What’s Profit Fade and How to Avoid It

In general, the concept of profit fade determines whether a construction project will be successful in terms of profit by the time it is fully completed. It is a tool to self-evaluate a project during different stages of construction. This helps project managers understand how their gross profit margins are faring because profits estimated at the start of construction can change by the time of completion. 

According to research covered by ForConstructionPros, poor communication, rework, and bad data management cost contractors $177 billion every year in the United States. The loss of projected profit margins also reflects poorly on contractors or the company as a whole. 

It is important that construction companies have a system in place to keep track of their profit margins and take necessary precautions to avoid any profit fade as possible. 

What’s Profit Fade in Construction?

Profit fade means earning less than you expected on a project, which is a common problem for subcontractors because projects are time-consuming and complex. Hindered profit fade is when your work is delayed by things outside of your control, which can be recouped if they are documented. Unhindered profit fade means it’s your fault.

For example, consider a project that was estimated to bring in around $100,000 profit. However, the actual profit turns out to be $90,000 after the project is completed. The $10,000 shortfall is the profit fade incurred, meaning that either the earlier estimates or the periodical financial reportings were incorrect.

eSUB helps prevent the causes of unhindered profit fade by providing quick and easy access to project data, improving project productivity, and increasing the accuracy of project information.

Profit Fade Analysis: Common Reasons Behind It

There can be several reasons why profit fades, but they are not exclusive to all construction projects. Sometimes, profit fade might occur due to indifferent reasons based on the project’s activities, scope, and type. That being said, below are some of the most common reasons behind profit fades.

• Overly optimistic profit estimates during the conceptual phase, including incomplete unit costs.
• Incorrectly estimating rates and rental fees for labor, equipment, and tools, which may or may not account for market fluctuation.
• Extra work outside of the original requirement, or activities performed after undergoing changes that cannot be billed.
• Unreliable supply chains and poor subcontractor performance.
• Badly managed workers and contractors on the site.
• Inefficiently managed resources and equipment available on the site.
• Inexperienced workers or workers assigned to the wrong posts.
• Bad weather or unexpected conditions that hamper site activities.

How to Calculate Profit Fade

Considering the complexity and number of factors involved, most of which are beyond your control and expectations, there is no single formula to accurately calculate profit fade for a construction project. The only respite project managers can find is in estimating profit fade at different phases of construction. This is done by doing a gain/fade analysis which compares gross profit margins at any point in the project’s lifecycle.

For example, analyzing profit margins estimated at the bidding stage against different stages of completion until the project is completed. Ultimately, going in reverse by comparing the final profit margins against the estimated margins at the start of the project is an excellent way for contractors to learn about their jobs. The experience gained from gain/fade analysis helps determine the success rates of future projects.

How to Tackle and Mitigate Profit Fade

There are two overlapping aspects to understand here. Firstly, construction project managers must take all necessary steps to help prevent profit fade. However, there is no guarantee that a project will not see profit fade over its lifecycle. Hence, it is also equally important to follow the best practices to mitigate profit fade after it has been analyzed. The following are some common ways to avoid and mitigate profit fade for construction projects.

• Include codes for construction phases and activities in your budget systems to easily track costs incurred.
• Keep monthly reports for job profitability.
• Keep weekly reports for labor costs incurred based on the job and construction phase.
• Keep daily reports for labor and equipment usage based on the job and construction phase.
• Keep daily reports for all completed jobs.
• Keep regular/periodic reports for construction costs at completion based on project requirements.
• Have project managers include a list of all completed jobs and activities in their profit fade assessments.
• Have a system to track equipment, their usage, ownership, and operating costs.
• Have a system to track all purchase orders for committed jobs.
• Involve project managers, the planning team, and stakeholders to improve the reliability of profit fade estimates.
• Have all bids and forecasts approved by the management.
• Have a plan on standby to take immediate remedial actions to mitigate profit fade. This can include a plan to change how equipment is used and adjust the crew size to match schedules.

5 Ways eSUB Helps Protect Your Profits

1. Gives you greater project management visibility for office and field workers so you can identify whether projects are on time or delayed.
2. Provides daily data-driven reports, the most powerful documentation from workers in the field, especially when photos are uploaded.
3. Improves field productivity, including an hours-lost report to capture how much labor you lost due to issues beyond your control (helps win change orders and avoid back-charges).
4. Improves office productivity, including integrations with accounting systems and drawing software to reduce data entry and errors.
5. Job costing so you can bid with confidence and be profitable on future projects.

Contact us and share your project management, bidding, and invoicing challenges to receive a personalized demo that shows how you can avoid profit fade.