Managing Margins for Construction Business.

It’s quite known that the average profit margin in the construction industry is low. There is a running joke that nobody in the construction industry would retire wealthy at 65.

If this truth was hard to digest, you’d be more shocked to know that the profit margins aren’t just low, they are continuously eroding. The industry has been suffering from ‘Margin Erosion’ since 2019.

Having said that, how do you increase margins for the construction business? We’ve broken it down for you.

1) Job Costs - Job costs, if not managed properly, have the potential to reduce the success margin, causing massive problems for smaller contractors and subcontractors who work on small financial buffers.

While there are many factors such as frequent change orders that contribute to projects going over budget, the biggest issue of all is the failure to develop an accurate cost estimate. Since a lot of builders don’t know the exact labour rates and equipment costs, they end up creating inaccurate estimates, leading to poor profit margins. So, if you want your project to be financially successful, make sure you start off with an accurate estimate sheet.

2) Sales - Having sales goals is one of the most important aspects of growing a business financially. Surprisingly, not many contractors set sales goals or track them. Result? They don’t get the desired profit margins. Hence, it’s imperative to know your sales volumes and targets to reach your net profit goals. Once you have the desired number in place, find out the projects, make an estimate, and once you have the gross profit goal, divide it by the gross profit percentage to identify your sales volume target.

3) Overhead - You must be wondering: why does overhead cost matter? The answer is: Overhead cost is a critical number to identify how to charge for a service in order to make a decent profit. Whether your firm wins a bid or none – operates at a profit or loss – it’s a given that your firm will have to pay overhead regularly. So, be mindful of this when you’re going about any project to make sure your project margins are not hampered.

4)?Avoid the commoditization trap - Contrary to the belief, price is only the only way to win business. Instead, focus on making your business different and special, and bid for projects that match your offerings. It’s better to choose higher margins over more work.

5) Exploit new technologies - New technologies give an opportunity for companies to be more efficient by taking time-consuming and error-prone manual work out of the business wherever possible. So, make use of technology and focus on things that can take your business to greater heights.

6) Supply- Chain Issues - Construction materials costs have increased between 20 - 60 % Percent in the last 2 years, reaching 40-year high due to several Supply chain, raw materials and logistics reasons. The key players in the Global Construction chemicals market are adopting different key business strategies such as acquisition, expansion, and product launch to withstand in the global competitive market.

Truth be told, it’s not easy to make substantial profit margins on construction projects, however, with the right approach, projects can be made lucrative and beneficial for everyone.