Most construction companies only make 2% to 4% net profit after paying job costs and fixed expenses. The little things you don’t think about can add up to an additional 1%, 2% or even 5% more profit at the end of the year. This additional amount can be the difference between struggling and running a successful business.
You don’t make money building things or doing great work. You make money by knowing what it actually costs to run your construction company and what to charge for labor, equipment, materials, subcontractors and overhead. Below, find nine tips for making the most of your company’s profit potential.
1. Get An Accurate Labor Burden Rate
Most construction companies don’t use accurate labor rates when calculating their crew bid rates. Every year, tax, unemployment, social security, and workers’ compensation rates change. Plus, as your employees get older and their situations change, their health insurance rates will also change. Don’t forget to factor in the overtime used versus anticipated in your bids.
Good estimating starts with accurate labor rates—so have your accounting manager figure out exactly what the accurate rate is for every field employee. You’ll find that your labor burden rate can vary by as much as 20% or more for each employee.
2. Calculate Equipment Costs
Calculate the exact cost for every piece of equipment you own factored by the annual utilization to determine the right rate to charge. For each piece of equipment, add the purchase price, interest, depreciation, maintenance, gas and oil, service, tires, repairs, insurance, storage rent, and mobilization costs you really spend across the life of the equipment.
Divide this total cost by the total number of hours you hope to bill, utilize and charge for the equipment over that duration. This is your real cost of ownership per hour, not including overhead and profit. Next, compare this cost with the price of renting it. Get rid of all the equipment that costs you more money to own than you’ll get back from your projects.
3. Maximize Change Order Pricing
Determine what rates you want to charge on each job based on what the allowable or highest fair and competitive rate is in your area that your clients will tolerate. Present your proposed rates to your customer to make sure you are on the same page before you begin any extra work. Are small tools and equipment free, or do you charge for them in your change orders?
To maximize your change order pricing, always include these additional items required to perform extra field work. Some contracts clearly state the allowable change order markup rates, while others don’t.
Why not try 15% or 20% for overhead, and then 15% for your profit markup, instead of the traditional 15% in total? This double markup will increase your bottom line on changes by 1% to 3%.
4. Watch Overhead Costs
You must know what it costs to keep your doors open without any work under construction. This is your break-even minimum you must cover before you make a profit.
Make it a priority to sit down with your accounting manager and get a handle on this annual amount. Then, trim the fat. Look at every overhead check you signed last year.
Where are you wasting money? Consider outsourcing payroll services, craft training, project scheduling, marketing services, safety programs and equipment maintenance. By outsourcing, you’ll free your staff to take care of the important things that make you money.
5. Shop Materials Prices
You’re often busy running your company, and keeping your customers happy and crews occupied—this doesn’t allow you enough time to get enough materials quotes for every job when bidding projects. You get stuck using the same suppliers on most jobs.
When this happens, your materials prices inevitably creep up over time. And when you need more material on jobs, you just call your old friend at the supplier and get more shipped out, without taking the time to get another price from a different supplier.
6. Never Run Out of the Tools & Materials
You Need Another mistake occurs when your crew runs out of material, tools or supplies at the last minute. The foreman heads to the store to buy things they forgot to order in advance. And while the foreman goes to the store, the crew stops working. Require your foremen to prepare a weekly inventory, clearly listing out all the tools, materials and equipment they will need for the next week. And never allow the foreman or superintendent to leave their jobsite to go to the store.
7. Hit Your General Conditions Budget
On almost every job, contractors run over on their general conditions budget. Ask your estimator the last time they checked the actual cost of temporary facilities, fencing, trailers, toilets, water, security or power. They tend to use old numbers on estimates because they’re too busy bidding new work.
Temporary toilet facilities can vary by $100 to $300 per month, depending on how many times per week they are serviced. Look at how many bids you got on those services, such as fencing, power, water, trailers and final cleanup. Too busy to inspect? Give up your next vacation, and you’ll probably cover what you lost on general conditions on your last two jobs.
8. Rank Your Team
Do you know which estimator, project manager, superintendent or foreman makes you the most money? Rank each management team member by work performed, gross dollars and net dollars earned, actual profit versus bid profit, callbacks, punch-list items and customer satisfaction.
Also, rank them by who hits their project labor, material, equipment and general conditions budgets. Focus on how better players make results happen and which low-ranked players don’t do well. Give poor players a chance to improve by providing mentoring and training.
9. Manage Your Money Aggressively
Most contractors run a lot of money through their checking accounts every year. What are you earning on your bank balance? By meeting with your banker, you can design a program to earn interest or invest your bank balance on a daily basis.
There are many ways to invest your cash in short-term investment programs that full-service banks offer. For every $1 million in sales volume, you should be able to generate $20,000 to $40,000 in interest or investment income annually. This will only take about 5 minutes a day to do. That’s not a bad return on your accounting manager’s time.