As a small business owner, you already know that your construction projects have to be profitable in order for you to succeed. But how do you ensure that you’re making enough money from each job to cover costs and stay afloat?
By calculating and setting healthy construction profit margins.
In this article on profit margins, we’ll cover:
What is a construction profit margin?
A construction profit margin is the money that you have left after all the costs associated with running your business have been paid. It’s made up of two main elements: overhead and markup.
Overhead consists of the expenses you have to pay in relation to keeping your construction business up and running. Think wages, bills, and office rent.
Markup is how much you charge on top of your overhead expenses to ensure you turn a consistent, healthy profit. How much markup to charge depends on your industry, costs, and pricing.
When combined, overhead and markup determine your construction profit margin on each job.
What is overhead in construction?
Overhead includes all of the expenses associated with completing a construction project and running your business. You likely have a mix of fixed, semi-variable, and variable costs, such as:
- Subcontractor wages and labor costs
- Utility costs
- Cell phone bills
- Vehicle leases
- Repairs and maintenance
- Construction management software
As you can see, overhead costs include both direct costs and indirect costs.
For example, subcontractor wages and materials can be directly tied to specific jobs and clients while office rent and utility costs can’t. However, both are required to run a successful construction company.
Determining your overhead costs is essential in determining your construction profit margin. Make a list of all your monthly expenses and add them up so that you have an idea of what you spend each month.
How to calculate your overhead as a percentage %
Add up your total monthly profit and overhead for an average month. From there, divide your overhead by your profit and multiply it by 100.
For example, let’s say you had $15,000 in overhead and $40,000 in profit.
15,000/40,000 = 0.375
0.375 x 100 = 37.5
That means that you spend 37.5% of the money you bring in on operating expenses and overhead.
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What’s a good construction profit margin?
What counts as a healthy construction profit margin depends on a variety of factors, such as:
- The services you offer
- Where your business is located
- The average wages for general contractors
- Whether you offer commercial or residential services
That being said, you should try to aim for an average profit margin of 15-45%. That leaves you with enough room to make a reasonable profit, even if your expenses fluctuate here and there.
Low profit margins can mean you end up covering expenses out of pocket, so it’s important to set and enforce healthy profit margin goals from the get-go.
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How to calculate your construction profit margin
To calculate your overall profit margin, follow these instructions:
Step 1 – Determine your overall revenue
Step 2 – Add up all your overhead expenses
Step 3 – Subtract your overhead costs (including materials) from your revenue
Step 4 – Divide this number by your revenue to get a decimal
Step 5 – Multiply the answer by 100 to find the percentage
Pro Tip: To calculate your contractor profit margin, markup, and pricing on a specific job, use our free profit margin calculator.
Here’s an example of those instructions in action ➡️
Step 1 – Monthly revenue: $15,000
Step 2 – Overhead: $5000, materials $5000 (total cost of $10,000)
Step 3 – 15,000 – 10,000 = 5,000
Step 4 – 5,000 / 15,000 = 0.33
Step 5 – 0.33 x 100 = 33%
Your profit margin for that particular month would be 33%.
If your profit margins aren’t where they should be, there are a number of ways to increase profit and introduce new cash flow strategies to your construction business. As mentioned, stay on top of your profitability to ensure you can pivot and adapt before a minor adjustment becomes a major problem.
How often should you recalculate your construction profit margin?
Your construction company’s profitability is directly impacted by your profit margin, which means it’s important to check it often and adjust your pricing as necessary.
For example, the cost of goods, rent increases, and higher wages all affect your profit margins and may mean that you need to reevaluate how much you charge.
It’s recommended you review and recalculate your construction profit margin at least once every three months. That way, you can stay ahead of any changes and make adjustments before you lose money.
Keeping construction profit margins on track
Profit margins play a huge role in the success (or failure) of any business. To make sure that your construction profit margins stay in the green, be sure to:
✔️ Recalculate your profit margins at least once every three months
✔️ Keep an eye on changes in expenses, like increased cost of goods
✔️ Adjust your prices when necessary
✔️ Negotiate prices with current suppliers, or look for new ones
✔️ Review expenses and make adjustments or cuts when applicable
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This post was originally published in April 2020. It was last updated in March, 2022.