbers provided above are averages and may not accurately represent your specific business situation. Various factors, including location, competition, expertise, and market trends, could significantly impact these estimates.)

Which type(s) of customer(s) to target?

It's something to have in mind when you're writing the business plan for your independent contracting business.

The most profitable customers for an independent contracting business are often those who value quality over price, have consistent and substantial project needs, and appreciate transparent communication.

These clients prioritize long-term relationships and are willing to pay a premium for reliable, high-quality services.

To target and attract them, emphasize your expertise, showcase successful past projects, and highlight your commitment to excellence. Utilize online platforms, such as a professional website and social media, to establish a strong online presence. Networking within industry-specific events can also help build connections.

To retain these profitable customers, consistently deliver exceptional results, maintain open communication, and exceed their expectations. Offer loyalty programs or exclusive benefits to incentivize ongoing collaboration, and actively seek feedback to show your commitment to continuous improvement. Building a reputation for reliability and excellence is key to keeping these clients coming back for more.

What is the average revenue of an independent contracting business?

The average monthly revenue for an independent contracting business can vary significantly, typically ranging between $5,000 and $50,000. Below, we break down this estimation into three typical scenarios, reflecting varying levels of success and scale in the independent contracting industry.

You can also formulate a personalized estimate of potential revenue using different parameters relevant to your unique situation, potentially utilizing a financial plan tailored to independent contractors.

Case 1: A solo independent contractor

Average monthly revenue: $5,000

Starting on the smallest scale, we have independent contractors who work alone. These individuals might specialize in services such as repairs, home improvements, consulting, or freelance content creation, among other professions.

Such a business does not typically offer additional services or products and has a limited capacity, primarily due to the constraint of working hours and the professional's ability to take on multiple projects.

Assuming they charge around $50 per hour and work roughly 100 hours per month, the average revenue for a solo independent contractor would be approximately $5,000 monthly.

Case 2: A small, reputable independent contracting firm

Average monthly revenue: $25,000

This type of business operates on a slightly larger scale, often involving a team of skilled professionals. Located in areas with higher commercial activity, they're capable of taking on multiple projects simultaneously, thanks to the diverse skill set within their team.

Unlike a solo operator, this small firm may offer additional services, extending their marketability. For instance, they could provide comprehensive home renovation, business consulting packages, or a series of IT solutions, ensuring a more stable and substantial income.

With an estimated standard rate of $100 per hour and the combined team managing to bill up to 250 hours per month, this business could generate an average revenue of $25,000 monthly.

Case 3: A large, diversified independent contracting company

Average monthly revenue: $50,000

At the top end, we have large independent contracting companies. These businesses are well-established and known for their diverse range of services. They might operate across several cities or even states, boasting a sizable team of professionals in various fields.

This scale allows them to handle multiple large projects simultaneously, catering to both individuals and corporate clients. They could offer services ranging from major construction projects, extensive legal consulting, large-scale IT infrastructure setups, or advertising campaigns.

Given their reputation and the scale of services provided, they're able to command higher rates, potentially around $200 per hour. With a substantial workforce and the capacity to bill for more than 250 hours of work per month, a large independent contracting company could easily generate a monthly revenue of $50,000 or more, depending on the exact nature of their projects and scope of work.

business plan independent contracting business

The profitability metrics of an independent contracting business

What are the expenses of an independent contracting business?

Independent contracting business expenses include tools and equipment, transportation, marketing, and administrative costs.

Category Examples of Expenses Average Monthly Cost (Range in $) Tips to Reduce Expenses
Office Rent/Utilities Office space rent, electricity, water, internet $500 - $2,000 Consider a home office, negotiate rent, use energy-efficient appliances
Insurance Liability insurance, health insurance $200 - $800 Shop around for insurance quotes, bundle policies for discounts
Transportation Fuel, vehicle maintenance, public transportation $100 - $500 Optimize routes, use fuel-efficient vehicles, consider carpooling
Equipment and Tools Tools, machinery, computers $100 - $1,000 Buy used equipment, lease instead of buying, maintain regularly
Advertising and Marketing Online ads, business cards, website hosting $50 - $500 Focus on cost-effective marketing channels, DIY design and content
Professional Fees Accountant, lawyer, consultant fees $100 - $500 Seek referrals, negotiate fees, do some tasks in-house
Taxes Income tax, self-employment tax $200 - $1,000 Keep meticulous records, claim deductions, consult a tax professional
Supplies and Materials Raw materials, office supplies $100 - $500 Buy in bulk, compare suppliers, minimize waste
Travel and Entertainment Client meetings, meals, travel expenses $50 - $300 Limit non-essential travel, use video conferencing, set spending limits
Education and Training Workshops, courses, certifications $50 - $300 Look for free or low-cost online resources, invest strategically

When is a an independent contracting business profitable?

The breakevenpoint

An independent contracting business reaches profitability when its total revenue surpasses its total fixed and variable costs.

In simpler terms, it begins making a profit when the money it earns from its services exceeds the expenses it faces for tools, equipment, transportation, insurance, and possibly subcontractor wages, among other operational costs.

This indicates that the contracting business has arrived at a stage where it no longer operates at a loss but starts to see financial gains; this crucial juncture is known as the breakeven point.

Let's discuss an example where an independent contractor's monthly fixed costs are roughly around $10,000.

To estimate the breakeven point for such a business, one would start by understanding that the business needs to generate at least $10,000 monthly to cover its fixed costs. However, this does not yet include variable costs that depend on the number of jobs, such as materials, permits, or additional labor. If, for instance, an average job's variable costs are $500, and the contractor charges $1,500 per job, the profit per job is $1,000. Therefore, the contractor needs to secure at least 10 jobs per month to cover the fixed costs alone.

It's vital to acknowledge that this indicator can fluctuate significantly based on numerous factors like the nature of the services provided, the cost of equipment, the scale of the projects undertaken, market demand, and competitive pricing. A contractor specializing in large-scale renovations or technical installations may inherently have a higher breakeven point compared to a small contractor handling minor repairs and installations, due to the difference in operational scale and expenses.

Interested in understanding the financial trajectory of your contracting business? Consider utilizing a tailored financial plan designed for independent contractors. By entering your specific financial assumptions, you can determine the revenue you need to generate to establish a profitable operation, accommodating for both your fixed and variable costs.

Biggest threats to profitability

The biggest threats to profitability for an independent contracting business often include unpredictable fluctuations in customer demand, which can result in periods of low income or even financial instability.

Additionally, rising material and operating costs can eat into profits, making it challenging to maintain healthy margins.

Competition within the industry can lead to price wars, reducing the contractor's ability to charge fair rates for their services.

Economic downturns and recessionary periods can reduce overall construction and renovation projects, directly impacting the business's income.

Cash flow management can be tricky, with delayed payments from clients and the need to cover upfront expenses for labor and materials.

Lastly, legal and regulatory challenges, such as licensing requirements and liability issues, can add complexity and costs, further affecting profitability.

These threats are often included in the SWOT analysis for an independent contracting business.

What are the margins of an independent contracting business?

Gross margins and net margins are financial metrics used to gauge the profitability of an independent contracting business.

The gross margin represents the difference between the revenue earned from client contracts and the direct costs tied to fulfilling those contracts.

Essentially, it's the profit remaining after deducting costs directly related to executing the work, such as subcontractors, materials, and direct labor.

The net margin, conversely, accounts for all the expenses the business incurs, including indirect costs like administrative expenses, marketing, business insurance, and taxes.

Net margin delivers a more comprehensive view of the business's profitability by encompassing both direct and indirect costs.

Gross margins

Independent contracting businesses generally have average gross margins between 25% and 50%.

For instance, if your contracting business generates $20,000 per month, your gross profit might be approximately 40% x $20,000 = $8,000.

Here's an illustrative example:

Consider an independent contractor handling projects for clients, with each project contract valued at $2,000. If the contractor completes ten projects in a month, the total revenue is $20,000.

Direct costs, including materials, subcontractors, and any hired labor, might total $12,000.

Therefore, the business's gross profit would be $20,000 - $12,000 = $8,000.

In this scenario, the gross margin for the contracting business would be $8,000 / $20,000 = 40%.

Net margins

The average net margin for independent contracting businesses tends to range from 10% to 20%.

To exemplify, if your contracting business earns $20,000 per month, your net profit might be around $3,000, which is 15% of the total revenue.

Continuing with our consistent example:

If the business still makes $20,000 a month with direct costs of $12,000, there will also be additional expenses. These indirect costs, such as marketing, administrative expenses, insurance, and taxes, could amount to $5,000.

After accounting for both direct and indirect costs, the net profit of the business is $20,000 - $12,000 - $5,000 = $3,000.

In this instance, the net margin for the contracting business would be $3,000 divided by $20,000, equating to 15%.

As a business owner, comprehending that the net margin (in contrast to the gross margin) offers you a clearer insight into your actual earnings is vital. It factors in the total operational costs, painting a realistic picture of your business's financial health.

business plan independent contracting business

At the end, how much can you make as an independent contractor?

Now you understand that the net margin is the indicator to look at to know whether your independent contracting business is profitable. It essentially informs you how much money remains after covering all your expenses.

How much you will make naturally hinges on the quality of your execution and business decisions.

Poor-performing contractor

Makes $2,000 per month

If you start an independent contracting business but don’t invest in decent tools, neglect networking, ignore customer satisfaction, and don’t diversify your skills or services, you'll likely generate no more than $10,000 in total revenue.

Furthermore, if your expense management is as lackluster as your investment in the business, you might barely achieve a net margin of 20%.

This would mean your monthly earnings are capped at around $2,000 (20% of $10,000).

For an independent contractor, this is a scenario you want to avoid, as it indicates your business is barely staying afloat.

Average independent contractor

Makes $7,500 per month

If you’re an independent contractor with a decent set of tools, good work ethics, and a moderate network, you could perform fairly well. You might offer a few specialized services and take client feedback seriously, improving your craft based on their input.

With reasonable efforts, your total revenue could climb to about $40,000.

Assuming you manage your business expenses wisely, you might be able to secure a net margin of around 25%.

Consequently, your monthly earnings in this scenario would be around $7,500 (25% of $30,000). This is a respectable figure for an independent contractor operating an average business.

Exceptional independent contractor

Makes $50,000 per month

As a high-performing independent contractor, you consistently deliver excellent work. You invest in high-quality tools, continuously upgrade your skills, and are well-connected in several industries. Your reputation for reliability and high-quality work allows you to charge premium rates.

You could also offer consultancy services, based on your extensive experience, adding another revenue stream. With your commitment to business excellence, your total revenue could soar to $200,000 or even higher.

With smart expense management and the optimization of operations, your net margin could reach or even exceed 40%.

In this optimal scenario, your monthly earnings would be around $50,000 (40% of $125,000). This represents the lucrative potential of running a top-tier independent contracting business.

Realizing this level of success starts with a detailed, forward-thinking business plan, commitment to customer satisfaction, and continuous personal and professional development. Aim high, and you could make your mark in the contracting world!

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