Updated: Nov 30
It's believed that the average profit margin for the construction industry is too low. Those in other industries often joke about why most construction company owners are working insanely hard for little reward.
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The deep truth is that the net profit margin in construction isn't low but most business owners are failing to manage costs, productivity, and cash flow. Let’s take a look at the statistics from the CSI market. The construction services industry profitability ratio is 35,49 % in 2021. Other statics from different resources also claimed the same. That’s right. You read that correctly.
Indeed, most contractors are well at building beautiful architecture but don't know how to make a profit. If you’re struggling to keep your head above water in the construction sector, let’s dive into how you can improve your construction company’s profitability no matter how volatile and competitive the market is.
Set Profitability Goals
It goes without saying that companies who have specific strategic plans with clear targets and goals might make more profit than companies without scheduling ahead.
Before you start striving to improve your construction profit margin, it’s crucial to have specific profitability goals you can work toward. Most companies shoot for moving targets by announcing to make as much money as possible by effectively cutting down overhead. These are not clear goals. As the price of materials fluctuates, your overhead and net profit can move up and down like a roller coaster.
It’s hard to hit a target that is fuzzy and always moves around. Now working on making your goals SMART - Specific, Measurable, Achievable, Relevant, and Time-Based. For example, our company will increase profit margin by 15% within one year.
Once you’ve determined how much profit you’ll want to make, you’ll be on your way to realizing the positive net profit, or even higher than the average number in the construction industry.
Know All Your Cost
The fact is only 20% of contractors deeply understand the true cost of their business. The remaining often make decisions about bidding and completing projects without ever checking to see if the numbers are adding up. I hope you do not belong to this group.
Declaring that you are going to improve your profit margins and set the prospect goals are both meaningless endeavors if you don’t know how much the costs of each project to bid. If you don’t clarify all relevant costs that mean there’s no way of knowing how profitable you are on each job.
For this reason, you need to know, measure, and track important financial metrics. Do you know what is your company’s gross and net profit? How much are your overhead costs? What is the true cost of the project you just bid on? How much cash do you need to invest in your business for the growth necessary to achieve success? And there are so many other questions and numbers you need to monitor to ensure your construction company is profitably growing.
Knowing how much you spend to complete each job is a decisive factor in understanding and increasing your profit. Job costs include labor, materials, supplies, equipment rental costs, bonding premium, fuel, permits - just to name a few. Job costs also vary from job to job, so it’s important to keep a closer eye on your job costs if you’re doing multiple projects at the same time.
Moreover, the construction industry is so volatile and fiercely competitive, you also need to keep updated and deal with fluctuating material costs that can skew your jobs in a way that greatly affects your profitability.
Accuracy in calculating and reporting overheads gives your business a chance to submit better bids. Once you’re developing accurate cost estimates that will reduce overhead, ensure construction profit margins, you have a competitive edge in the bidding marketplace.
One of the most cost-effective actions you can work on to improve profit margin is focusing on productivity in the workplace. I know you are well on creating high-quality jobs but productivity is not just measured by beautiful or completed work but it means you work effectively to control costs and stay on schedule.
To achieve these goals, you and other relevant contractors must work together to make sure that work is completed in a logical sequence that focuses on maximizing the effectiveness of everyone working on the project. Train your team well and keep your line of communication often to make sure your worker know to properly complete assigned tasks. Make productivity everyone’s focus by equipping them with the tools and resources needed to effectively do their job.
Keep in mind that lack of productivity or poor management can lead to unnecessary rework, stagnant work, accidents, mistakes, and missed deadlines. Missing the deadlines can stretch your budget and ruin your reputation.
In sum, the more productive your workers are, the less of a chance that you’ll miss a deadline or make a mistake that could cut into your construction profitability.
Consider rental equipment
Purchasing new equipment is costly. Instead of stretching out every dollar or taking out costly loans, consider renting equipment. It can be a good option, especially when you’re struggling to maintain profit margins. This gives you access to new, top-of-the-line equipment and technology without having to ear the cost. You also do not need to be responsible for maintenance and repairs, saving you more money in the long run.
Follow bookkeeping and accounting tips to stay on of your overhead so you can create a clear strategy for pricing jobs. We’re here to help you streamline your job costing to make sure your construction company is making profits. Start a Free consultation here.