5 Ways to make your Construction business more profitable

Whether you are a sole trader, or an established SME Ltd Company, running a construction company can be difficult, especially when you are trying to get to grips with the various different contracts and clients.

Whats even more difficult, is working out which jobs are profitable and which ones aren't.

Through having over 10 years experience working in different construction companies, we have come across various different ways in which contracts are run and managed, ranging from a well structured approach, to a much more ad hoc approach.

What business owners can also find difficult, we have noticed, is that when the accounts are produced at year end, they don't always reflect any internal reports which have been produced, often as they don't take into account other associated costs which we have when running a business.

Within this article, we have identified 5 simple steps which you can adopt today to improve the profitability in your company. They are straight forward to adopt, and they won't cost you hardly any money!

Cost Cost Cost

You more than likely have various different suppliers which you go to, as well as having a variety of different people accessing those accounts to purchase materials. Although there is some element of control over this, in some/most cases where there is no formal procedure for recording what is bought, then the references used are usually the person ordering the materials, or some other vague description put on the invoice.

Introducing a simple costing system, which can either be generated on excel, or even better, on an accounts package which your accountant can provide you with, allows you to control your spending.

We call these purchase order numbers, or order numbers for short. Effectively we generate a starting point for our order number system, i.e. 1000, and then work from there.

You are able to contact each of your suppliers and inform them of the change in practise, locking down the account, so only orders with a valid purchase order number can be placed on the system.

For the sake of an initial set of phone calls to suppliers, as well as handing over an order number when purchases are made, this will give you a massive increase in control over what you are buying and where.

Number your contracts

Something which you may already have in place, or you may not, but numbering your contracts is something which is vitally important. Instead of referring to a job as Mr and Mrs Smiths, or a property address, or street, we instead give it a contract number.

Again we can start this with perhaps a C, followed by a 3 digit number for example.

What this then gives you, is a sequential set of contract numbers for every job you have done.

What this also gives you, is on placing an order at a suppliers, we provide an order number, followed by asking which contract it is for. That way, we are not only getting control over what is being ordered and where from, but we are also allocating this to a particular contract number.

Again, this can be inputted on excel, or even better on accounting software such as Sage, Quickbooks or Xero which have this option built in.

Analyse the Raw Data

Now that we have got both order numbers and contract numbers, then we are able to analyse how the job is actually performing. By allocating every invoice to a contract, as well as having order numbers against each of them, then we are not only able to see whether the job is making money, but we are able to look at its efficiency.

By having individual order numbers every time you make a purchase, you can see how many times orders are placed. You could find that multiple orders are being placed during the course of the day for the same contract. You can imagine the time and money that is being wasted by the combination of multiple trips over the course of weeks and months.

Armed with the raw data, you are able to make further enquiries as to why this is happening, and remedy it if necessary.

Whats most important though, is looking at the bottom line figure at the end of the job, and how much it has made compared to what you have tendered. With this information you are able to effectively assess your performance, and look at ways in which you can improve.

If you don't know, then you will continue performing the same way.

Supplier Check Ins

For most small construction companies, there simply aren't the resources available to hire a full time buyer to the company. Whilst they often provide enough savings throughout the year to justify their sales in larger companies, this is not possible in a smaller firm due to the quantities of materials being ordered.

Whether you have a quantity surveyor that prices your contracts or not, you will often obtain quotes from suppliers for the contracts which you price, then, if successful, you then place the order with them and away you go.

One way in which companies can lose money, is by not checking their invoices regularly. What we have noticed in our experience, is that suppliers often have different branches nationwide, and sometimes your prices aren't always locked in to all branches.

Every couple of months, spending an hour or two checking your invoices against agreed rates is a good way of ensuring that you are being charged the agreed amounts for what you have ordered.

Not only this, but if you find yourself in the situation where you have additional items on a job which are extra's, then it is always worth picking up the phone to your suppliers and agreeing a rate first. Although this may sound time consuming and tedious, the small amounts you save each time you do this soon add up.

Retention Check Ins

One of the most least enjoyed parts of the construction industry is retention and the 3-5% which is taken off each valuation/invoice.

When we price a job, and we place a mark up of 10% for example, in real cash terms this is only 5%, due to the retention being taken off.

If you are a carrying out a number of commercial contracts, then this retention figure can build up quite substantially, causing issues with your cash flow.

It is vital then, that there is some element of control over this. By not having effective controls, then the knock on effects can be liquidity problems, delaying payments to suppliers and having to source materials from more expensive places, as well as the risk of the retention becoming a bad debt the longer we leave it.

A simple way in which you can record your retention is through an excel spreadsheet. On completion of the job, or practical completion, we can request for half of the retention to be released. This is the first step in claiming back the retention.

Often then, the final portion of the retention is released a year later. We can record this down on our excel sheet, or other system. What is also useful, is by placing a reminder on our calender's, whether this is in the office, a shared calendar on one drive/outlook, or even on our phones.

You would be surprised at how many companies have unclaimed retention's sat in clients banks waiting to be released.

Whilst some of these controls you may already have in place, the emphasis here is on how simple they are to implement, and how effective they can be, both in terms of controlling your company, but, more importantly, its profitability.

Whats also important to consider, is that if you have aspirations to grow your business, then having controls such as those listed above, allow you to grow the business, knowing that the controls you have put in place, are effective and can support your business growing.

The bigger your business grows, the harder it is to control everything that is going on. This is why having controls are so important, protecting your business and its profits.

Do you have any other controls which you think are important for construction companies?

Would you like to have a chat with us to see how we can help you grow your business? Give us a call today on 07393627041, or email us at [email protected]