If you own a construction company, you’re well aware of the opportunities to soar your business to new heights. There are more than enough jobs to go around, but contractors are often forced to limit the volume of bids placed due to financial constraints due to cash flow issues. More specifically, construction projects are lucrative, but finding a way to cover supply and labor costs until receiving compensation can be challenging.
For this reason, maximizing your profit margin as a construction business owner is paramount to ensure you can continue expanding your company.
What is Profit Margin?
In short, profit margin is a term used to describe the net proceeds after all costs have been covered on a construction project. This ratio is presented in percentage form and includes both indirect and direct costs. Indirect costs are also known as general and other administrative costs that aren’t project-specific but direct costs are directly linked to a particular job.
How Do You Calculate Commercial Construction Profit Margin?
Follow this step-by-step process to calculate the commercial construction profit margin on a job:
- Step 1: Calculate your total job costs and profit by subtracting your overhead from total revenue for a specific period.
- Step 2: Deduct your total job cost from the same period from the figure found in step one to compute your total profit.
- Step 3: Divide your total profit from step two from your total revenue to calculate the profit margin.
To illustrate, assume you complete a job that pays $150,000. Your overhead is $37,500, and your job costs are $75,000. Based on this example, here’s how you’d come up with your profit margin:
- Step 1: $150,000 (total revenue) – $37,500 (total overhead) = $112,500 (total job costs and profit)
- Step 2: $112,000 (total job costs and profit) – $75,000 (total job costs) = $37,000 (total profit)
- Step 3: $37,000 (total profit) / $150,000 (total revenue) = 24.6 percent (profit margin)
Ways to Increase Commercial Construction Profit Margin
1. Utilize Job Costing
Before submitting a bid for a new project, take a moment to calculate both job-specific costs and overhead costs. Be sure to include them in the bid, and add a slight cushion, as it’s not uncommon for cost estimates to change once construction projects are up and running.
2. Adjust Your Rates and Markup
Raise your rates before taking on new jobs to ensure you can cover costs and still turn a sizable profit. But if you wait until the client is already on board, adjusting your rates could be difficult for them to manage. And in some instances, they’ll look elsewhere for a contractor they can comfortably afford to finish the job.
3. Improve the Accuracy of Your Estimates
Examine past estimates to determine if they’ve been close to what you projected or significantly off target. If it’s the latter, identify the areas where you understated projected costs and be sure to include them in future comparable cost estimates moving forward.
4. Track and Monitor Expenses
Track and monitor expenses during construction jobs to stay on top of your expenditures while working on construction jobs. It’s easy to go over budget rather quickly when you’re not keeping up with what’s being spent. However, monitoring expenses can help you keep spending aligned with the projections and curb unnecessary expenditures.
5. Reduce Overhead Costs
Examine operating costs and identify areas where you can scale back—for example, using outdated equipment that could soon create hefty repairs costs should be swapped out for a more modern piece of equipment.
Another way to reduce overhead is by having the right insurance coverage amounts for your current jobs. You can confirm this by working with an agent to ensure the level of coverage and deductible meets your company’s specific needs while maximizing cost savings.
6. Manage Change Orders
If a customer requests an amendment to the contract or a change to the scope of work, take a step back to evaluate how your bottom line will be impacted before moving forward. That way, you’ll have the knowledge needed to adjust the cost estimate for the job properly.
7. Use Automated and Digital Tools
Consider investing in construction management software or other related technology to operate more efficiently. There are tools available that can provide accurate job estimates, inventory and tool tracking, project management, accounting functions, and much more.
8. Increase Cash Flow
There are instances where you could be working on a series of lucrative projects with high potential profit margins. But unfortunately, payment delays cause cash flow issues, and you’re forced to resort to costly funding sources to get over the hump.
But it doesn’t have to be this way. A better option would be an online platform that offers an alternative funding source for construction contractors.
