The main goals of construction companies are to build things and make money. Why do many people succeed initially but struggle to make a profit later on?
If you give jobs to the contractor with the lowest bid without thinking about the contractor’s expertise, experience, or quality of work. After all, that’s why contracts exist, right?
This seems to be changing because there are more requests for Proposals, Design-Build, and Prequalification Requests for Bids. Instead of just focusing on price, these ways of getting bids look at a contractor’s qualifications and the quality of their work more than how cheaply they can build the job.
Instead of worrying about things you can’t change, think about how your company can cut costs, make better deals, and do better work. Here are a few things you can do to make your projects more profitable.
Boost Productivity
Productivity is the ratio of output to input. In construction, man-hours are the input, and cubic yards of dirt dug up and square feet of roofing placed are the outputs. Maximum productivity on the job site is needed to cut costs and meet goals. Construction companies try to improve their productivity because jobs that come in under budget and on time make them more money. Planning and making a work schedule help people get more done.
General contractors and trade contractors must work together to get work done in a way that makes sense and gets the most out of the job. Remember that how well workers do their jobs is only one part of output. Managing the supply chain, making schedules, having accidents, and having to do extra work can also hurt production and profits.
Understand the Expenses Involved
Profitability depends on knowing how much a job costs. This includes both job and extra costs. You can’t figure out how profitable a job is without knowing how much it costs.
All costs for a job are direct. Costs include labor, materials, supplies, renting tools, bonding fees, fuel, licenses, and so on. You pay for things on the job site. Keep track of job costs, especially if you work in different states, since costs can change by location and type of project. Paying prevailing wages or having variable material prices could change the costs of a job and make it less profitable. Overhead costs are business costs. Overhead costs include things like the salaries of support staff, tools, insurance, utilities, office rent or mortgage, equipment, debt payments, legal fees, IT, etc. To make better bids, your estimators need to do accurate estimates of overhead costs.
Estimation of Profit
When you win a deal and get the contract, you expect to make money. That needs estimates that are fair and accurate. If your figures are too low, you won’t make money no matter how well you run your projects or how productive you become. It’s important to keep track of job prices and expenses. It lets estimators add markups so they can meet their goals for profit margin. A good deal is based on facts, not on a hunch. Think about the risks of the job and include a line in your bid to cover any extra costs. To avoid a race to the bottom, always bid low. It’s never a good idea to pay less than others to win. Your choice about whether to bid or not should be based on how profitable the project is, how risky it is, and how capable your company is.
Profitability Goals
Set goals for your profit margin to help your company make more money. The goal of your company for the coming year? Five years? How long? You might want to get bigger or move into new markets. You might want to work on bigger projects or switch from the public sector to the private sector.
When you know your business’s long-term goals, you can set realistic income and profit goals to get there. It will also tell your estimators how much of a markup to add and how to group projects so you can reach your goals.
Make Money And Keep an Eye on Expenses
If you want to make the profit you want on a project, you have to keep costs low and finish the project by the date you planned. Make sure to keep track of the prices of any change orders so they can be billed correctly and your profit margin can go up. Don’t do more work on a job until you’ve agreed on a price and the client has given you the go-ahead.
Don’t let people stand around with nothing to do. Keep track of your materials and set up the job site so that your workers can be as busy as possible. To avoid crashes and injuries, each worker should get the right safety training and be given the right personal protective equipment. A construction place that is safe is both more productive and more profitable.
Make sure you keep good records of all the money you spend on your job. You don’t have to keep track of every screw and nail, but you will need to be able to compare your real job costs to what was budgeted so you can do a thorough analysis when the job is done.
Examine Results
Compare forecasts to actual costs. Note any costs you didn’t expect so you can do better next time. If productivity was a problem, think about educating your employees and cutting down on downtime when planning your next project. There are gains made in construction. That’s not how the business world works. Too many things can stop a business from making money. It takes hard work to go from barely making it on little profit margins to making enough money to grow and reach your goals.
Conclusion
Construction is a dynamic field where needs, scope, and market needs change all the time. This makes it hard to figure out an exact profit margin, especially for a contractor who is just starting out. To make things a little easier, you can use the six ways we talked about in this blog to increase your income in the most useful way.
