Construction companies are in business to build things and make a profit. So why do so many excel at the first thing but struggle to be profitable you may ask?
One major reason behind this is the way the industry works. A lot of business leaders focus on bidding on contracts and winning jobs rather than making a profit in order to keep up. Many clients, especially in the public sector, tend to award contracts to the lowest bidder, making it a challenge for contractors to maintain profitability.
On top of this are the frequent payment delays and instances of nonpayment that contractors contend with. And with the scope and complexity of construction projects, companies burdened with profitability problems and payment issues are unable to keep up and lack the cash to cover expenses and fund growth opportunities.
However, times are changing and instead of focusing on price, solicitation focus more on a contractor’s qualifications and quality of work than the ability to build the project as cheap as possible..
For construction companies to survive many challenges, it is important that they maintain healthy margins. Here are some of the ways contractors can increase profit margins.
Avoid lowering prices to stay competitive.
The construction industry is one of the most competitive industries in the world. As the conventional way of getting more jobs is bidding, many construction companies consider lowering prices as the only way to win more contracts. Unfortunately, this type of strategy is a lose-lose situation for both contractors and clients.
A client may think that they got the job for cheap but it could be substandard because the contractor cut corners to meet the bid. A contractor may get a job but change orders and other unforeseen setbacks typical of construction projects may cause them to just break even or worse, lose money.
Instead of lowering prices, construction companies should focus on getting quality projects that take advantage of their skill set. Think about your unique selling point, which is what you specialize in, and emphasize it in your marketing. It is better to get fewer jobs but with higher margins rather than more work but with paper-thin margins that are at risk of turning into losses.
Put simply, productivity is the measurement of the effectiveness of effort. Productivity rates are measured as total output per unit of input. In construction, an example of output could be cubic yards of earth excavated or square footage of roofing installed, with the input typically measured in man-hours.
Maximizing productivity on a job site means working efficiently to control costs and stay on schedule. Projects that are completed under budget and ahead of schedule usually result in higher profit margins which are why construction firms are always looking to improve productivity.
Improving productivity requires careful planning and scheduling of work and making sure each worker has received the proper training and are equipped with the tools and resources needed to effectively do their jobs.
Reduce the need for RFIs.
Like it or not, requests for Information or RFIs are a necessity in the construction industry. RFIs are used to gather and clarify information that may not be included in the initial plans and specifications of a project. They are critical in resolving issues that can delay the completion of a project and have it go over budget.
However, RFIs themselves can slow down a project, causing frustration for all parties, and this can lead to a negative impact on profits. They are expensive, time-consuming, and a pain to manage.
Minimize mistakes that cause rework.
Rework is one of the more expensive issues that can happen to a contractor. It not only impacts a company’s profits from a project but the damage to their reputation also affects future profits. Ensuring that there is open communication between teams will minimize the need for rework. In addition, if contractors participate in the early phases of the project, the viability of the project will improve and the need for late-stage changes will be reduced.
Know Your Costs.
In order to be profitable and improve profitability, you need to understand the costs associated with completing each project. This includes not just your job costs but also your overhead costs. If you don’t have a sense about what your projects cost to complete, there’s no way of knowing how profitable you are on each job.
Job costs include everything directly needed to complete a project. These include labor, materials, supplies, equipment rental costs, bonding premiums, fuel, permits, etc. Basically, anything that pertains to costs on the actual jobsite is part of your job costs.
Overhead costs are the expenses needed to operate your business. Overhead items include support staff payroll, tools, insurance, utilities, office rental or mortgage, equipment, debt payments, owners’ salary, legal fees, IT, etc.
When calculating and reporting overhead costs, be sure to capture all costs and be as accurate as possible because your estimators will need these to submit better bids.
Take advantage of new technologies.
The construction industry is one of the least digitized industries in the world, second only to agriculture. There are plenty of time-consuming processes behind the scenes that will benefit from automation. These processes have a major impact on your margins and profitability and leveraging new technologies to make these processes efficient, you can do more work that actually makes money.
One of these time-consuming and error-prone processes is the monthly payment application. Switching to an automated application from a paper-based process reduces time wastage, along with the costs associated with paper-based processes and the potential for human error. This will also bring multiple benefits of using new technologies such as improving communication and reducing misunderstanding with clients and getting paid on time.
Estimate for Profit.
When you bid a project, you expect to win. When you win a bid and are awarded the contract, you expect to make a profit. For that to happen, your estimates need to be realistic and as accurate as possible. If your estimates are too low, no amount of project management or productivity gains will get you profitable.
This is why having an accurate account of your job costs and overhead is so important. It allows your estimators to add in the proper markups to hit your profit margin goals. A good bid is based on concrete data, not guesswork. Be sure to consider the risk factors on each project and build in a contingency line to your bid that can absorb additional costs when risk becomes reality.
Estimators also need to know the productivity levels of your field workers, so they can create realistic job costs. Keep track of actual versus estimated job costs on each project, especially labor costs and productivity rates, so your estimators can determine how accurate their estimates were and what adjustments might need to be made on your next bid.
Set Profitability Goals.
If you want to improve the overall profitability of your company, you need to set profit margin goals. Where does your company want to be in the next year? Five years? Ten years? Maybe you’re looking to grow your business or expand into new markets and territories. Perhaps you’re wanting to tackle larger projects or make the jump from public projects to the private sector.
Knowing your long-term business plans will allow you to set achievable revenue and profitability goals to get you where you want to be. It will also help shape the types of projects you take on and guide your estimators on the markup percentage they should shoot for on each project to help you hit those goals.
Manage for Profitability & Track Costs.
Good project management is key to improving profitability. If you want to hit your profit goal on a project you have to keep your costs down and finish the project within the scheduled completion date. Be sure to keep track of costs on any change orders so that they can be billed properly and increase your profit margin. Don’t do additional work on a project until a price has been agreed upon and it has been approved by the client.
Avoid having workers milling about with nothing to do. Stay on top of materials management and stage the job site in a way that helps your workers be as productive as possible. Each worker should have proper safety training and be provided with necessary personal protective equipment to avoid accidents and prevent injuries. A safe construction site benefits both productivity and profitability.
Once you’ve completed a project, there’s still some work to do. Gather your team and conduct a postmortem analysis of how close your estimated profit was to your actual profit. Did your estimated job costs match up with what was estimated? Was overhead accounted for properly in your bid? Did issues occur on the job site that resulted in productivity losses or caused you to go over budget?
Take a hard look at your estimates versus your actual costs. Make note of costs that were over or under what you expected so you can do better next time. If you had productivity issues consider providing additional training to your workers and look for ways to reduce downtime when you start planning and scheduling your next project.
In construction, profits don’t just happen. The industry isn’t built to operate that way. There are too many things that can go wrong and sink what would otherwise be a profitable project. It takes diligence and hard work to go from eking by on razor-thin margins to being profitable enough to grow your business and meet your business goals.
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