6 Ways to Improve Your Construction Company's Profitability
Construction companies are in business to do two things: build things and make a profit. So why do so many excel at the first thing but struggle to be profitable?
Part of the reason is the way bids are solicited and contracts are awarded. Many clients, especially in the public sector, award projects to the lowest bidder, with the contractor’s expertise, experience, and quality of work an afterthought. That’s what contracts are for after all, right?
That seems to be changing as we are seeing more Request for Proposals, Design-Build, and prequalification requests for bids. Rather than just focusing on price, these methods of solicitation focus more on a contractor’s qualifications and quality of work than the ability to build the project as cheap as possible.
Stiff competition and fewer opportunities during the last recession led many companies to lower bids to be competitive, surviving on razor-thin margins to maintain enough work to stay in business. Now that the economy and construction industry has recovered, labor shortages are forcing some contractors to offer higher wages to recruit and retain experienced workers.
The cost of building materials had been steadily increasing even before factoring in the effects of trade negotiations and tariffs. All of these can eat into a company’s profit margin, but for the most part are outside of a company’s control.
Instead of focusing on things you can’t control, take a look at ways your company can reduce costs, submit better bids, and delivering quality work. Here are a few tips on how you can improve profit margins on your projects.
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 jobsite 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. General contractors and trade contractors must work together to make sure that work is completed in a logical sequence that focuses on maximizing the efficiency of everyone working on the project.
Because your field workers are an essential part of productivity, it’s important that your workers know how to properly and safely complete assigned tasks. This means making sure each worker has received the proper training and are equipped with the tools and resources needed to effectively do their jobs.
Keep in mind that your workers’ efficiency, or lack thereof, is only one aspect of productivity. Other factors that can negatively impact productivity, and by extension profitability, include supply chain management, poor scheduling, accidents, and unnecessary rework.
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.
These can vary greatly by region and type of project, so it’s important to stay up to date on your job costs especially if you do work in multiple states. Having to pay prevailing wages on a job or dealing with fluctuating material costs can skew your job costs in a way that greatly affects your profitability.
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.
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.
Avoid racing to the bottom by always trying to be the lowest bidder. If you undercut your bids to win, you’ll always struggle to be profitable. As you go through your bid/no bid decision making, profitability should be your top consideration along with a risk analysis and your firm’s capability to perform the work. Bottom line: don’t sacrifice profit just to win more work.
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 jobsite 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.
A good project manager should be able to spot the red flags of an impending issue and make the necessary adjustments to keep the project on schedule and within budget. They should be constantly looking for ways to reduce waste and improve productivity.
Be sure to keep accurate accounts of all your job costs. You don’t have to keep track of every screw and nail, but you’ll need to be able to compare your actual job costs to what was budgeted so you can complete a thorough analysis once the job is finished.
Analyze Your Results
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 jobsite 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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