This article is part of our Construction Business Startup Guide—a curated list of articles to help you plan, start, and grow your construction business!
In the construction industry, there are a number of ways to increase your profit margins, even when you are new to the business.
So, if you’re interested in maximizing your profits and getting the right amount of profitable jobs, the seven tips in this construction profits guide should give you insight into what you can do to run a highly profitable construction business.
1. Set profit targets to aim for
When you’re first setting up shop, it’s tempting to say that your only business goal is “more than last year” or “as much as possible.”
But those aren’t targets. They’re just vague directions that can hurt not only your business’s profitability but its very viability.
George Hedley, a CSP based in California, is known as “The Business Builder” and has worked in the construction industry since 1977. One of the top problems he’s found with construction company owners? No written profit goals or targets for other important numbers.
Setting realistic targets
In order to keep your business on track for where you want it to be your first year, next year, and ten years down the line, set realistically written targets for:
- Overhead, as recommended by Hedley, should be set at a minimum 20 percent annual return on your fixed costs, from estimating and marketing to accounting and office supplies.
- Job costs (and no, those are not the same as overhead). Job costs are specific to each job your firm is working on, from labor and equipment to project management and worker’s comp.
- Sales goals, based on your firm’s profit margins and goals for gross profit and net profit.
Profit goals, based on growing the business as well as paying owners, management, and personnel. Your baseline goals are simple: always make at least some profit, and aim for between 15-20 percent gross profit.
2. Use good years to buffer lean years
A handy rule is to expect three lean years for every seven good years. That is not a formula (as we know from the economic downturn of 2009) but it can guide your budgeting and financial projections.
Also use it as a reminder to continue buffering your cash flow, so you have liquid funds stashed for times when business is down or credit is scarce.
Here, we turn to an experienced source: Since 1981, Denise St. Clair has served as Vice President of Jack St. Clair Inc., managing the finances for the Virginia utility contractor. If your firm is in a stretch of good years, she recommends you improve the company’s financial foundation—especially when, as is the case with many firms, you may have assets financed on credit.
“I like to get things paid for,” says St. Clair. “Never be late with payments, and pay things off as quickly as possible. If things are going well and you have things on credit, such as machines, start paying off whatever you can. Start with the smallest balance, pay it off, and work your way up.”
St. Clair also recommends stashing away some liquid capital. “If things are paid, take 10 percent and just tuck it away for when times are leaner.”
3. Join area trade associations and attend events
Part of getting business is making connections.
With all the different firms and trades involved in projects of any size or scale, no construction company is an island.
As you start your construction business, join local, regional, and national trade associations, as well as your area chamber of commerce—and attend their events.
If you are a sub-contractor, for example, then your end customer is a general contractor. That’s who you will market to and network with so that the general contractors know you and come to trust you. Trade memberships give you a built-in way to network with the other firms you may be bidding on jobs for, so be sure to accept those event invitations.
Membership also helps you stay in the know on changes in regulations, current issues, or changes in equipment and practices. By knowing about the latest news and challenges affecting your industry, you are more likely to make informed decisions that help you manage costs, decrease injury and liability risks, and ensure that your crews have the right equipment and skills. All these things can help you meet job tasks more productively and profitably.
4. Find profitable niches to focus on
Whatever sector your construction business is in, keep an eye out for profitable niches where you can devote more resources and make more money.
Your entire business doesn’t have to center around one thing (though depending on the niche, it can), but you can have dedicated teams, or a set percentage of business, that you want to be devoted to a specific area.
Examples of niches could be:
- A home construction firm that specializes in building additions
- A remodeler that specializes in kitchens, whole house, or bank repossessed buildings
- Period restorations of older buildings
- An electrical firm that specializes in commercial projects for a specific industry
- A plumber that specializes in specific types of re-plumbing
These are just a few ideas to get you thinking. Meet with your management and other teams, examine job records, and look at trends and forecasts for your industry and area. What opportunities are there that could become high-profit jobs for your construction company?
5. Minimize waste
It’s no secret that job sites create waste. But have you thought about how much of that waste going to the landfill could have been savings going to your profit margins?
The State of Nebraska has been trying to encourage construction firms to reduce waste not only to protect the environment but as a way for companies to cut back on lost profits. Lumber and manufactured wood products alone can make up to 35 percent of construction waste. If your firm bought those materials, that 35 percent still came out of your pocket.
Firms that set up programs to minimize construction waste can realize job site savings that turn into a better bottom line. Here are some suggestions:
- Optimize designs to maximize usage of purchased materials at supplied dimensions
- Store materials to minimize the risk of damage and theft
- Where possible, have supplies delivered via returnable containers; you won’t have to pay to dispose of them, and the supplier can pick up empty containers for re-use at their next drop-off
- Negotiate supplier buy-backs of unused materials
- Donate leftover materials (in useable condition) to organizations such as Habitat for Humanity (donations may also be tax-deductible, so discuss this option with your company’s tax professional)
- Keep back scraps for backup or patch pieces
- Order only what you need, and try to avoid materials with excessive packaging
- Check with state or local officials for programs or incentives for waste reduction, reuse, or recycling
6. Have a 24/7 marketing, sales, and customer service rep—your company website
It works 24 hours a day, 7 days a week, 365 days a year. It can handle marketing, sales, and customer service. And the crazy thing is, many of your competitors may not be using this model worker at all. What could this possibly be?
Your construction company’s website.
While construction can be a primarily word-of-mouth and referral industry, in today’s online world a website is an essential sales, marketing, and customer service tool. But, many firms don’t have an online presence.
Your website can be your company’s business card, brochure, and point of contact for new business, potential business, and returning customers. More importantly, if your competitors aren’t online and you are, then you are increasing your visibility and your chances of landing more jobs.
Make sure your firm has at least a basic website with pages that cover:
- A company bio, including history, service area, memberships, accolades and awards, and short profiles of key personnel (such as owners and management)
- Services provided as well as specialties
- Contact information, especially for bids and estimates
- Testimonials from past customers and examples of past jobs (with photos and videos)
- Job and career opportunities
- An FAQ
7. Decrease equipment downtime with consistent maintenance
Does maintenance cost money and time? Yes. Does it cost as much as dealing with a broken machine that should have been working on site? Nope.
Whatever the size and scope of your fleet, you are running equipment. Even if it’s just your truck, it’s essential to day-to-day operations. In order to maximize profits, you want to minimize breakdowns and costly repairs.
The best way to do that? Regular maintenance.
- Know where your equipment is, what it’s doing, and what dates it’s been on a job
- Track vehicle data for when equipment is running, working, idling, or off (many pieces of modern equipment have built-in sensors and tracking for data collection)
- Follow supplier and manufacturer recommendations for maintenance schedules
- Keep track of operator notes and feedback so you can be more aware of equipment condition and potential problems
- Dedicate resources to maintain equipment at regular intervals and between jobs
The better your take of your equipment, the better it will take care of business—and that will help take care of profits.
Ready to turn a profit?
This is by no means an exclusive list of ways you can increase profits for your construction business, but following these tips will get you off to a good start.
Need some more advice on starting your construction company, or prepping your business plan? Let us know!