Construction profit margin can be hard to predict. In 2013, contractors were seeing a commercial profit margin of 2.96% on average. However, in busy years like 2018, it tends to be higher than in slower years. About 54% of contractors expect to see their profits rise over the next year, and 29% of contractors expect to see a 7% increase in profits or higher. There are various ways to increase profit margins and avoid the many pitfalls some companies face when trying to improve their own profitability on projects and increasing their construction profit margin.
Profit Margin vs Markup
When estimators prepare a bid they look at the costs necessary to complete the project. They also need to look at the overhead and profit for the projects. The job costs are labor, materials, equipment costs, bonding, supplies, and every other cost associated with just the project. Overhead is what it costs to operate your business. These costs are rent, support staff, insurance, tools, bookkeeping, legal costs, owner’s salaries, debt payments, and other costs associated with operating the business. Profits are what remains once you subtract job costs and overhead. Profit is what allows a business to grow and make investments in itself. Profits also can act as an emergency fund. Without a construction profit margin, a business will be in trouble.
When estimators are preparing a bid they have to take into account the amount they need to add to ensure the company can cover overhead and make a profit. But to ensure the company will make a profit and overhead, estimators must know how much to add for overhead. The only way to ensure that they can add the appropriate markups and margins is to know how much overhead is. This is why businesses must know the exact cost of operating their business and what the estimated revenue should be. By dividing the two, estimators or the back office will know the percent they need to add to each project in order to cover overhead. They can also figure out the amount they have to add to the bid in order to have a construction profit margin. However, this is just part of the equation to increase construction profit margins here are a few tips and tricks to help.
Create Business Goals and Actionable Plans
One of the easiest ways to increase your profit margin is to have a set goal. It’s hard for an estimator or accountant to know what the business goal is if it hasn’t been set. Simply adding an additional 10% to estimates for profit and overhead isn’t going to cut it. In order to increase construction profit margins, the estimators must know what the goal margin is. By meeting to discuss yearly overhead costs, your business trends, and desired profit you can set business goals and plans on how to achieve it. If the goal revenue is 2 million dollars and overhead is $100,000, then an overhead of 5% should be added to every bid.
This also gives your management team the chance to create the necessary steps and contingency plans to meet these goals. If you know you have a busier season and might need to hire extra workers or rent equipment, you can plan this into your business goals and plans. This helps prevent unexpected costs and increase your construction profit margins.
The estimating process is an estimate of the total project cost. Many projects have unexpected costs and overages, but an accurate estimate can help increase construct profit margin. The estimating process is important in ensuring an accurate estimate. Some estimators are extraordinarily accurate due to experience and method; however, estimating software is always a good option to ensure a more accurate bid and track old data. That way you can pull from past knowledge when crafting your newest bid. It’s important for the estimator to also include risks in the estimate. Risk refers to the risk factors and their possible costs. This creates a padding around your bid which ensures that you are able to have a larger construction profit margin. Without the risk padding, if there are any unexpected costs it will come out of the profits and overhead which isn’t good for your business.
Communication is crucial to increasing your profit margin. Communication across different departments and levels throughout the company assure that everyone is on the same page. One way to assure this is to schedule regular contact with clients, managers, architects and other key figures in the project. The regular communication, through daily reports or field notes, lets everyone know what went on in the field that day. It helps prevent miscommunication and delays that occur from a lack of communication.
Regular communication is key, but so is saving communications. It’s important to ensure that everyone is on the same page and have a record of that. Great construction project management software has the ability to aid in communication. Whether it links to your email to send documents or allows you to send documents in the application. What it also does is keep a record of communication from the project. That way any and all communication about the project is kept in a project folder. This can save your business many headaches since it will be easy to find project communications and help increase your construction profit margin.
Training is an undervalued investment in your workforce that can actually help increase your profit margins. It offers your team the ability to increase their skills. Training will teach your employees the best practices for their field. This can help solidify good practices that reduce the amount of rework and reduce construction time. Training also helps employees feel heard and like there is a path for them. It shows your employees that you care about their future at your company. Ensuring that your employees know the best and fastest methods to achieve their work will improve your business practices and increase your construction profit margin.
Performance rewards can be a great way to increase motivation and increase your construction profit margin. Some companies when they come in under budget, use that money to provide bonuses to their employees. It incentivizes the employees to get projects in under budget and on time. The further under budget the project is the more money goes directly to the employees. Benefits like performance rewards encourage employees to complete work correctly the first time as well. If the project is finished under budget but it doesn’t pass inspection then they wouldn’t receive their bonuses. Better work keeps you on the path to make your construction profit margin goal.
An important part of business nowadays is data analysis. You can use data analysis to see where and why you’re not meeting your construction profit margin goals. Construction companies can use daily reports and field notes to help determine the progress of work compared to the schedule. They can also use the purchase orders and payroll information to better understand where estimates went wrong or why they were correct. Data analysis helps your business perform better and increases your construction profit margin.
In busy construction years like 2018, there tend to be greater profit margins all around. However, in busy years like this one, it’s easy to be unprepared for all the work which causes lower profits. Improving your profitability and instituting plans to ensure it will help your business regardless of the season.