The construction sector does not have differences from other business niches. The top priority of entrepreneurs who perform in the building markets is high-profit margins. There are many factors that have a direct impact on the revenues of construction companies. Among them are accurate estimating, costing, and perfect bidding.
Almost everything takes place in the early stage of building or in the so-called pre-construction phase. That is why today’s contractors are interested in various optimizations that bring awesome results. For example, construction pricing software matters for your risk-free financial reports and budget planning at the very beginning.
The same story is with bidding and costing in general. You should take into account all the aspects in the context of supply, labor, equipment, and other costs to perform as a reliable contractor for clients of any size (including giant corporations and small businesses that require time-to-time building orders). Software for bidding estimating makes a difference when it comes to the quality and attractiveness of your bid to your potential audience and tender arrangers.
But what is a pure profit margin in construction? All the peculiarities of this matter together with the right calculations of your expected profitability rates should be taken into consideration every time you are ready for new projects. Let’s take a closer look at the most helpful tips, hacks, and recommendations concerning construction profit margins.
What Are Profit Margins in Construction and How to Calculate Them If You Are a Contractor?
The best way to calculate your profit margins is to take your net income and divide this amount by sales. It is possible to use the pre-tax income of your company. The profit margin will be calculated this way well too. But it is worth noting that you should focus your attention on excluding discrepancies from all the planned operations if the pre-tax income is the first sum you use for dividing it by sales.
This way you will not be dependent on the tax rates that are usually ever-changing from one project to another. The hot-topic recommendation is to start with your net income to get more precise calculations and see your real profit margin without hidden pitfalls.
Other Helpful Tips for Contractors in the Context of Profit Margins
It is recommended to divide all your potential profit margins into categories to understand what processes are profitable and which ones are far from revenue-generating. For example, your labor costs can be too high, so the construction phase with other spending items to pay like rentals, and purchase of materials and equipment can be very pricey for your company.
Pick sides with sub-categories to be sure that each detail is covered. Note that if you are a reputable contractor, your large-size company can have extra funds and capital together with sound purchasing influence. The same story is about machinery costs that you can cut down through zero rentals and the only expenditures for equipment maintenance.
Among other helpful hacks and tips are:
- Use financial indicators for the overall profit margin modeling. Start with the exploration of your annual report research. Here you will find some historical data together with core statistics and skeletons of your further strategies to cut costs and increase your profits.
- Keep track of trends, innovations, and profit rates in various construction directions. You will be surprised but the highest profit margins were generated by building companies that make a specialty out of land subdivision orders (8.7% pretax profit rates) and industrial construction (3.8%).
- Automate your financial reporting including all the stages of estimating and costing. This way you will not lose spending items and will get ready with true profit margins to expect. Even if you do not perform in the market with land subdivisions with the highest margins, you will increase your profitability through perfect cost management due to digitization and modern software.
Remember that it is difficult to predict high-profit margins only through return-on-equity rates. ROEs can vary from one building direction to another. Just pay attention to numerous factors for a more comprehensive analysis and conclusions about your project’s profitability.
It is more likely to become a rule that larger companies always pretend to have higher profit margins. Your capital is growing, so you can purchase more materials at the bulk price and take part in other loyalty programs to cut your costs.
Do not forget to pay attention to administrative expenses while calculating your profits. For your convenience, always convert the result of your net income to sales proportion into a percentage. This way you will be able to compare the first margins you expected to have and the final ones after your estimators’, managers’, and analytics’ work.
