Cell-mediated compaction of the extracellular matrix (ECM) plays a critical role in tissue engineering, wound healing, embryonic development, and many disease states. The ECM is compacted as a result of cellular traction forces. We hypothesize that a cell mechanically remodels the nearby ECM until some target conditions are obtained, and then the cell stops compacting. A key feature of this hypothesis is that ECM compaction primarily occurs in the pericellular region and the properties of the ECM in the pericellular region govern cellular force generation. We developed a mathematical model to describe the amount of macroscopic compaction of cell-populated collagen gels in terms of the initial cell and collagen densities, as well as the final conditions of the pericellular environment (defined as the pericellular volume where the collagen is compacted (V^∗) and the mass of collagen within this volume (m^∗)). This model qualitatively predicts the effects of varying initial cell and collagen concentrations on the extent of gel compaction, and by fitting V^∗ and m^∗, provides reasonable quantitative agreement with the extent of gel compaction observed in experiments with endothelial cells and fibroblasts. Microscopic analysis of compacted gels supports the assumption that collagen compaction occurs primarily in the pericellular environment.