Your mix of service, replacement and construction work decides how your firm makes money, how much cash it needs and what kind of people you hire. Changing it is one of the largest decisions a mechanical owner makes, and it should be made with a model, not a hunch from one good year.
Why the mix matters: a worked comparison
Compare $1,000,000 of annual revenue from two different kinds of work, using illustrative numbers. Your own will differ.
| Residential service and replacement | New construction subcontract | |
|---|---|---|
| Gross margin (illustrative) | 45% | 18% |
| Gross profit | $450,000 | $180,000 |
| Typical collection | On completion, within days | Progress billing, often 45–75 days |
| Average receivables (at 7 vs 60 days) | about $19,000 | about $164,000 |
| Retained by the payer until completion | Nothing | A holdback, if your contract and province's lien law allow it |
| Overhead it needs | Dispatch, call handling, vehicles, marketing | Estimating, project management, bonding |
The service side looks far better on gross profit, but it also carries heavier overhead per dollar. The construction side looks thin, but it can keep a large crew productive with relatively few sales costs. The real answer sits in your net margin by division and in how much cash each one ties up, which is what the model calculates.
Notice also what the two columns ask of the owner. Service rewards a well-run office: phones answered, technicians routed sensibly and invoices sent the same day. Construction rewards careful estimating, tight project management and the patience to wait for payment. Most owners are naturally stronger at one, and the mix should reflect who will run it.
Who it is for
- New-construction firms thinking about a service department
- Service shops tempted by a large builder or general contractor relationship
- Residential firms considering maintenance agreements or a commercial service line
- Firms whose cash gets tight every time a big project starts, even in good years
What is included
- Division accounts. We split revenue, direct costs and a fair share of overhead across service, replacement, maintenance and construction, so you can see net margin for each.
- Cash cycle. Days to collect, holdbacks and material outlay by division, and the working capital each needs.
- Scenario model. Your current mix and two alternatives, for example 20% more service or a new builder contract, with crew, overhead and cash implications.
- Division plan. If you add a line of work, a 12-month plan covering crew, pricing, dispatch, the first marketing budget and the break-even point.
- Review points. The three or four numbers that tell you after six months whether the change is working.
Timeline
A mix review takes four to six weeks. A full division launch plan adds two to four weeks. Owners who go ahead often keep a retainer for the first two or three quarters of the new division.
How we measure results
We compare net margin by division, days sales outstanding, cash on hand at month end and crew utilisation before and after the change. For a new division, we track the break-even month against the plan. One of the results from our HVAC work shows the idea in action: GasBoilers.ca was set up as a gas-boiler division for CANRO Heat and now covers 26+ BC communities, and the related CanroHeat.ca site recorded 250% lead growth. A new division needs its own numbers from day one; the results page explains more.
Mistakes to avoid
- Judging by gross margin alone. Service overhead is real. Allocate it.
- One big customer. A single builder at 40% of revenue sets your prices for you.
- Mixing crews without rules. Pulling service technicians onto a late construction job empties tomorrow's schedule.
- Underfunding the change. New construction ties up cash; a new service line needs marketing and dispatch before it pays. Plan the gap.
- No exit test. Decide in advance what result after six months would make you stop.
Before you bid on more construction work, read the bid/no-bid scorecard. For pricing each division correctly, see pricing and estimating.
Frequently asked questions
Is service always more profitable than construction?
Higher gross margin per hour is common in service, but service also carries more overhead: dispatch, call handling, vehicles and marketing. Net profit depends on how well each side is run. The model uses your numbers, not rules of thumb.
Should we start a maintenance agreement program?
If you have a residential or light-commercial customer base, agreements give you predictable shoulder-season work and repeat customers. They only pay if you have the crew hours to deliver the visits, so capacity comes first.
We are a new-construction firm. Can we add service?
Yes, but it is close to starting a second business: different technicians, different scheduling, different customer handling and different marketing. We plan it as a division with its own numbers.
Do you help market the new division?
We plan how it will win work and what that is worth paying for. Campaign delivery can be handled by our group's marketing brands or any agency you choose.