5 Ways To Increase Profit Margins In Construction

Here are 5 ways to increase profit margins in construction as you will see, the goal is not to work more, but to work more effectively— and improve your company’s bottom line as you go; consequently, increasing your revenue.

Whether you are the main contractor, subcontractor or self-builder working within residential, commercial, home building or any other construction trade, a systematic approach to developing business practices will ultimately result in an increase in profit margins.

1. Estimating

The first of the 5 ways to increase profit margins in construction is estimating. It is important to remember that the mathematical difference between the budget and the bid is both overhead and profit. The goal of an accurate estimate is to determine your true costs–and offer you the ability to accurately assess the progress and profitability of each job against a predetermined benchmark.

Creating a detailed, accurate estimate for the work you propose to do is the first step toward achieving real profitability—yet too many contractors fail to calculate the true cost of a proposed project based upon three essential elements: overhead, risk and job costs. Each of these elements must be reflected in the estimate ahead of time if you expect an increase in profit margins once the job is completed:

• Overhead
• Risk
• Job Costs

2. Managing Job Production

Once we are awarded a job, it’s crucial that we carry out the work in the most cost-effective way possible in order to increase profit margins. While that may be easy in theory, it can be another matter altogether in practice. To effectively manage a job, keep these important factors in mind:

• People Productivity – Simply put, ‘keep everyone informed’. Both employees and subcontractors need to know the job schedule. As a subcontractor we appreciate early notice of schedule changes and therefore will be more willing to help out.

• Changed Orders – In order to track and manage a change in orders, we suggest you create procedures in order to record these changes in the field, turn those changes into work orders, and obtain sign-off on approved work for billing purposes.  According to Ben Franklin, too many contractors lose money by not tracking costs and therefore not taking the time to bill for the ‘changed work’ they perform.

3. Define Goals & Set Expectations

True job cost accounting can increase your profitability by helping you understand the actual costs associated with each job. Remember that an accurate construction accounting system must distinguish between overhead costs and direct job costs. You must also be able to systematically compare your budgeted costs to your actual job costs to measure estimating effectiveness, labour productivity and use of materials.

An effective accounting system will enable you to meet daily bookkeeping needs as well as address issues of special concern to contractors; better management means better cash-flow—taking you a step closer to seeing an increase in profit margins.

5. Value Engineering Options

Value Engineering (VE) is a management technique that seeks the best functional balance between cost, reliability and performance of a product, project, process or service. Value engineering involves:

• Identifying the main elements of a product, service or project.
• Analysing the functions of those elements.
• Developing alternative solutions for delivering those functions.
• Assessing alternative solutions.
• Allocating costs to alternative solutions.
• Developing in more detail the alternatives with the highest likelihood of success.

An accurate estimate for the work you propose to do is the first step toward achieving real profitability—yet too many contractors fail to calculate the true cost of a proposed project based upon three essential elements: overhead, risk and job costs.

Each of these elements must be reflected in the estimate ahead of time if you expect an increase profit margin once the job is completed. The project manager must take a pro-active role in both giving direction and leadership in the value engineering process, but must also ensure that time and effort is not wasted and does not have a detrimental effect on the progress of the project.

Conclusion

Hopefully, as you have seen, the goal is not to work more, but to work more effectively— and improve your company’s bottom line as you go. These 5 ways to increase profit margins in construction contain strategies that can be used effectively in any number of ways. Ultimately, the key to success is the integration of every step within the profit cycle—yet substantial results can be achieved by selecting and implementing only a few of these steps every month.

Value engineering is a powerful problem-solving tool that can reduce costs while maintaining or improving performance and quality requirements. Value engineering can improve decision making that leads to the optimal expenditure of owner funds while meeting the required function and quality level. The success of the VE process is due to its ability to identify opportunities to remove unnecessary costs while assuring quality, reliability, performance, and other critical factors that meet or exceed customer’s expectation.

Here at UK Acoustic Systems Ltd, we believe that having a sole supplier is essential for the reduction of manufacturing and overhead expenses. Over the past few years, we have invested heavily in manufacturing and production, thus opening a Warehouse Facility. By doing so, we have been able to reduce expenses and in turn, increase profit margins for our clients whilst keeping our product sources all from the same location.