Fri Feb 5, 2021 | | Cash Management, Construction, Financial Reporting

Increase Your Commercial Construction Profit Margin Now

commercial construction profit margin

If you are in the commercial construction industry, you have probably struggled with profit margins in the past. Unfortunately, profit margin depends on several factors outside of your control, and some years tend to be more profitable than others.

It is common for many construction companies to not know whether they made a profit until a job is completed.  In construction, there is an old adage that states if we want to know how the business is operating, we will tell you when the jobs are completed. However, even though some aspects of a construction company’s profit are uncontrollable, contractors can take several steps to maximize profit margins, reduce overall costs and have an understanding of their numbers before a just is complete, and especially prior to the end of a quarter and end of a year.

Read ahead to learn seven straightforward ways to increase your commercial construction profit margin.

Seven Ways to Increase Commercial Construction Profit Margins

Create Tangible Business Goals

Construction companies often struggle with profit because they do not set goals for their bottom line. Creating tangible, detailed business goals that all of your employees and accountants are aware of will encourage you to take measures to meet those objectives and achieve your desired gross profit.

If you set annual goals for your business, you can evaluate your progress each month to determine if you are on track. Setting yearly goals gives you a better idea of what your payback should look like each month, allowing you to make changes throughout the goal period.

If you regularly fall short of your net profit goal, you should examine how you can minimize business costs to increase your profit.  You also should examine your estimating process to ensure the work you are bidding and winning is profitable. 

Track Overhead Expenses

“Overhead” includes all of the expenses that go into running your construction company, including but not limited to salaries, support staff, legal fees, and tools. Many construction businesses fail to incorporate these extraneous expenses into their overall job costs.

One essential way to increase net profit margins is to factor overhead into your job prices. If you have a dozen support employees whose salaries you have to pay, add these numbers into your overall expenses. You should closely examine where your funding goes and keep detailed records of every expense.

Make sure to calculate overhead costs each month and alter your bid to reflect these expenses. Doing so will prevent your margin from decreasing as your overhead fluctuates.

Overhead can be looked at as an investment, and you should be able to see a return on this investment each year. If not, you may need to work to decrease these extraneous charges.

Develop Accurate Job Cost Estimates

One major pitfall of construction profitability is underestimating each job’s overall cost. You need to factor material costs, equipment costs, labor costs, and additional supplies into your estimating process to determine an accurate overall cost. Many businesses fall short in the estimating process. This can lead to catastrophic results for construction companies.

Additionally, most jobs produce unexpected problems that drive up the price. If you are not incorporating risk into your project estimators, you will probably come up short and have to take funds out of your profit to cover the difference.

If you think your company may be underestimating your total expenses, look at the construction profit margin numbers of your past projects. Be sure to factor markup, risk, and material cost into each bid to maximize payback.

Automate Your Bid Processes and Workflows

Passing down the business from generation to generation is common in the construction industry, and many companies have had the same construction business owner for several decades. While there are advantages to keeping your business in the family, many businesses struggle to keep up with modern technology and new, innovative practices.

If your business does not utilize automated bidding, estimating, and project management processes, your employees are probably costing you extra time and money. Automatic estimators can help you produce detailed, accurate bids that factor risk into the equation. Utilizing automated software allows your employees to focus on more pressing tasks, which also optimizes their time.

Many modern construction businesses also automate their workflows with digital software. Companies that are still using pencil and paper to manage processes often waste time, can be more disorganized, and are typically unaware of how their business is performing. Switching to automated processes frees up your employees’ time, improves accuracy and consistency, and saves you money.

Hire a CFO or Financial Controller to Help with Finances

If you are like many business owners, you know more about the construction industry than you do about finances and accounting. One reason contractors struggle with profit margin is that they do not have experience with the generally accepted accounting principles (GAAP) and handling percentage of completion and revenue recognition rules and regulations.

Hiring a CFO or financial controller is an easy way to get a handle on your net profit margin. These firms can help you keep track of your receivables, contracts, cash, and most importantly can provide financial advice on how your business and jobs are performing so that you can increase your profits.

An outsourced or part-time CFO firm can also help you stay on top of every expense that goes into your construction projects, allowing you to maximize your gross profit margin and can help you with strategic business growth and planning. Your firm will keep your accounting numbers clear and organized so that you can look back on past projects to glean the information you need to know for future bids. Most importantly, the best CFO firms will also provide projections and a work in process schedule (WIP) to help project and analyze how your current jobs are performing and estimate how these jobs will ultimately perform by the end of the project.

All in all, whether you are a subcontractor, general contractor, a small or a large construction company, hiring a CFO can make your life much more manageable, save you time and money, and increase your overall profits.

Train Your Employees Regularly

If your employees are undertrained, it may take them twice the amount of time to complete a project, costing you additional money and resources. Training your employees regularly is vital to the success of your business, as you can teach your workers to improve efficiency.  

Offering frequent training is also an effective way to show employees that you care and want to invest in their careers, which can aid in reducing employee turnover.

Reward Employee Performance

Along with training your employees regularly, you should also incorporate performance rewards into your company’s monthly activity. You might offer bonuses during the months that your company’s projects come in under budget, encouraging employees to work more efficiently and reduce cost.

We Can Help Increase Your Commercial Construction Profit Margin

Whether your commercial construction company is struggling to stay afloat, or your company is doing well, getting assistance from financial experts can help improve your cash position, reduce costs, and improve the bottom line of your business. 

CFO Strategies offers a team of chief financial officers, financial controllers, and accountants that specialize in construction companies. They help construction companies increase profit margins and understand how their jobs are performing. They will provide financial reporting, including work in process schedules, and most importantly help businesses reduce their stress and feel more confident about the overall success of their company.  

CFO Strategies also provides a range of other services to construction companies, including cash management, earnings forecasting, and strategic planning, to allow you to focus on what you know best: construction. Contact us today to learn more.