Construction companies are in business to do two things: build things and make a profit. So why do so many excel at the first thing but struggle to be profitable? Part of the reason is the way bids are solicited and contracts are awarded. Many clients, especially in the public sector, award projects to the lowest bidder, with the contractor’s expertise, experience, and quality of work an afterthought.
That’s what contracts are for after all, right? That seems to be changing as we are seeing more Request for Proposals, Design-Build, and prequalification requests for bids. Rather than just focusing on price, these methods of solicitation focus more on a contractor’s qualifications and quality of work than the ability to build the project as cheap as possible.
Stiff competition and fewer opportunities during the last recession led many companies to lower bids to be competitive, surviving on razor-thin margins to maintain enough work to stay in business. Now that the economy and construction industry has recovered, labor shortages are forcing some contractors to offer higher wages to recruit and retain experienced workers.
The cost of building materials had been steadily increasing even before factoring in the effects of trade negotiations and tariffs. All of these can eat into a company’s profit margin, but for the most part, are outside of a company’s control. Instead of focusing on things you can’t control, take a look at ways your company can reduce costs, submit better bids, and deliver quality work.
Here are a few tips on how you can improve profit margins on your projects.
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How can you improve profit margins on your projects?
Construction companies are in business to do two things: build things and make a profit. So why do so many excel at the first thing but struggle to be profitable? Part of the reason is the way bids are solicited and contracts are awarded. Many clients, especially in the public sector, award projects to the lowest bidder, with the contractor’s expertise, experience, and quality of work an afterthought.
- That’s what contracts are for after all, right? That seems to be changing as we are seeing more Request for Proposals, Design-Build, and prequalification requests for bids.
- Rather than just focusing on price, these methods of solicitation focus more on a contractor’s qualifications and quality of work than the ability to build the project as cheap as possible.
Stiff competition and fewer opportunities during the last recession led many companies to lower bids to be competitive, surviving on razor-thin margins to maintain enough work to stay in business. Now that the economy and construction industry has recovered, labor shortages are forcing some contractors to offer higher wages to recruit and retain experienced workers.
The cost of building materials had been steadily increasing even before factoring in the effects of trade negotiations and tariffs. All of these can eat into a company’s profit margin, but for the most part, are outside of a company’s control. Instead of focusing on things you can’t control, take a look at ways your company can reduce costs, submit better bids, and deliver quality work.
Here are a few tips on how you can improve profit margins on your projects.
Why is it so hard to calculate profit margin in construction?
Be Visible & easily accessible virtually – Technology has taken everything online. And it only makes sense to use it to your advantage. Customers nowadays prefer to search and get as much information online as possible before buying a product or service. Hence, investing in a good virtual presence for a construction company seems like a lucrative option. Consider getting your own website and being present on social media. Respond to the queries you receive through these mediums promptly as it will only help broaden your customer base and strengthen your goodwill, creating additional revenue channels.
Final Thoughts The construction industry is a dynamic sector with frequently evolving demands, scope, and ever-evolving market needs. That makes it difficult to calculate a precise profit margin, especially for a newbie contractor. To make things a bit easier, you can rely on the seven strategies we explored in this blog to boost your revenue in the most practical manner.
How do you make enough profit on a construction project?
Business management – How much should you compensate for jobs? What should be your quote to win the construction contract with a sufficient profit margin? What are the core requirements of your business for hassle-free operations? Answers to all these questions lie in accurately calculating overhead and profit. The consistency of it opens up the door to streamlined, smoother business management.
Is 5% the new normal for construction margins?
Why the Average Profit Margin for the Construction Industry Is So Low – By now it’s a truism that the average profit margin for the construction industry is low. Those in the industry often joke that most construction firm owners won’t retire wealthy at 65. They’ll have to work until they die or are too old to work anymore.
- Indeed, contractors themselves worry they don’t make enough profit to support their own families and that they’ll die broke.
- But this truism–and the humor it gives rise to–obscure a deeper truth: construction profit margins aren’t just low, they’re actually eroding.
- That’s right.
- You read that correctly.
Low margins are actually getting even lower. Margin erosion–a gradual reduction in gross profits over time–has actually been increasing in the construction industry. According to the authors of a 2019 study in the Journal of Building Engineering, which examined over 2700 projects, although gross profit margins were rapidly increasing between 2008 and 2012 from 10% to almost 20%, they began to rapidly decline after 2014 and fell off a cliff three years ago. Gross Profit Margins for Construction Industry Over Time After adjusting for overhead, the study revealed that a whopping 44% of all projects suffered losses rather than achieved profit. That means that nearly 1 out of every 2 projects will result in loss.
- These numbers are staggering.
- And no builder is exempt from this dreaded effect.
- For evidence, witness the collapse of Carillion, one of the largest UK government contractors, due to 1.5 billion in debts caused by “underbidding for contracts that have had low margins since the financial crisis.” Carillion employed over 22 thousand workers, had multiple billion-dollar contracts and were responsible for the renovation of the Tate Modern Museum and British infrastructure projects.
Yet none of this fortified Carillion from shrinking margins due to underbidding–a chronic problem caused by poor estimation and increasing competition. According to McKinsey Consulting, which analyzed over 30 large public engineering and construction companies between 2005 and 2015, 85% had margins lower than 10%, 5-Year Failure Rate of Small Businesses by Sector In fact, according to an index updated annually by Small Business Trends, when it comes to long-term success, the construction industry fared worse than every other sector. Why? The likely culprit is the continued inability to achieve profitability due to ever-shrinking margins. 
Indeed, Leo Quinn, CEO of Balfour Beatty, has stated that although 5% of margins are unsustainable for contractors, two-thirds of builders surveyed in Building magazine claimed their margins were lower than 5%. In reality, construction margin benchmarks that hover between 1.5% and 2% are the new normal according to industry experts.
Yet if it’s possible, these famously low numbers are still belying just how bad the situation is. Mark Castile, the COO of MACE construction group, goes so far to suggest that if it is “nearly impossible for contractors to achieve margins beyond 2%,” real profit margin averages were as low as,38% in 2018, dropping from 1.7% in the previous year.
While not all sectors are equal, residential home builders in the U.S. who have seen their net profits rise are still not even close to enjoying double-digit profits. So, will the 40% operating margins other industries experience remain forever out of reach for the construction industry? Are small GCs and subcontractors doomed to work tirelessly only to achieve steadily diminishing returns? According to McKinsey, there is some good news to be found.
Contractors can still hope to achieve 20 or 30% operating margins, but only if they redesign their operations to focus on profitability rather than utilization. And this is really the heart of the matter. So many builders simply go into business and forget to monitor the numbers that can mean the difference between profitability and bankruptcy.
They don’t understand at a practical level how to run their construction business, like a business. In this post, we highlight the most important numbers general contractors and subcontractors should monitor to increase their average profit margins for the construction industry and start running their business like a business.
What is the average profit margin for a construction company?
What is the average profit margin for a construction company? According to the Construction Financial Management Association (www.cfma.org), the average pre-tax net profit for general contractors is between 1.4 and 2.4 percent and for subcontractors between 2.2 to 3.5 percent. Is the construction industry profitable?
Why are construction profit margins so low?
Why Are Construction Profit Margins Low. There are several economic reasons for low construction profit margins. The highly-fragmented nature of construction naturally spreads money thin; potential profit margins cover several different trades all working on the same project. There has also been historical cost and labor inflations, eating up
