Margin Erosion — The Silent Killer of Engineering & Manufacturing SMEs

Most engineering and manufacturing firms quote based on experience, gut feel or optimistic assumptions about how smoothly a job will run. Time estimates are tight. Contingency is minimal. Scope is vague. Commercial risk isn't priced in.

When the work starts, reality hits. The customer changes something. A supplier is late. A design iteration takes longer than expected. Materials cost more than budgeted. The team hits a technical snag. What was quoted at 35% margin ends up delivered at 18% — or worse, at a loss.

The quote looked fine. But it didn't reflect operational reality. Weak quoting is the single biggest source of margin erosion in owner-managed businesses. If your quotes don't include contingency, risk adjustment, realistic labour rates and accurate material costs, you're guaranteeing margin loss before the job even starts.

Rework is the hidden cost that no one prices into a quote. A weld fails inspection. A dimension is wrong. A component doesn't fit. A supplier sends the wrong part. A drawing wasn't updated. Someone misread the spec.

Each rework event seems small — a few hours here, a day there. But across dozens of jobs, rework burns thousands of hours of labour that can't be billed. Worse, it creates downstream delays, expediting costs, customer dissatisfaction and team stress.

Rework happens because quality loops are weak. There's no structured review at the handover between design and production, no final check before dispatch, no root cause analysis after failures. So the same mistakes repeat — and margins erode with every repeat.

When delivery dates are unpredictable, costs escalate. Jobs take longer than planned. Labour hours overrun. Overtime increases. Materials sit in WIP longer than expected. Cash flow tightens. Customers get frustrated. Your team scrambles to catch up.

Delivery variation isn't usually caused by laziness. It's caused by poor planning, weak handovers, unclear priorities, unrealistic schedules, resource bottlenecks and a lack of visibility into what's actually happening on the shop floor. When the plan says two weeks but reality is three and a half, margin disappears.

Predictable delivery is one of the strongest profit levers in manufacturing. When you can consistently hit dates, you can price confidently, manage capacity proactively and avoid the margin-killing costs of chaos, expediting and firefighting.

Customers ask for changes. Sometimes they're small. Sometimes they're significant. But if your commercial process doesn't capture, price and authorise every change, you end up doing extra work for free.

Engineers are particularly vulnerable to this. The customer asks for "just a small tweak." The engineer agrees because it seems reasonable. The work happens. No variation order is raised. No extra payment is received. Margin erodes.

This isn't about being difficult with customers. It's about commercial discipline. Every change should be documented, priced and agreed before work proceeds. If you're delivering more than you quoted, you're losing money. If your team can't say no — or doesn't know when to escalate — you're haemorrhaging margin on every job.

Project managers in engineering and manufacturing businesses are often excellent at the technical side: schedules, drawings, materials, coordination. But they're frequently weak at the commercial side: tracking actual costs against budget, escalating when margin is at risk, challenging scope creep, managing customer expectations, pricing variations.

The result is that projects drift. By the time someone reviews the job financially, it's too late. The work is done, the margin is gone, and there's no mechanism to recover it. Commercial visibility arrives as a post-mortem, not as an early warning.

Fixing this requires project-level P&L visibility, regular commercial reviews, clear escalation protocols and training your project managers to think commercially — not just operationally. Every project should have a target margin, tracked weekly, with deviations escalated and addressed before the job closes.

Some customers have been with you for years. The pricing was set a decade ago. Labour rates have gone up. Material costs have increased. Overheads have risen. But the price to the customer hasn't moved — because no one wants to have the difficult conversation.

Legacy pricing kills margin. You end up working for customers who generate high revenue but low or negative profit. They're busy, demanding and often difficult — but commercially, they're destroying value. The business would be more profitable without them.

The fix is commercial courage. Review customer profitability annually. Identify who's profitable and who isn't. For underpriced customers, increase prices to market rates, renegotiate terms or — if they won't accept — let them go. Losing unprofitable revenue creates capacity for profitable work. That's not a loss. That's strategic margin management.

As businesses grow, overheads tend to creep up: more office space, more admin staff, more software, more vehicles, more support functions. If revenue grows faster than overheads, margin improves. If overheads grow faster than revenue, margin erodes — even if gross profit per job stays stable.

This is particularly dangerous in periods of revenue plateau or slow growth. Fixed costs keep rising (rent, salaries, insurance, software subscriptions), but revenue doesn't keep pace. The gap between gross margin and net margin widens. Profitability collapses even though the business looks busy.

The solution is disciplined overhead control. Every cost should be justified by contribution to revenue or operational capability. Regularly review non-productive costs. Challenge everything that doesn't directly support delivery or sales. Overheads should grow only when revenue justifies it — not because it feels like the business "needs" something.

Most businesses don't track margin at job level. They track revenue, backlog and sometimes gross profit. But they don't see margin erosion happening in real time. By the time the year-end financials are reviewed, the damage is done. The team has worked flat out, delivered dozens of projects — and profit is lower than the previous year.

Without job-level P&L visibility, you can't tell which customers, which project types, which team members or which processes are destroying margin. You just know the overall number is down. That makes it almost impossible to fix systematically.

When margin erosion is happening, more revenue doesn't solve it. It amplifies the problem. You take on more work, hire more people, increase overheads — and find that profitability stays flat or declines. Busy doesn't mean profitable. Growth without margin discipline is just expensive chaos.

This is why many engineering and manufacturing SMEs feel trapped. They're growing revenue, working harder than ever and struggling to understand why profit isn't following. The answer is almost always margin erosion across the portfolio — small losses on many jobs that add up to a structural problem.

Buyers, investors and lenders value businesses based on profitability, not revenue. A £10M turnover business with 5% net margin is worth significantly less than a £6M turnover business with 12% net margin. Margin drives valuation.

If margin erosion has been happening for years, it signals weak commercial discipline, poor systems and structural problems. That destroys value and makes the business hard to sell or exit. Buyers won't pay a premium for a business that's busy but unprofitable. They'll discount heavily — or walk away.

You can't manage what you can't see. Every project should have a target margin, tracked against actuals weekly or fortnightly. Labour hours, material costs, subcontractor spend, variations and overheads should all be captured at job level.

This doesn't require expensive software. A simple Excel tracker reviewed in a weekly commercial meeting is enough. The discipline of tracking margin in-flight — not just at the end — transforms commercial performance. Margins that are visible get protected. Margins that aren't visible get eroded.

Every quote should include realistic time estimates, accurate material costs, contingency for unknowns, risk adjustment for complexity and commercial terms that protect margin. If your quotes don't include these, you're guaranteeing margin loss.

Implement a quote review process. Before a quote goes out, it should be checked by someone other than the person who created it. This catches optimistic assumptions, missing costs and scope gaps before they become losses.

Rework is the margin killer no one prices in. The fix is structured quality loops: design reviews before fabrication starts, first-off inspections, hold points before critical stages, final checks before dispatch and root cause analysis after failures.

Track rework as a KPI. Measure it in hours and cost. Make it visible. Hold people accountable. Rework won't disappear overnight — but when it's measured, escalated and addressed, it drops sharply. That directly improves margin.

Every scope change should trigger a variation process: document the change, estimate the cost impact, get customer approval, raise a variation order and track payment. If your team is doing extra work without this process, you're giving margin away.

Train your project managers and engineers to spot scope creep and escalate it immediately. Commercial discipline isn't about being difficult with customers. It's about protecting the business from margin loss disguised as "being helpful."

Not all revenue is good revenue. Some customers are profitable. Some break even. Some destroy value. The only way to know is to analyse customer profitability: total revenue, total costs, margin contribution and effort required.

If a customer consistently delivers low or negative margin, you have three options: increase prices, reduce service levels or exit the relationship. Losing unprofitable customers frees capacity for profitable work. That's margin management, not failure.

Every overhead cost should be justified by contribution to revenue, delivery capability or risk management. Regularly review non-productive spend. Challenge everything. Cut what doesn't contribute. Delay new costs until revenue justifies them.

Overhead growth is the silent killer of margin in mature businesses. Revenue plateaus. Overheads keep rising. Profit collapses. The fix is discipline: every cost must earn its place.