Residential and commercial construction and other specialised trades are responsible for creating millions of jobs and contributing billions of dollars to the Australian and New Zealand economies every year. But despite the record number of small, medium and high scope developments, the need to deliver projects at highly competitive rates has led to increased pressure on construction companies’ profit margins.
In fact, there has been a correlation between the increased amount of development with the decrease in commercial construction profit margin. There’s also significant pressure to deliver returns to investors, further cutting into profit margins in construction. A 2017 study that looked at a sample of Victorian commercial builders found that their profitability was wafer-thin at two and three percentage points of total revenues, with further pressure exacerbated by supply chain issues and staffing. Interestingly, the study also revealed that companies with higher revenues — i.e. over $500 million — showed smaller profit margins than smaller companies.
Now more than ever, developers are looking at how they can increase profit margins for their construction projects. Returning a margin to the company and its investors are essential for maintaining a healthy and sustainable business — one that can successfully grow and secure financing to compete for future projects.
With projects being delivered at breakneck speeds, it is easy for construction companies to focus on production timelines and project management for a successful handover delivery. When you are managing a multitude of different teams, departments and external vendors, it can be easy to create a bubble for yourself where you are only tracking day to day expenses and activities. But are you across your construction’s profit margin? Have you calculated your operating profit from your gross profit? Are you aware of the true cost of the job you won the tender for?
It’s important to consider whether your company can demonstrate healthy growth both in project scope and profits. Pursuing bigger projects with ever-shrinking razor-thin margins will just lead to collapse. Understanding the financial data of these points can make or break your business. We’ve curated some expert tips to help you understand your position and move your business forward if you want to know how to calculate profit on a construction site.
1. Effective project estimation
If you want to learn how to increase your construction’s profit margin, accurate cost estimation should be your starting point. Without the proper foresight, it is easy for large projects with complex and changing requirements to overwhelm your construction company. Through effective and accurate cost estimation, you can identify whether a prospective project is feasible and whether it will also make a positive contribution to your construction’s profit margin or be a growth opportunity for your firm.
When you’re looking to tender for new projects, it can be tempting to offer overly competitive job costs to secure the job. However, rushed or cost estimates that don’t consider all the variables that can occur during a build have the potential to impact the profit margin of your commercial construction and can thwart your firm’s success. This is especially true for smaller firms that may not have financial buffers to protect them from cost overruns and frequent change orders.
2. Complete understanding and overview of your construction’s profit margin
When you manage any type of construction project, whether it is a small residential project or a large commercial undertaking, you need to be a jack of all trades — from building best practices to HR, marketing and more. However, being an accountant is a role that will have one of the most significant impacts on the profit margins of your construction firm.
Reviewing your financials should not be saved for tendering and tax time — instead, you should be continuously tracking throughout the course of any project. While you may be across the measurements of your panelling and frames, taking regular stock of your financial data will help you to manage the profit margins of your commercial construction project. This involves having a thorough understanding of your gross profit and net profit, as well as your profit after tax and the full scope of your other operational expenses.
Having a thorough understanding of your profit margins and revenue will give you the foresight needed to compete for future projects.
Whether your business is currently working on a project or your build has stalled, you are still liable for the overhead costs. These expenses are not directly tied to creating a product or service — they’re just to keep your business open. It is important to track these expenses as it is easy for them to balloon and affect your profitability.
4. Contracts and receivables
It is essential that you are constantly monitoring your contracts. If you are looking at how to calculate profit on a construction site, you need to be able to readily identify which contracts are open and which are closed. The most successful contractors understand how much these contracts cost and how they profit from them.
This process often requires continual optimisation. Everybody likes to get paid, but wasting time chasing down clients and vendors only increases your costs. Maintaining a record of your accounts will help you secure any monies owed. This brings improved insights into the profitability and feasibility of your business as you enjoy a more comprehensive understanding of the operating, labour and equipment expenses associated with your construction.
Additionally, leaving accounts open for an extended period of time can also affect the profit margin of your business, as you may incur interest charges or receive less competitive rates from suppliers.
How to increase your construction’s profit margin with Nexvia
From streamlined cost estimation, remote project management, enhanced workflows and real-time production updates, Nexvia offers you an all-in-one platform to maximise your productivity and the profit margins of your construction business. If you want to see Nexvia’s next-level software for yourself, book a live demo for a tailored demonstration of its full capabilities. Have a question? Reach out, and one of our knowledgeable staff members will be happy to help.