How to Calculate Profit Margin for Your Commercial Construction Project
Posted January 28th, 2019
Due to the inconsistent nature of commercial construction, it is essential to build a healthy profit margin into each of your projects, and to know what the breakeven point is that will determine whether each job ultimately finishes with a profit or a loss. The key is to properly run the numbers, being as specific as possible with your job costing, overhead costs and the project’s payment schedule.
Is your commercial construction business profitable? For many commercial construction companies, the answer is “Yes, I think so!”
It can be stressful to take a full look behind the curtain of your finances, especially if you are worried that your profit margin is thin or non-existent. But identifying red flags is important to preventing job delays, payroll shortfalls or as the owner, finding yourself unable to take home a paycheck.
Note: Whether you’re starting from scratch or taking a fresh look at your finances, user-friendly accounting software such as QuickBooks can simplify the process as you estimate and track your costs.
Step 1: Tally Job Costs
The first step in calculating profit margin for your commercial construction project is to generate a list of your job costs, including:
- – Materials
- – Payroll – (Direct labor and Subcontract labor)
- – Bond premium
- – Permitting
- – Equipment
Job costs should be broken down for each project and then married up to the job’s overall schedule and built into your business’ budget and cash flow planning. Make a note of when you will need to order some of those materials (lead times can be long for some things), when you will be invoicing for those materials and labor, and how long until you will be paid. Be sure to account for retainage.
Step 2: Verify overhead
To calculate your business’s overhead, generate a list of all bills and expenses outside of your job costs that are needed for your business to operate. These typically include:
- – Rent or mortgage payments
– Payroll for office-based support staff
– Insurance (General Liability, Workers Comp, Vehicle, etc.)
– Company vehicle payments
– Website costs
– Phone bill(s)
– Owner Salary
– Outstanding debt payments
Overhead should be broken down on an annual and then monthly basis so that the costs can be included in your bids for new projects. For example, if your annual overhead costs are $100,000 and you have one contract that will be your primary source of revenue for six months, you should add $50,000 to your bid amount to account for overhead during that time.
Step 3: Crunch the numbers
Using your bid amount and the values you calculated in Step 1 and Step 2, complete the following formula to see your net profit and margin:
Questions about estimating markup and profit margin? Check out our free guide!
Download a free copy of Margin versus Markup.
Step 4: Look for Improvements
Don’t stop at the first calculation. Knowing that delays and other issues may arise, rework the numbers until you are confident in your bid amount. Again, knowing where your breakeven point is on the job will allow you to know what type of delays and / or other issues you can handle and still be profitable.
Having a complete understanding of your profit margin can allow you to make adjustments that allow your business to function better, such as negotiating better payment terms or lower retainage with your general contractor. In turn, that means getting out of debt, confidently investing in new equipment, hiring more qualified employees, and bringing home a steady paycheck for yourself.
Step 5: Rinse and Repeat!
This process should be standard for each of your jobs, and the numbers should be revised and adjusted as each project progresses. Inevitably, some projects will be delayed or drawn out, unforeseen expenses may arise, or perhaps your estimates were off in some way. The more you get into the habit of working through the numbers and recalibrating your bid estimates, the better you will get at it, and the better your business will operate.
Are you still unsure of your profit margin, or are you in need of additional capital to fill the gap before you receive payment on the job? Mobilization Funding’s knowledgeable team of experts can help. Contact us today for a free consultation.
And for more tools and strategies subscribe to our newsletter.