Construction Profit Margin – How to Improve Profitability on a Project
Table of Contents
Here are 8 ways that the subcontractor can improve profitability on a project:
When estimating a project, it is important to not only include variable costs but also fixed costs such as overhead. Additionally, the subcontractor must also account for unpredictable costs by including a line for contingency costs in the estimate. Labor costs must also be estimated correctly. This can only be done if the subcontractor has a good understanding of how long each task will take and how many labor hours will be required to finish it. Having an accurate estimation will avoid any surprise costs incurred down the road that hurt a project’s profitability.
Productivity improvements in construction can be made to both processes as well as to workers. One way to improve process productivity includes automating processes such as change orders, purchase orders, RFI’s, accounting and payroll, etc. One way that the subcontractor can improve worker productivity is by assigning the right jobs to the right people to ensure the best job fit, job satisfaction, and worker productivity. This requires the subcontractor to be aware of the strengths and weaknesses of each employee in order to properly leverage these strengths and mitigate these weaknesses in their assigned jobs.
Purchase orders allow the subcontractor to compare actual prices billed to the original purchase order to ensure no over-charges and no duplicate charges. By employing construction software that can handle purchase orders, the subcontractor can automatically check the POs for any discrepancies, and these POs can automatically fill in accounting data within the same integrated system. By utilizing purchase orders, the subcontractor will save money from billing mistakes that will contribute to profitability.
Have Defined Goals
The first step in creating defined goals is figuring out what the success of your company is measured by, whether it is profits, growth, etc. When defining the goals of the company, it is also vital to consider the long-term and not just the immediate goals of the company. One way to help visualize the long-term goals of your company is by crafting a business plan. This forces the subcontractor to look to the long-term and create a systematic way to achieve his or her goals. Once the subcontractor knows what drives the success of the company, these specific goals and expectations must be communicated to the rest of the team. This will contribute to productivity because employees with shared goals perform better as a team. Expectations must not only be set for employees, but also for clients. Setting clients expectations for additional costs to be incurred or other unpredictable parts of a construction project is crucial for creating long-term relationships with these clients that will hopefully lead to continued work. On the other hand, if a client has unrealistic expectations, the profitability of a project will suffer.
Incentives cannot make up for job dissatisfaction or poor management, but it does help to motivate employees in the short-term. By offering employees money for managing your bottom line effectively is a win-win for both the employees and the company. When employing a program like this, it is important to weigh results more heavily then hours worked. This is rewarding productivity and results rather than just simply putting in the hours with little to no results.
Productivity and good process all start with training. Investing time and energy into employees pays off when they can perform their jobs more effectively, saving your company money that contributes positively to profitability. Additionally, finding and training a new employee, should a current employee quit, is very costly. Therefore, the subcontractor must constantly train current employees and ensure that employee job satisfaction is always high. This can be done by asking and listening to employee’s feedback about what they dislike about the job and their suggestions for improving it. Even though all of the employee’s requests may not be feasible, employees want to know that they are being heard and that an effort is being made to keep them satisfied.
Due to the nature of construction projects, communication to the many different stakeholders is vital to the success of any project. Some of the many stakeholders that may be involved in a project include owners, general contractors, employees, architects, etc. Making communication a priority amongst these many groups is a great way to ensure profitability on a project. Construction software can help this communication effort by allowing for real-time updates to keep everyone on the same page. It also allows for centralized communication so that all emails, reports, and other documents are stored with its respective job number to keep them organized. This software will also provide standardized professional documents such as change orders, purchase orders, RFI’s, etc. All of these communication efforts help to keep everybody informed and prevent any costly misunderstandings that hurt profitability.
It is important for the subcontractor to keep in mind that even though there are actions that can and should be taken immediately to improve their profitability, it is not an overnight process. All of these things will have to be employed consistently for them to positively impact their profitability.