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Construction profit margin: 5 ways to improve profitability and grow your margin

Picture of a building in construction in NJ viewed from Manhattan | Profit margin | Knowify

What’s your current average profit margin on a job? What would you like your average profit margin to be in the future? What kinds of jobs tend to have the best margin for you? 

Far too often, contractors have the goal of being profitable, but don’t know where to start to move the needle in the right direction. Here are 5 simple but effective ways you can start to reduce construction costs and increase profit margin in your construction business today.

What’s the average profit margin in construction?

The average profit margin in the construction industry is approximately 4.2%; however it is tough to label any percentage as an industry standard as profit margins will vary significantly depending on the type of trade performing the work, project type, equipment used, technical work required, and company size. In addition, all business owners are impacted by market conditions.

Nevertheless, the construction industry operates on tight margins compared to other industries. This is why analyzing costs, evaluating efficiency, and setting goals is crucial for specialty contractors. The good news is that by using effective strategies with the right know-how, general contractors and subcontractors can start to steadily improve profit margins.

How to calculate profit margin

There is not a single method for calculating profit margin, as calculating profits can come in many different forms that tell different stories. For example, there is net profit margin, gross profit margin, and operating profit margin. Below we will look at the most common method for calculating net-profit margin. 

Net Profit Margin = (Revenue – Expenses) / Revenue

First, you must determine total revenue for a certain period of time; we recommend using month-long or year-long intervals. Total revenue will include all income earned through services and jobs performed for the given time period. 

Total Revenue = (Total Revenue from Contracts + Total Revenue from Additional Services) – (Cost of Materials + Cost of Labor + Cost of Equipment + Cost of Sub Fees + Additional Costs)

Next, determine all associated direct costs that were incurred for the same time period. This will include labor, materials, equipment, subcontractor fees, and any miscellaneous costs. 

From here, subtract total costs from total revenue to arrive at a number that will reflect net income.

Net Income = Total Revenue – Total Costs 

Finally, divide net income by total revenue to arrive at a net-profit margin. 

Net Profit Margin = Net Income / Total Revenue 

You will now have a number that will reflect the profit margin across all jobs for the given time period. This number can be used for a number of business analysis purposes. You should look to compare this number to a previous period to assess performance and identify trends. 

One aspect not mentioned yet is the impact of overhead on profitability. Although we recommend leaving out overhead costs in your profit & loss statements, overhead costs still need to be tracked and accounted for. It doesn’t matter how you track or calculate indirect and direct overhead costs (every company will track it a bit differently) as long as they are recorded and accessible. With that said, an industry-experienced accountant will be able to help you set an appropriate margin target for your jobs that excludes overhead for a more accurate depiction of job-level profitability. 

How to increase profitability in construction

There is no one size fits all solution for hitting profit goals. The specific needs of your business will dictate where and how you can improve profitability. This is because it could be related to poor time management, inaccurate estimates/budgets, lack of quality data acquisition, poor cash flow management, labor inefficiencies, or a combination of all these factors. The first step in solving the profitability problem will be assessing where you currently stand. Where do you have these inefficiencies, and where are the gaps in projects that are affecting your bottom-line? 

To answer these questions you need two things: 1.) a consistent job costing system, and 2.) a management system that allows you to store, access, review, and keep track of the daily operations of your business. Using a construction management software can go a long way here. Management software, gives contractors a centralized platform to access all project and financial data. Information is power, and having it all secured in a system that allows you to easily track, analyze, and report job costs is an indispensable part of growing a profitable business, as it allows contractors to improve their job costing capabilities; in turn, this fosters better estimating and better anticipation of potential overruns. Meaning contractors can plan for and mitigate overspending.

This will provide a solid foundation in which to improve profitability. To take things even further here are five effective ways to reduce cost and boost your contractor profit margin.  

Utilize a detailed budget

Detailed construction budgeting is a surefire way to help you control costs and increase your overall construction profit margin. Your budget can go well beyond what resources you need to simply get the job done; if reviewed during and after completion of each project phase, your budget can also be the greatest source of insight into how to increase your construction profit margin. For example, did you underestimate your materials budget? If it was a matter of quantity, you may need to revise your estimating sheets. If the prices were higher than expected, then you might consider using an RFQ process with vendors to find the best prices for materials and lock them in ahead of time. In either case, you’re using real-world data to make profit-enhancing decisions. 

Detailed construction budgeting should factor in things like:

  • Crew efficiency and downtime (eg, driving time to get to a distant jobsite)
  • Fully burdened labor costs
  • Detailed material quantities and costs
  • Labor, material, and subcontractor markups

Planning out these aspects in advance as well as reviewing progress throughout the job via job profitability reports allow budget-consuming expenses, habits, or mistakes to be identified and adjusted for the future. One Knowify customer noted of the software’s job costing and project management features:

“We’ve increased our profit substantially, mainly due to material cost and things of that nature. I can look and see the analytics and see my actual profit percentage for a particular job. It’s helped us to decrease our materials cost because we have better control over loss prevention of the materials.”

Efficiently communicate

Communication goes beyond face-to-face interactions and emails. It’s ensuring that everyone on the team knows where to find critical information and are on the same page regarding projects, deadlines, budgets, and goals. One business productivity report found that:

  • 41% of respondents found it difficult to get a detailed overview of project statuses at any given time.
  • 62% have experienced losing a critical file on a personal hard drive, within their inbox, or another location that isn’t accessible to others.
  • 70% of customers have chosen to stop working with companies they felt were disorganized, moving on to one of their competitors.

Better communication ensures that issues and problems are addressed sooner, when there still may be a chance to address them. In order to ensure your profitability doesn’t take a hit, empower your employees – both in the field and in the office – to follow a clear communication pattern and provide accessible updates regarding projects. This can be achieved when an all-in-one business solution is utilized to allow for centralized and streamlined project statuses, visibility, and reporting.

Emphasize safety

Safety is critical when completing construction projects, and injury can occur to anyone at any time while on the clock. Taking the time to ensure proper procedures and precautions are being followed on the construction job site, alongside regular safety briefings and training, can pay off big time when it comes to cost control in construction.

Aside from the direct benefit of your employees’ safety, “OSHA estimates that construction companies save $4 to $6 for every $1 invested in safety programs.” Not to mention the money saved in loss of manpower or delays associated with illness or injury.

Get to know your crews’ strengths

No two workers are created equal. You may discover that your crews are much more efficient with certain kinds of work, and that focusing on that kind of work can lead to an increased construction profit margin for your business. Playing to your workers’ strengths can have other benefits, too: 73% of employees who are utilized for their strongest skills on the job are more likely to be engaged at work. And this engagement translates into profit, with companies boasting high levels of employee engagement seeing a 21% increase in their profits.

Take the time to understand each of your employees’ strengths, shortcomings, and backgrounds. By doing so, you’ll be able to create crews that round each other out and can work autonomously to get the job done well and efficiently. Alternatively, if your crews are already established, pay attention to the projects they are placed on and phase work they complete. Is one crew more efficient than another at a certain phase or type of work? By noticing trends and understanding gaps in your crews’ productivity, you can take steps towards remedying causes of project delays and mishaps.

Invest in your team

One of the most common problems contracting firms are facing these days is employee retention. It’s a competitive industry, and highly skilled, high-performing workers can be hard to come by. Losing a great person to a competitor can be a big setback and hit to your bottom line – not only do you now have to go find a replacement, but you’ll inevitably have to spend time training the new person to perform work to your standards. 

According to LinkedIn Learning, “94% of employees say they would stay at a company longer if it invested in their learning and development.” Training, goal planning, and performance reviews can potentially reduce employee turnover, improve productivity, and increase workplace morale. Do you have any high-performing workers who have been with you a while and really know your business? Do they have leadership aspirations? Maybe you should introduce them to the estimating or project management sides of what you do. Even if they’re not going to become an estimator or project manager, giving them the opportunity to see more of the upper-level business functions will make them feel like you’re valuing their professional development and investing in them as professionals.  

Conclusion: the next step for increasing your construction profit margin

With Knowify, contractors and construction companies receive the actionable insights and tools they need to reliably increase their profit margins and control costs. Thanks to features like job costing, project management, billing and invoicing, and job profitability reports, Knowify users take control of their profitability and understand how they can remain successful. To find out more about how Knowify users take on an average of 20% more projects in their first year, request a demo or start your free trial now – no credit card required!