When to Fire a Customer (The Math Behind the Decision)

You know the customer I'm talking about.

They give you steady work. But they pay in 90 days when the contract says 30. They dispute every change order. Their PM calls your guys directly and asks for "small favors" that never get billed. Your crews hate working their jobs.

You keep them because "revenue is revenue" and "we need the volume." But are they actually making you money?

Let's do the math.

The True Cost of a Bad Customer

Most contractors look at a customer and see top-line revenue. "They gave us $400K last year." But revenue isn't profit. Here's what you need to calculate:

1. Actual Margin on Their Jobs

Pull the job costing on every project you did for them last year. What was your gross margin? Not what you bid—what you actually made after all the scope creep, disputed change orders, and "while you're here" requests.

I've seen contractors bid 25% and realize they made 8% on a customer's jobs because of all the unbilled extras.

2. Cost of Carrying Their Receivables

If they pay in 90 days instead of 30, you're financing their business. That has a cost.

Simple version: If you have a $100K receivable sitting for 60 extra days and your cost of capital is 10%, that's about $1,600 in carrying cost. Do that across $400K in annual revenue and you're looking at $6,000+ per year just to float their cash.

3. Administrative Overhead

How much time does your office spend chasing their payments, answering their disputes, revising their invoices, and dealing with their chaos? Time is money. If your office manager spends 5 hours a week on one customer's BS, that's 250+ hours a year. What's that worth?

4. Opportunity Cost

This is the killer. While your crews are tied up on low-margin jobs for a problem customer, they're not available for higher-margin work from better customers.

If Customer A gives you 10% margin and Customer B gives you 22% margin, every hour spent on A instead of B is costing you the difference.

The Customer Profitability Calculation

Here's a simplified framework:

Revenue from customer: $400,000
Actual gross margin: 12% = $48,000
Minus carrying cost: -$6,000
Minus admin overhead: -$12,000 (250 hrs × $48/hr)
Net customer profit: $30,000
Effective margin: 7.5%

That "big" customer giving you $400K in revenue is actually netting you 7.5%. Meanwhile, your smaller customers paying on time with clean jobs might be netting you 18%.

"But they're 20% of my revenue!" Maybe. But they might be 5% of your profit and 40% of your headaches.

The Warning Signs

You should at least evaluate firing a customer if:

They consistently pay beyond terms (60+ days late)
They dispute more than 10% of invoices
Your actual margin on their jobs is 5+ points below your target
Your crews actively avoid their jobs
You dread seeing their name on caller ID
They require constant hand-holding and escalation

One or two of these? Normal cost of doing business. All of them? You're subsidizing someone else's operation.

How to Fire a Customer (Without Burning Bridges)

If the math says they need to go, here's how to do it professionally:

Option 1: Price Them Out

Raise your rates for them specifically. "Due to increased costs, our pricing for 2026 will be 20% higher." They'll either pay the premium (making them profitable) or take their business elsewhere. Either way, you win.

Option 2: Change the Terms

"Starting next quarter, all invoices are due in 30 days with a 2% late fee after 45 days." If they can't live with that, they'll leave. If they stay and pay on time, problem solved.

Option 3: The Direct Conversation

"I've enjoyed working with you, but our current arrangement isn't sustainable for us. We need to either adjust pricing/terms or wrap up our current projects and part ways."

This is scary. But most of the time, bad customers know they're bad customers. They're not surprised. And sometimes, the honest conversation actually fixes the relationship.

Option 4: The Slow Fade

Stop bidding their work. Be "too busy" when they call. Let the relationship wind down naturally. This is the path of least resistance, but it takes longer.

What About the Revenue Gap?

This is the fear that keeps contractors stuck with bad customers. "If I lose their $400K, I can't cover overhead."

But think about it differently: you're freeing up capacity. Your crews, your cash, your admin time—all now available for better customers.

You don't need to replace $400K in revenue. You need to replace $30K in profit. That's two or three good jobs with customers who pay on time and don't dispute everything.

The Bottom Line

Not all revenue is good revenue. Not all customers are worth keeping.

Run the numbers. Calculate true customer profitability. And if a customer is costing you more than they're worth—in money, time, stress, or opportunity—give yourself permission to let them go.

Your best customers deserve your best service. Stop letting bad customers steal capacity from the good ones.