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Is a Construction Business Profitable?

26 July 2023 by Shweta Jhajharia

Construction companies sound like they should be fairly simple right? Bid on construction projects, build said projects, and make a profit. Unfortunately business growth for construction companies hasn’t been that simple for the construction industry in recent years.

From a boom period experienced in the early 2010’s, profit margins have been diminishing for the past 5 or 6 years. A study in the Journal of Building Engineering in 2019 found, at that point, a huge 44% of all construction projects would actually result in a loss.

The manner bids are requested and contracts are given out is one of the causes. 

The knowledge, experience, and calibre of the contractor’s work are sometimes overlooked by clients, especially in the public sector, who frequently give projects to the lowest bidder. After all, that’s what contracts are for, right?

Instead of concentrating on problems you can’t control, consider how your construction company can cut costs, present better bids, and do excellent work. 

So—is a construction business profitable? We have some construction related business ideas to answer this question.

Can a construction business be profitable?

The construction sector is undoubtedly profitable, but it is also true that it can be challenging to forecast the profit margin in such a sizable sector. Industry experts believe that the average margins within construction are probably between 1.5% & 2%, a far cry from the 40% operating margins experienced within other industries. 

But the good news is, according to the experts, that contractors could well achieve an average profit margin of 20-30% if they redesign their operations to focus more on profitability.

Construction businesses often consider a wide range of expenditures, including the project’s overhead and profit, while preparing their offer for contracts. They must also account for labour, supplies, equipment, bonding, and any other expenses related to carrying out the project.

One expense to be aware of while operating a construction firm is overhead costs. These expenses include rent, office supplies, insurance, tools, bookkeeping, legal fees, owner salaries, debt payments, and other expenses related to running the company.

What’s left over after deducting job costs and your job overhead is profit. The compensation for the building company is this profit. It is what enables the company to develop and invest in itself. A building company will run into difficulty if it doesn’t make an adequate sum of money.

6 of the best construction business ideas to boost profits

Here are some business strategies formulated by our business growth experts on how to increase your projects’ profit margins.

Realistic estimates

You anticipate winning when you bid on a project. You anticipate making a profit after you are given the job after winning the bid. You need to be as exact and practical with your estimates as you can be for it to occur. You won’t become profitable no matter how well you manage your projects or how much you increase production if your estimations are too low.

This is why it’s crucial to have a precise accounting of your construction project costs and overhead. It enables your estimators to apply the appropriate markups in order to meet your profit margin objectives. 

A good bid is founded on factual information, not conjecture. Make sure to take into account the risk factors associated with each project and include a contingency line in your proposal that can absorb extra expenses if the risk materialises.

Productivity

On a jobsite, maximising productivity entails working quickly and effectively to keep expenses under control and meet deadlines. Construction companies are constantly striving to increase productivity since projects that are finished on time and under budget typically have larger profit margins.

Planning and scheduling your work carefully is necessary to increase productivity. To ensure that work is carried out in a manner that maximises the productivity of all project participants, general contractors and trade contractors must cooperate.

Keep in mind that productivity encompasses more factors than just your employees’ efficiency (or lack thereof). Supply chain management, shoddy scheduling, mishaps, and needless rework are additional elements that might have a detrimental effect on production and, consequently, profitability.

Set goals

Setting profit margin objectives is necessary if you want to become a profitable business. Where does your business plan to be in a year? 5-year period? A decade? Perhaps you want to expand into new areas and countries or build your company. Perhaps you wish to take on more significant projects or move from domestic and commercial buildings to private ventures.

Establishing attainable revenue and profitability targets can help you achieve where you want to be, and knowing your long-term company plans will help you do that.

 In order to help you achieve your goals and become a successful construction business, it will also influence the kinds of jobs you embark on and direct your estimators regarding the markup proportion they should aim for on each project.

Keep track of costs

Profitability can be increased through effective project management. Keep your expenditures low and complete the project by the stated completion date if you want to meet your profit target. 

Keep track of the costs associated with any modification orders so that you can correctly bill for them and raise your profit margin. Never work on a project further until a fee has been decided upon and the client has given their approval.

A skilled project manager should be able to recognise the warning signs of a potential problem and take the appropriate action to keep the project on track and under budget. They must be on the lookout for approaches to increase output and decrease waste.

Keep thorough records of all the charges associated with your work. It’s not necessary to record every screw and nail from your construction equipment, but you will need to be able to compare the prices of the job to the budget so you can perform a full study after it is finished.

Always analyse the end result

There is still work to be done when a project is finished. Gather your team and perform a retrospective analysis to determine how closely your predicted profit matched your actual profit. 

Did your estimated building materials costs match the estimates? Was overhead correctly taken into consideration in your proposal? Did problems on the jobsite force you to go over budget or lose productivity?

Examine your projections and real expenditures carefully. Note any charges that differed from what you anticipated in order to improve your performance in the future. When you begin planning and organising your next project, if productivity is a problem, take into account giving your staff more training and looking for ways to cut downtime.

Looking for a business growth consultant for your construction business?

We hope these construction business ideas have given you a positive outlook on the future of your construction company. The industry in the past few years may have looked bleak but we can assure you the future is definitely brighter, even more so when you hire an expert construction business growth consultant.

Our knowledgeable business growth experts can assist you in developing your business plan and offer guidance on the best growth techniques for your particular requirements, and of course advise on the best ways for you to be making a profit!

With a range of business consultancy services all aimed at helping your business grow, you can rest assured that you’ll be in good hands with Growth Idea.

So why not get in touch and see what we can do for you? Successful businesses start here!

Grab your free business strategy review today to find out how we can help you reach your goals.

Is construction business profitable FAQs

What is a typical profit for a construction project?

The recommended range for the profit margin is 8% to 15%. Profits do not always equate to a greater contractor wage. The contractor’s wage is accounted for the overhead costs. Any earnings should be put back into the company.

How do you calculate construction profit?

Divide your project’s total estimate by the total estimate minus the overhead, material, and labour costs to determine your profit margin. This is the portion of the project’s overall budget that the profit makes up.

Is margin the same as profit in construction?

The margin, which is expressed as a percentage, shows how much of each pound in sales goes towards business profits and how much goes into general expenses. There is no practical need for markup in building; it is a percentage value that illustrates the relationship between your sales price and your costs.

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Shweta Jhajharia

Shweta Jhajharia is one of the leading authorities on Business Value Building and the creator of the unique 6M Model. Shweta is widely respected as an impactful, intelligent and results orientated professional who helps business leaders unleash their potential to reach meaningful, higher objectives. This realisation of potential and maximisation... Read more
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