Construction firms, developers, contractors, and subcontractors are in business for two things: first is to build structures that can be world-renowned and second is to make a profit. But why are there those who struggle to make money in this industry when there are those who see success in their first try?
Well, part of the reason why some companies don’t prosper is that they easily stick with the one with the lowest bid. The expertise, experience, and quality of third-party service providers serve as an afterthought. But these days, the process is changing.
Relevant Issues in the Construction Industry
What contractors and subcontractors can bring to the table is now more important than how much lower can they offer their services.
Prequalification requests are now becoming more important than ever. From the ability to build a structure as cheap as possible, project owners are now shifting their focus on work quality which is a way to lessen repeat works, mistakes, or accidents that can lead to delay and cost overrun.
The recession in the construction scene from the previous years led to stiff competition. Consequently, contractors and subcontractors then offered lower bids just so they can survive on razor-thin margins and win the project to stay in business. However, the quality of work was the one that was compromised. And with lesser crew members staying on board to cut costs, overrun due to delay is the next big problem.
In the past few years, though, the industry has already recovered. However, there’s still a shortage in labor with most millennials preferring white-collared jobs and starting their own businesses than joining the blue-collared workforce. As a remedy, contractors offer higher wages to recruit new talent and retain existing crew members.
Another relevant issue is the cost of materials and equipment. As the years go by and technology continues to flourish, the rental and purchase rates are shooting up by tenfold. These are outside a company’s control and the sad part is that they can eat into a company’s profit margin. In the end, if the contractor isn’t wise, he ends up at a break-even point instead of enjoying big profits.
Ways to Increase Profitability in Construction
It’s common sense – to increase your profit, you should reduce costs. And to reduce costs, you should deliver high-quality work and submit a thoroughly planned and researched bid.
If you don’t want to end up with zero profit, here are more tips from us on how you can improve your profitability:
1. Improve Productivity
Your team’s productivity rate will tell you how much profit you ought to earn at the end of the project. There are contractors who do so well in submitting budget plans and control the workflow of the site so they can speed up the work by 10-20% of the estimated time of finish. The remaining days of supposed work then become a part of their profit. This is why contractors prioritize productivity at the site.
Productivity measures the effective effort of your crew members. The rate can be measured as the total output per unit of input. In our blog “Measuring Productivity in Construction and Why You Should Care,” e also mentioned a better and more accurate way of measuring productivity in your team which is to use the best construction project management software available like Pro Crew Schedule.
A productivity software compares declared output in a day and compares it to daily targets. With this Pro Crew Schedule construction project software, you don’t need to guess or compute productivity in your site. You’ll get accurate data to have a clearer view of whether your project will turn out profitable or not. And if in the way, you find your team’s productivity rate sloping down, you can quickly do something to change the situation.
For your team to be productive, you as a project leader needs to make sure that their work is efficient so that costs are controlled and the project stays on schedule. As mentioned in our example earlier, projects that are completed ahead of time usually get higher profit margins. Not only did you save costs on payroll, but early turnover gives you the opportunity to take on another project even before your contract period finishes.
When improving productivity at the site, you need careful planning and scheduling of tasks as well as equipment and material order dates. General contractors and subcontractors should all work together in the planning stage and go as planned to make sure that each of their team’s tasks are completed in a logical sequence. This ensures maximizing the efficiency of everyone working on the project.
2. Define all Costs Needed in Your Project
From screws and snaps to the purchase of new heavy equipment and payrolls, you need to know all costs associated with completing your construction project. Operational and overhead costs should also be determined. If you don’t define these costs, there’s no way for you of knowing how much profit you can earn in your project.
Some of the costs involved in any construction projects are payroll, materials, equipment rental, permits, power for operation, fuel, supplies, etc. But the costs can vary greatly from state to state or region to region. There are some cities where securing permits are more expensive than in rural areas. Wages can vary too. If you agreed with your workers to base their salaries on the minimum wage rate of the current state you are working your project on, then payroll can vary.
Overhead costs like office rental, debt, legal fees, support staff payroll, insurance, IT, etc, are expenses you need to declare in your budgeting too. Be sure to capture all costs and be as accurate as possible when reporting to the project owner so you won’t be shouldering them when you aren’t able to declare an item. Doing this will also help you make better bids in the future
3. Estimate for Profit
When you go for bidding, you want to win. But don’t do it by attracting the client with a super low budget. In the end, when your estimate isn’t feasible or too low to carry on with the operation, it is your profit that will suffer. Sometimes, you will even need to backup for expenses you failed to put in your bid.
Make your estimates realistic and if you can, make it as accurate as possible. As mentioned, define all costs involved in the project. Call your suppliers for actual rates and don’t just get them from Google. Doing an accounting of everything needed in a project can be tiring and boring, but missing to declare the right prices might lead you to spend your own money for the project instead of gaining.
Do not forget to consider risk factors in your bid. Build in a contingency line to your bid that can absorb additional costs when risk becomes reality.
Contractors, as well as subcontractors, should also know the productivity level of their field workers. This helps them come up with a more realistic job costing and look into where adjustments can be done.
Avoid racing to the bottom with your competitors by being the lowest bidder. If you mistakenly undercut your bids without even studying whether you’ll have some money to bring home or lose it all to backup for wrong estimates, you might see your business closing soon. The bottom line is don’t sacrifice profit just to win more work.
4. Set Goals for Your Profitability
To improve your overall profitability, you need to set profit margin goals that will be worked on by you and your whole team. Think about where you want your business to be in the next five years? How much do you aim to earn this year? How many projects do you wish to close in the next two years?
Look into how you want your business to expand and from there, list the steps you need to take to achieve the goal.
Knowing your long-term business plans motivates you to achieve higher profitability and will help you shape the types of projects you should take to grow your business. This will also serve as a guide for your estimator on setting markups that will help you hit those goals.
5. Track Costs and Manage Your Profit
One of the keys to improving profitability in your business is good project management. Good project management, on the other hand, means being able to track costs, progress, and schedule. All these elements will determine your profitability. So be sure to monitor them. You can do so more effectively with the help of a construction project management software like Pro Crew Schedule where all of these are being tracked on a daily basis.
Another tip we have for you is to stop doing additional work on a project until a price has been agreed upon and it has been approved by the client. Also, try to stay on top of your materials management. Stage the construction site in a way that fosters productivity. Train them on how to work while practicing safety so you won’t need to shell out for unnecessary expenses. Remember that a safe construction site benefits not just productivity but also contributes to your profitability.
And like we always say, motivating your workers is one of the best strategies for boosting productivity that leads to profitability. Read our tips on how you can motivate your crew members so they can give back to you with their performance.
6. Analyze Results of Your Stints and Plans
Like we mentioned at the beginning of this blog, you won’t know how profitable you can be in your project if you don’t measure it. Capitalize on your construction project management software. Teach your members on how they should input their daily output. This way, you won’t need to do estimates but rather get a more accurate measure calculated by your software.
But don’t rely solely on your software too. Apart from the daily monitoring through your construction project management software, schedule meetings with your foremen and project managers to do a postmortem analysis of how close your estimated profit was to your actual profit.
Take a hard look at your cost estimates and your actual costs. Note costs that were over or under your estimate. This will help you do better estimation the next time around. Look into productivity issues that might have caused overruns. This way, you can train your workers on how they can improve their methods and look for new and better ways to reduce downtime.
In construction, profits are not instant. You work hard for them. And the profit you earn is greatly dependent on how you estimate the project and increase your productivity rate so that you can get more from the budget given to you by the owner. You should always consider adding at least 10% of the total estimate you made so there’s something you can use for emergencies.
Looking to better manage your budget and monitor costs? Use Pro Crew Schedule to compare your actual cost with your estimate and your progress with your plan. Pro Crew Schedule improves the accuracy of your data with comprehensive and real-time project updates