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Friday, January 27, 2023

What Is an Ideal Construction Profit Margin?

Are you the proud owner of one of the almost 4 million construction companies in this country? If so, you probably enjoy taking the ideas that your clients have and bringing them to life.

This is one of the biggest joys for construction company owners. They’re able to create something that didn’t exist before to make their customers happy.

But of course, construction company owners want to do more than just keep their clients happy. They also want to turn a profit in the process. Their goal is to achieve the biggest construction profit margin possible.

So, what is a construction profit margin? And more importantly, what is the ideal construction profit margin that construction company owners should strive for?

Continue reading to learn more about construction business profit margins, the average construction profit margin, and so much more.

What Is a Construction Profit Margin?

Construction profit margin might sound like it would be a pretty complicated concept to wrap your head around. But it’s not as confusing as you might think.

It refers to the amount of money you’ll have left over at the end of a construction project after you get all the expenses associated with it squared away. Your construction overhead and markup will be the two main factors that affect your construction profit margin.

Overhead is all the expenses that are associated with keeping your construction company up and running. It includes everything from the rent you pay for your office to the gas you use to fuel up your trucks (as well as the trucks themselves!).

Markup, meanwhile, is the money you charge your clients for providing them with your construction services. In order to turn a steady profit, it’ll be important for your markup to be higher than your overhead every month.

How Do You Calculate Construction Profit Margin?

Now that you know what construction profit margin is, let’s get into talking about how to calculate profit margins. This is, again, not as difficult to do as it might seem.

To figure out what your construction profit margin is, you’ll need to sit down and crunch the numbers every month when it comes to construction overhead and profit. You’ll need to see how much you spent on overhead and how much money you were able to profit.

You can then put these two numbers next to each other to use a very basic equation to calculate your construction profit margin. This equation will call for you to divide your overhead by your profit and then times that number by 100. This will provide you with a percentage of your construction profit margin.

What Is a Good Construction Profit Margin?

There isn’t really a clearly-defined “good” construction profit margin. Every construction company is going to operate a little bit differently. So what’s good for your company might not be good for a company right up the road.

But generally speaking, a good construction profit margin will fall somewhere between 15% and 45%. As long as it ends up landing in that gap, you should be able to bring in enough money each month to turn a consistent profit.

Why Should You Monitor Your Construction Profit Margin?

There are a number of reasons why you should keep a close eye on your company’s construction profit margin. First and foremost, it’ll guarantee that you’re putting your company in a position to turn a steady profit.

But that’s only the beginning. You should also monitor your construction profit margin so that you can make adjustments to your operation to increase your profits over time.

Additionally, you should know where your construction profit margin stands just in case you ever decide to sell your business. Part of your construction business exit planning will need to include sharing your profit margins with potential buyers.

The better your profit margins are, the more you might be able to sell your construction company. You won’t have any trouble finding suitors when they see how much money your company is making.

How Can You Increase a Construction Profit Margin?

Is your construction profit margin well below what a “good” margin would be? This might frustrate you to no end. You might also think there aren’t going to be any good ways to improve it.

But this couldn’t be further from the truth. In reality, there are tons of steps you can take to make dramatic improvements to your construction profit margin over time.

You can try:

  • Finding an office space that has a lower rent
  • Looking for a new supplier for your construction materials
  • Encouraging your employees to cut down on how much gas they use
  • Working with different subcontractors
  • Implementing construction management software

It might take a little extra work on your part. But by doing these types of things, you will see your construction profit margin steadily increase. It shouldn’t be too long at all before your construction company is turning a much bigger profit month in and month out.

Start Making More Money for Your Construction Company

If you don’t have any idea what your ideal construction profit margin is, it’s going to backfire in a big way. Ignorance will not be bliss in this case.

You might be missing out on being able to bring in the big bucks by not paying close attention to your profit margins. By making just a few simple changes to your business plan, you can start to turn bigger profits from here on out.

Browse through our other blog articles for more useful business tips and tricks.

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