Practical Ways To Improve Construction Profit Margins

The reality is that being a construction contractor means operating in an extremely competitive field. As a contractor, you may not always have the resources—financial or otherwise—to compete with the best bids. Operating on thin profit margins is inherently risky, all you need is one thing to go wrong on a project, and there go your profits.

Luckily, there are some key strategies that you can use to improve your profit margins, both in terms of billing higher and reducing your expenditures. The most beneficial tips for increasing profits are:

• Track and reduce your labor costs
• Transfer costs directly to clients
• Be selective about your jobs
• Track your overhead and labor burden
• Outsource when needed
• Develop relationships with vendors and suppliers
• Frequently reassessed for inflation

Together, these strategies can keep you—and your construction profit margins—on track.

Track and Reduce Your Labor Costs

One of the most significant costs for contractors is labor. Tracking this expense and (hopefully) reducing it will greatly improve profit margins.

Labor costs can easily get out of control. Employees may over-report their time. A loss of control over employee scheduling can lead to unchecked overtime. And misallocating employee hours from client to client may give you the wrong impression of each project’s profitability.

By improving your labor tracking and having a construction profitable analysis, you can improve your labor costs. Use Workyard to track field employee locations via GPS, automatically assigning work hours to each site—and giving you a real-time overview of your labor costs.

Transfer Costs Directly to Clients

Another way to improve profit margins is by transferring costs to your clients. Materials, labor, mileage—all these things can be directly billed to and transferred to the client. The more costs you can transfer directly to the client, the less you need to worry about potential overruns (within reason).

Naturally, there are limitations; there will always be costs that your company needs to absorb. But if a project is likely to have volatile levels of either labor or materials, it’s better to either transfer those costs to the client or insert a reasonable amount into your budget.

Be Selective About Your Jobs

Not every job is going to be profitable. Some jobs may even lose money. As a contractor, you need to be selective about the jobs you take on. Make sure you are only taking on projects that you are confident you can complete within the budget and timeline you have set.

A critical element to this is being able to accurately bid on projects and analyze your potential costs. Unless you have the right data in front of you, such as historic labor and material costs, you may not be bidding correctly on jobs. Over time, this will lead to selecting jobs that may not be profitable.

Track Your Overhead and Labor Burden

Small contractors frequently ignore or miscalculate their overhead and labor burden costs. Indirect costs such as administrative staff, office space, equipment maintenance, and permitting can be difficult to track. But they’re necessary.

Labor burden, in particular, can have a significant impact on labor-intensive jobs. If you aren’t tracking your overhead, you don’t really know how much a project is costing you—and you may not be making as much as you think.

Outsource When Needed

There may be certain jobs or tasks that you simply do not have the resources to complete, or there may be jobs where it makes more sense financially to hire an outside contractor. If you’re a landscaper, it’s possible that you just don’t have the tools and resources to do drainage. Good news—you don’t have to. Outsourcing is a great way to cut costs and improve profit margins.

Develop Strong Relationships With Suppliers and Subcontractors

For contractors to be successful, it is important to establish strong relationships with suppliers and subcontractors. It’s not just about having access to the materials and labor you need at competitive prices (although that’s a bonus). One of the biggest issues with being a contractor is working with people who produce work late or not up to the client’s expectations. Foster relationships with suppliers and subcontractors you can trust. It will give you a long-term advantage.

Regularly Assess Costs and Inflation

Costs can increase over time due to inflation, so it’s necessary to periodically adjust prices accordingly. If you do not increase your prices, your profit margins will decrease. It’s easy to lose sight of this, especially when prices are increasing so dramatically (especially in terms of material and labor).

Ultimately, improving construction contractor profit margins requires time and planning. But with the proper construction planning and scheduling strategies in place, you can make sure that your books never hit the red.

FAQs

What Is the Average Profit Margin for a Contractor?

Gross margin can range from around 17% to 23%, but it really depends on the industry. Profit margins within the construction industry can be as lean as 4%. The smaller your business, the less you can tolerate lean profit margins; large companies can tolerate lean profit margins because they make it up in volume.

What Is the Standard Markup for Construction Contractors?

There is no standard markup for construction contractors, as each business will have different costs and expenses that they need to take into account when setting their prices. Calculate your overhead, labor burden, and other costs to determine what you need to charge to make a healthy profit.

How Do You Calculate Your Construction Profit Margin?

Add up all your expenses (both direct and indirect) and all your income. Your profit margin will be the difference between the two. It’s essential to have accurate numbers when calculating your construction profit margin, or you may run into cash flow problems.

Improve Your Construction Contractor Margins With Workyard

Workyard helps improve your construction contract margins by providing you with accurate labor data, mileage tracking, and site-by-site reporting. Reduce the amount that you spend on incorrectly reported hours and make sure you always know exactly how much a job is costing you.