The construction business has its ups and downs, and between private work and government contracts, there will be no shortage of construction work in the coming years. Making real money can be a challenge, though, so it helps to understand what a commercial construction profit margin is. In general, profit is the money that remains after all the overhead and operating costs are subtracted from all the income proceeds. Profit margin is a ratio that represents this, shown in percentages.
Commercial Construction Profit Margins
The writers at Conexpo Con/Agg post that commercial construction is a high-risk industry with low profit margins and claim that the average profit margin (before tax) was around 6 percent for electrical and highway contractors and just 4 percent for general contractors. The main reasons for the low numbers are frequent change orders, job site accidents and the inherent risk for accidents.
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As a comparison, the writers at Next Insurance share residential construction industry profit margins that are considerably higher. The gross margin in this segment of construction businesses averaged between 17.08 and 23.53 percent in 2020, but they point out that that margins can be even higher for new home construction, specialty work and remodeling. That's quite a jump up from 4 to 6 percent.
Calculating Commercial Construction Profit Margins
Jobber Academy shares the methodology for calculating commercial construction profit margins. The first step is to estimate the overhead, or the expected indirect costs of running the business in a year. This can be broken down into fixed, variable and semi-variable costs. Fixed includes things that remain the same, like annual salaries and rent; variable costs could be gas and equipment maintenance. Semi-variable costs are monthly but fluctuate, like construction permits or hourly wages.
To determine a profit margin, add up the overhead costs for one month, and then determine your sales revenue for the same time period. Divide the overhead total number by the sales revenue number; this will give you a decimal number. Multiply that by 100, and you will see what the profit margin percentage was for that month.
Increasing Commercial Construction Profit Margins
The first way to improve profit margins is to hire the best people in the business. Commercial construction companies that are devoted to finding, hiring and retaining quality employees have a much better chance of success. This also holds true for choosing clients; although work can be hard to find, being more selective instead of becoming the lowest bidder is usually the way to go. Quality clients pay on time, have better reputations and are more likely to have shared values. It's a hard-learned truth that the best clients, who don't micromanage and who trust your professional capabilities, tend to be those who also pay more and pay on time.
Eliminating waste also saves money. Old equipment should be replaced when it stops performing well, and steps should be taken to save on operating costs as long as it is done so safely. Successful commercial construction companies also invest in new technologies that track work better, protect against risk and provide key performance indicators.
Employees also have to be held accountable for their work, by using effective systems for estimating jobs, accounting, project management, tool tracking and inventory. This also cuts back on waste. Conexpo Con/Agg also stresses the importance of field reporting, which includes having safety managers who can control risk factors like jobsite accidents and illnesses. It is also a good idea to hire an accountant who can help company leaders understand the financial end of the business.
Consider also: What Is Retention in Construction?