Why are you in the commercial construction business?
- Are you making a profit?
- Are you hitting your profit target goals?
- How do you know if you are?
Table of Contents
What is profit margin in construction?
Gross margin is your gross profit on a project and is a fraction of the sales price. It shows earnings after paying your COGS (costs attached directly to a project) as a percentage of the gross profit. A margin is always based on the sales value.
Overheads are the costs not directly associated with a project. They are commonly referred to as administrative costs. They include Executive and administrative payroll, employee taxes and benefits, insurance, professional fees such as marketing and accounting, office rent and utility bills, vehicle expenses, tools and equipment, legal fees, etc.
How to calculate profit Margins
Knowing your profit is very important. As stated, the margin is always expressed as a percentage of sales. Hence step one is to calculate your total revenue(sales). Step two is to add up all your expenses.
This should include overheads and COGS( direct project expenses). Step three is to subtract the total costs (COGS+overheads) from the revenue(sales). Step four which is the last step is to divide the answer in step three by the revenue(sales) and multiply by 100.
This will give you a profit margin %. A healthy profit margin percent is usually between 15-45 %
A recent survey of 2,500 construction business owners and managers found that less than 40% of all companies had specific written net profit margins.
Chances are there are problems affecting your profit margins.
Can you answer these questions? Are you having trouble with:
- Poor takeoffs
- Estimating issues
- Problems with workflow processes
Likewise, do you know what’s going wrong in your company?
If you’re worried about your profits, here are the five ways to increase your commercial construction profit margin. They’re not as daunting as you might think.
1. Automate your bid processes
With automation, your bid processes are an improvement over your manual ones. As a result, your teams aren’t frantically looking for scattered estimates, data, or drawings. It’s tough to work in a climate where everyone is trying to find these because they’re located across different platforms, devices, files, and individuals.
As an all-in-one estimating solution, automation frees your estimators from dealing with error-prone manual estimates and takeoffs, which prove costly to the commercial construction profit margin.
The benefits of this are:
1. Automation helps to reduce manual, monotonous, wearisome work. This then frees your staff to do more high-value work hence driving costs down and increasing revenue.
2. Automated tasks reduce human error by showing clearly where a process is, who needs to do what and at what time. This then ensures tasks are completed on time and more importantly correctly. This boosts profits by ensuring projects are completed on time hence no extra costs and also no repeat jobs because a process was followed correctly.
3. Automation ensures that site rules and procedures are followed, reducing anomalies in a site. Such anomalies can shut down a site while investigations are taking place, which can be very costly.
4. Automation helps with material management. Visibility is vital to be able to allocate the correct amount of materials at the specified time to avoid costly delays. At the same time, overstocking materials increases the likelihood of waste and pilferage.
5. Automation lets you develop your processes better. With clear visibility of the whole process, you can start to iterate it and make small changes that can improve your efficiency by multiples.
6. Automation increases customer satisfaction by showing the client every step of the process, giving a sense of security.
2. Use a cloud-based digital estimating construction software
When you use cloud-based digital estimating construction software, all estimation data stays in one place because they’re available 24/7. Anyone can access information at any time and any place, whether individuals are in the office or out on the job site. Everyone is always on the same page, working with the same information, all of which is available in real time.
Here are some benefits of cloud-based digital software use;
- Reduced friction among different units.- A construction site has many different departments, e.g., sub-cons, architects, engineers, foremen, project managers, etc. All the site docs should be accessible to any professional at the touch of a button. This means that everyone is on the same page on the project, making work move seamlessly, thus reducing costs.
- Real-time updates are shared with everyone on site. Things happen on a construction site. That is the nature of work. But with the cloud, everyone on the team gets real-time updates, making them more agile and responsive to any disruptions in their plans. This is a significant cost saving because crises can be handled much better.
- Visibility to the accounting team- Costs are all documented, and it is easy to track expenses, giving data to the financial team to be leaner in future projects.
- Quality control is easier – with cloud computing, tasks are easily seen, allocated, completed, and checked as per a standard. A site manager, technician, foreman, and engineer are all on the same page regarding who did the task, when it was done, why it was done, and how. This dramatically enhances quality.
3. Use digital takeoffs
Having a solid takeoff is one of the most essential things in an estimate. According to Delta University, the use of automation tools is highly recommended.
Regular manual takeoffs often take 2-3 weeks to complete before review. Estimators can have 50% faster digital takeoffs and eliminate costly manual takeoffs. Takeoffs that once took weeks are often reduced to days or sometimes a few hours.
Estimators need to accurately calculate the amounts of equipment, concrete, wood, roofing materials, wiring, plumbing supplies, and even the most minor things like hinges, screws, and nails.
Estimation software gives you significant improvement over your current manual takeoffs. You see project plans automatically, so when It’s paperless, there’s no need to work with paper blueprints. Estimators can use one set of drawings across their teams so everyone is on the same page with one set of drawings.
Benefits of using take-offs include
- Organization and efficiency.- Projects often have take-offs that are repeated in large buildings like toilets. Instead of doing the whole process again, the same take-off can be used multiple times, saving a lot of man-hours. Numbers of certain installed items are usually needed, for instance, doors. Counting each manually for a highrise building would be very tedious, but take-offs help with such processes.
- Delivering accurate bids- for you to be profitable, your bid has to be correct, and the source data comes from Takeoffs. Being able to refer and accurately record it helps ensure that your bid price is consistent and that your financial targets are met
- Doing take-offs digitally ensures that you promptly present your bids to the client, which breeds confidence and two helps reduce man hours. you can work on other projects.
4. Create accurate estimates
Still trying to figure out why you keep losing bids? One of the first places to look is your estimating process. If you’re still using spreadsheets, you have more problems than you can shake a stick at.
It’s a well-known fact that human error is something that you can’t afford when it comes to well-produced estimates. Spreadsheets are error-prone. All it takes is one incorrectly entered cell or formula, and the entire estimating process can fail, especially when you have multiple people working in one spreadsheet.
You lose money because of miscalculations from these unreliable spreadsheets.
Poorly estimated estimates can spell disaster for profits and your reputation. For example, a project in the State of California to build a veterans home was estimated to cost $118 million. However, the project’s final cost was more than $230 million.
The problem: a severely inaccurate estimate due to incorrect data.
Benefits of accurate estimates software
- Speed – Estimates can be generated very quickly, thus making a company more competitive.
- Better budgeting- Fewer people are required to do the same work
- Accuracy – Before software, companies were using excel. If just one cell is wrong, your whole bid could easily be ruined. These are costly mistakes that the software ensures do not happen
- Good communication- this is important internally and externally. Internally is done by providing all communication is done on the platform. Externally is to the customer who updated continuously.
5. Establish automated workflows
Over recent years, workflow management has transformed from pencil, paper, and spreadsheets to digital software that automates this process. Digital workflows:
- Eliminate bottlenecks.
- Improve how people collaborate to get things done.
- Enable the projects to flow smoothly from one stage to the next.
- Make individuals accountable for their work on projects.
This can be thought of like the Gantt chart: record the jobs being done, who’s responsible, and the time is taken, only in digital form.
In moving away from paper, digital workflows eliminate the time-consuming work with numerous forms and other documents that waste capital.
ach out to ProEst and schedule a free 1-on-1 demo with one of our specialists today!