What Is Margin Fade in Construction?

By Martin · Updated 2026-02-02

Margin fade is the gradual erosion of profit margin as a construction project progresses and actual costs exceed original estimates. A job estimated at 15% gross margin might fade to 10%, 5%, or even negative if cost overruns aren't caught early. Regular WIP reporting is the best defense against margin fade.

Why This Matters

Margin fade is the silent killer of construction profitability. You estimate a job at 18% gross margin. Six months in, your WIP report shows 12%. By the time you close out, you're at 6% or worse. Nobody made a catastrophic mistake. Costs just crept up, week by week, until the profit disappeared.

I've seen this pattern hundreds of times. The estimator nails the scope. The PM executes well. But labor takes 10% longer than estimated. Materials cost 8% more. A few small scope changes never get priced as change orders. By the time anyone notices, you're 70% complete and the margin is gone.

The companies that catch margin fade early can fix it. Change order for the extra scope. Adjust the crew mix. Renegotiate sub pricing. The companies that catch it late just eat the loss. Your WIP report is the early warning system that makes the difference.

How It Works

Let's walk through a real example. You win a $2 million project:

Contract value: $2,000,000
Estimated cost: $1,640,000
Estimated gross profit: $360,000 (18%)

At 30% completion, your WIP shows:

Costs to date: $530,000
Percent complete: 32.3%
New estimated cost at completion: $1,640,000
Projected gross profit: $360,000 (18%)

Everything looks great. You're actually ahead of schedule.

At 50% completion:

Costs to date: $920,000
Percent complete: 50%
New estimated cost at completion: $1,840,000 (you've revised estimates based on trends)
Projected gross profit: $160,000 (8%)

You just lost $200,000 in projected profit. This is margin fade. Your original 18% margin dropped to 8%. What happened?

The usual suspects:

Labor overruns: Productivity wasn't as good as estimated. Weather delays. Learning curve on a new crew.
Scope creep: The owner kept asking for "small adjustments" that never got priced as change orders.
Material cost increases: Steel went up 12% between estimate and buyout.
Rework: Quality issues required some demolition and reinstallation.
Subcontractor overruns: Your HVAC sub is claiming extra work; you're negotiating but accruing the cost.

None of these individually was a disaster. But together, they ate $200K of profit.

The Real-World Impact

Here's the math that keeps me up at night. At 50% complete with $920K spent, you still have $920K of work to do (based on your new $1.84M estimate). But you only have $1.08M of contract value remaining ($2M total less the $920K you've earned).

Your remaining margin for the second half of the job: $160K profit on $920K of work = 17.4%. You need to execute the back half of the job at 17.4% margin just to deliver 8% overall.

If you don't catch this at 50%, it gets worse. By 70% complete, margin fade typically accelerates because:

You're deep enough that mindset shifts from "let's fix this" to "let's just finish"
Punchlist and closeout always cost more than estimated
Owner is slow-paying retainage and you're funding completion from working capital
Your best crews have moved to newer jobs; you're finishing with whoever's available

I've seen jobs estimated at 15% margin close at negative 5%. A $200K profit became a $100K loss. That's a $300K swing on a $2M job. Do that twice in a year and you're in real trouble.

Common Mistakes

The biggest mistake is not updating your estimate to complete. Some contractors just plug in the original estimate throughout the job. By the time they realize costs have run over, there's no time to recover.

Update your estimated cost at completion monthly. Not just for jobs in trouble. For every job. Ask your PMs: "Based on what we know now, what will this job really cost when we're done?" That's the number that goes in your WIP report.

Second mistake: ignoring early warning signs. If you're 20% complete and already trending 5% over estimated hours, you're not going to magically catch up. Productivity is what it is. Deal with it now. Can you value-engineer the remaining scope? Adjust crew size? Negotiate a change order for owner-driven delays?

Third mistake: no accountability for margin fade. If PMs aren't measured on projected margin throughout the job, only at closeout, they have no incentive to manage it. By then it's too late. Your bonus structure should reward catching and fixing problems early, not just delivering completed projects.

The Bottom Line

Margin fade is inevitable on some jobs. Market conditions change. Unforeseen conditions happen. Clients change their minds. The question isn't whether you'll have jobs with margin fade. The question is whether you'll catch it early enough to do something about it.

Run your WIP monthly. Track estimated cost at completion. Watch the trend in projected margin. If a job was estimated at 15% and your 30% WIP shows 12%, that's your signal. Don't wait until 70% to have that conversation.

The best contractors I work with have a rule: any job showing more than 2 points of margin fade triggers a project review. Get the PM, estimator, and owner in a room. What's driving the overrun? Is there a change order opportunity? Can we improve productivity? What's the realistic forecast?

Have that meeting at 30% complete and you might save the job. Have it at 80% and you're just documenting the loss.

Your WIP report shows you margin fade in real time. Use it.