What Is Backlog and Why Does It Matter?
Why This Matters
Backlog is your revenue pipeline. It tells you how much work you've sold but haven't yet completed. It's one of the most important leading indicators of business health — more important than revenue, more important than profit, because it predicts where you'll be in six months.
If your backlog is growing, you've got strong sales and future revenue locked in. If your backlog is declining, you've got a sales problem or a delivery problem (or both). If your backlog is flat, you're replacing completed work with new work at roughly the same pace — which is fine, unless you're trying to grow.
Banks look at backlog. Sureties look at backlog. Buyers look at backlog if you're trying to sell. It's a key underwriting metric because it represents contracted future revenue, not just sales pipeline or proposals. A $10M backlog means you've got signed contracts for $10M of work. That's real, that's committed, and that's why lenders and sureties care.
How to Calculate Backlog
Backlog is simple math: for each active job, take the original contract value (including approved change orders) and subtract the earned revenue to date. That's the remaining backlog for that job. Add up the remaining backlog across all active jobs, and that's your total backlog.
Example: You've got five active jobs:
- Job A: $2.5M contract, $1.8M earned, $700K remaining
- Job B: $1.2M contract, $400K earned, $800K remaining
- Job C: $3.0M contract, $2.9M earned, $100K remaining
- Job D: $4.0M contract, $1.0M earned, $3.0M remaining
- Job E: $1.5M contract, $0 earned, $1.5M remaining
Total backlog: $6.1M
If your annual revenue is $12M, you've got roughly 6 months of backlog. That's healthy. If your annual revenue is $18M, you've got 4 months of backlog — that's getting thin. You need to be selling aggressively or you'll have idle crews in six months.
What Healthy Backlog Looks Like
Most contractors should carry backlog equal to 6-12 months of revenue. Less than 6 months and you're vulnerable to gaps between jobs. More than 12 months and you're probably taking on work too fast — or you're not delivering work fast enough.
Healthy backlog is also diversified. If your $6M backlog is all with one client, you've got concentration risk. If that client delays a project or cancels, your backlog just dropped by half. Ideally, no single client should represent more than 25-30% of your backlog.
Healthy backlog is also profitable. I've seen contractors with $15M in backlog and terrible margins because they chased volume over profit. A $15M backlog at 3% margin is worse than a $10M backlog at 10% margin. You make more money, you tie up less working capital, and you reduce risk.
Warning Signs
Declining backlog. If your backlog drops from $8M to $6M over two quarters, you've got a sales problem. Maybe your estimator is pricing too high. Maybe your competitors are undercutting you. Maybe the market is slowing. Either way, you need to act fast — hire a business development person, adjust pricing, diversify into new markets.
Backlog concentrated in one client. I worked with a contractor who had $12M in backlog, all with one owner. That owner hit financial problems and put every project on hold. Overnight, the contractor's backlog went to $2M. Diversification isn't just about risk management — it's about survival.
Backlog full of low-margin work. You can have $20M in backlog and still go broke if every job is priced at 2% margin. High backlog feels good, but what matters is profitable backlog. Before you celebrate a big sales quarter, run the numbers on estimated margin. If you're selling work at 4% margin and your overhead is 6%, you're buying yourself a job, not building a business.
Backlog without capacity to execute it. This is the trap fast-growing contractors fall into. You sell $10M of work in Q1, but you only have the labor and equipment to deliver $6M. Now you're scrambling to hire, you're paying premiums for labor, your quality drops, your margins compress, and your clients get frustrated. Backlog without capacity is a liability, not an asset.
The Relationship to Capacity Planning
Backlog and capacity planning are two sides of the same coin. Your backlog tells you how much work you've sold. Your capacity tells you how much work you can deliver. If backlog exceeds capacity, you've got a resource problem. If capacity exceeds backlog, you've got a sales problem.
Smart contractors track both weekly. They look at backlog by quarter and compare it to labor capacity by quarter. If Q2 backlog is $4M but Q2 labor capacity is only $3M, they either need to hire, or they need to push project start dates, or they need to turn down new work. If Q3 capacity is $5M but Q3 backlog is only $2M, they need to accelerate sales or risk idle crews.
This is where most contractors fail. They sell work opportunistically — a big project comes in, they bid it, they win it, and then they figure out how to deliver it. Better approach: know your capacity, sell to your capacity, and grow capacity intentionally as backlog grows.
The Bottom Line
Backlog is your early warning system. Declining backlog tells you to focus on sales. Growing backlog tells you to focus on capacity. Healthy backlog — 6-12 months of diversified, profitable work — tells you you're managing the business well.
Track backlog monthly, compare it to capacity, and use it as a leading indicator for hiring, equipment investment, and sales strategy. Contractors who manage backlog proactively grow steadily. Contractors who ignore it either starve or overextend. Neither ends well.