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.
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If your company has more than a few employees, your revenue is growing, and you are juggling multiple jobs, it’s probably time to hire your own construction accountant, preferably a Certified Public Accountant. A good accountant often pays for themselves in a relatively short amount of time. After all, finances need to be current and accurate in order for you to stay on top of your accounts and plan for growth.
Hiring an accountant can save you time
Hesitant? Consider how much time you currently spend per week on payroll, sending out checks and keeping your accounts in order. What else could you be doing with that time? And how many times has something slipped through the cracks—like a late payment to a vendor or the IRS? Even once is enough to prove why hiring a CPA is a good idea.
A construction accountant can organize your company’s financial documents
No matter the industry, there are a handful of basic financial records that your company should maintain and pay attention to in order to operate efficiently. These barometers will reveal whether your company is making a profit or operating at a loss.
If you don’t know where your company’s financial information — like monthly accounts payable, accounts receivable, quarterly Balance Sheets, Profit and Loss Statements and other standard financial reports — are kept, or if they’re out-of-date or not organized, the right accountant may be your company’s new MVP.
Beyond creating an orderly archive of financial documents, a bookkeeper or CPA can dig into those numbers to identify strategies that can improve your company’s profit margin, eliminate debt, invest in future growth opportunities through strategies like increasing your prices, reducing overhead, or making other changes to your day-to-day operations.
Pay your taxes correctly and on time
Filing and paying taxes in a timely, consistent manner is an unavoidable piece of running a legitimate business. And the risks of incorrectly processing that paperwork are numerous and costly. Failure to do so can result in expensive fees by the IRS, plus automatic draws from your account to repay any unpaid taxes. An accountant will keep you in the IRS’ good graces.
Avoid costly overdraft and other avoidable bank fees
Bank and overdraft fees is not only a slow leak on your company’s bottom line — they’re also a tell-tale sign of financial problems. These fees and the underlying issues causing them (lack of organization, communication problems, etc.) will likely prevent you from qualifying for lines of credit or low-interest loans in the future. If this is a reoccurring issue, consider it a clear sign that you need help managing your cash flow.
An accountant can improve your business growth strategy
Are you passing up on growth opportunities due to a lack of capital? If your business has been approached to take on larger or more lucrative projects but you have turned them down due to financial uncertainty or issues with debt, it is likely time to find a financial expert who can help you to better direct your company to the right track.
How to find the right construction accountant
If you are reading this article, then by now you know it is time to take action. The next step is finding the right person for your business. Here are a few pointers:
1. Research candidates online. There are many websites dedicated to connecting employers and job seekers, such as ZipRecruiter.com, Glassdoor.com or even LinkedIn. Simply enter your qualifications (feel free to compare the requirements of similar businesses) and connect with local applicants.
2. Enlist help from a staffing agency. A temporary staffing agency in your area can place an experienced person with the right qualifications for a temporary amount of time, permanently, or a temp-to-permanent arrangement. While they charge a premium rate, this may be the best option for a business owner who doesn’t have time to weed through applications, order background checks or conduct initial interviews.
3. Reach out to trade associations. Your local chapter of the Associated Builders & Contractors (ABC) or similar agency like the Construction Financial Management Association may be able to connect you with viable candidates who is familiar the construction industry and would best fit your needs.
The bottom line: Your commercial construction business needs, and you deserve, a financial expert’s help.
You should be doing what you do best: focusing on growing your company and properly completing your jobs on time and on budget. Company owners are often reluctant to let go of finances, but the truth is that construction accountants understand your industry and are trained to look for inefficiencies, find other lending options, and help you to more efficiently run your company. Just remember that as the business owner, you should continue to review your financial position with your accountant on a regular basis.
Is your business getting ready to bid on your next big project? Contact us today for a free business consultation or click here to learn about how a financial capability letter could help give you a leg up on the competition.
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The devastation caused when Hurricane Harvey hit the Gulf Coast on August 25 was staggering. More than one million people were displaced and roughly 200,000 homes were damaged in a 300-mile span.
The cleanup and recovery will be a long one for the region, but within a few months, contractors working for the Texas Department of Transportation cleared 10 million cubic feet of debris from the state’s highways.
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The front door of one of the most historical sites in the country is undergoing a major renovation. The Independence Visitor Center, in Philadelphia, welcomes millions of people from around the country and around the world who want to see where the Declaration of Independence and the United States Constitution were signed.
Securing a surety bond can be a major hurdle for commercial construction companies looking to land bigger projects and grow their businesses. This is especially true if bidding on a government contract.
What is a surety bond?
Bonding is similar to an insurance policy, in that a surety bond company will cover the cost to fix any problems that occur, such as failing to complete the project, once a claim is filed against the policyholder. Unlike an insurance company, however, the surety bond company can then charge the policyholder for any dollars they pay out if a claim is a made.
To protect against losses, surety bond companies require stringent and thorough underwriting processes. In many cases, a bond company will charge a Bond Premium upfront before issuing the bond you need to start work.
Securing a bond can be a trying experience, especially when you have a valuable project at stake. The best strategy is to be organized, persistent and thorough.
First, know what kind of bond you need.
The first step in securing a bond is understanding what type of bond your company is looking for, as well as the value of the bond. Here are some of the most common, though they can be combined depending on your contract and situation.
Performance Bonds
Performance Bonds are the most common type of bond. They are required by many large projects, both public and private. If for some reason your business is unable to complete the work it was hired to do, the bonding company will have to cover the cost of getting the work done by someone else.
Payment Bonds
Rather than performance bonds, which primarily protect the project owner, payment bonds largely protect subcontractors, vendors and material suppliers for jobs on public property. Lien laws that ensure subs, vendors and suppliers are paid cannot be applied to projects taking place on public property.
Bid Bonds
Typically limited to public projects, bid bonds are a strategy for a project owner to pre-qualify bidders. By awarding a bond, the surety company is endorsing the bidder’s ability to do the work. A bid bond also means that if the lowest bid is accepted and then the bidder backs out, the bonding company will ensure that a bond penalty is paid (between 5% and 20% of the bid price).
Know what bond companies are looking for.
Surety bond companies only issue bonds to businesses that prove they are able to complete a project according to the contract. That means having the financial means to cover the cost of things like materials, labor and equipment.
They often require documentation such as:
- Company financial statements
- Work history
- The owner’s personal financial statements
- Credit checks
- Resumes of each owner
- Professional recommendations
To navigate the complicated system, most business owners hire a professional bond agent to help prepare and educate them on preparing the company for the application and underwriting process, identifying surety bond companies and then working with the owner through the underwriting process to secure the bid itself.
Surety bond underwriters consider the following categories when considering whether or not a contractor should be granted a bond, according to ConstructionBusinessOwner.com.
Character
Are the individuals who make up the construction firm of high moral character?
Capacity
Does the construction firm have the people with the knowledge, experience and understanding to do the work?
Capital
Does the construction firm have the equipment and financial wherewithal to complete the projects they desire bonds on?
Know how your credit affects your surety bond.
Similar to applying for a business loan, company owners and their spouses are typically required to sign an “agreement of indemnity” or a personal guarantee.
The cost of the surety bond is dependent on the company and business owners’ credit worthiness. Good credit can result in a bond premium of about 1% of the bond amount, or two to three times that if they have poor credit. That cost will often be due in full before the bond can be issued.
Danielle Rodabaugh, the chief editor of SuretyBonds.com wrote that you should thoroughly check your bond before signing and especially before submitting it to the project owner to verify that your company name, business address, bond value are all accurate and free of typos. Otherwise you risk your bond being rejected and losing the job.
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Tampa International Airport (TIA) is nearly finished with the first phase of its roughly $2.3 billion expansion. The first phase has included the construction of one of the largest car rental facilities in the country (2.6 million square feet), and a 1.4 mile people mover track, plus renovations to each of the four existing airsides and a major remodel of the main terminal.
The world of insurance can be confusing, especially for commercial construction business owners who need coverage for their commercial contracting companies.
The challenge is buying the right insurance so that your company is adequately protected and still within its operating budget. Insurance expert, Beckie Ervin of Ervin Insurance Concepts, recently spoke with Mobilization Funding to point out common, avoidable mistakes that can save you money and better protect your business.
If you own a construction company, you might feel pretty safe from hackers. Your company may not have a website, physical office location or a big staff. But unless you operate on a paper-only basis, you could be susceptible to hackers who want to exploit information and steal dollars from you, your company, employees, and clients.
Why would anyone want to hack your company when there are so many others out there? Because they can.
Hackers around the world are constantly looking for ways to steal money and information from American businesses of all sizes. They’ve captured thousands of credit card numbers through major retailers like Target. They’ve gained access and exploited information from all types of organizations, ranging from Fortune 500 corporations to public utilities and small private companies. They find ways to get everyday people to download corrupted files or programs or even emails that give them access to the information on your computer.
While it may seem unlikely, construction companies like yours have plenty of things that hackers want access to, like bank account information, credit cards, incoming receivables, employee records and personal information. But hacking is preventable. Many individuals fall prey to phishing scams where hackers are able to take control of a computer and force you to pay them so that you can access it again.
Here are a few easy steps you can take to minimize the chances of being hacked.
Update your passwords regularly
Do you use the same username and/or password for everything? If so, those accounts may be compromised already. Hackers, knowing that most people use the same log-in information, then use those same credentials to gain access to accounts on hundreds of different websites.
Large companies like Adobe (whose products include Photoshop or Acrobat) have been subject to hackers who stole username and password information from more than 150 million accounts.
While it is less convenient, your information will be exponentially more secure from hackers if you always use different passwords for your online accounts. For the most sensitive accounts like your email, online banking accounts and computer log-ins, you should change the password every three months and require your employees to do the same.
Bonus Tip: Use a service like 1Password so you don’t have to remember all those passwords.
Add extra security
For many online banking and email accounts, you can choose to add another layer of protection to your account called two-step verification. Two-step verification means that the website or bank will alert you if anyone attempts to log into your account from an unrecognized computer. It will also force whoever is logging into that account to input a code that is sent directly to your mobile phone.
Don’t log into unsecure networks
One of the most common ways for your computer and network to be compromised is to access free public WiFi networks like those at airports, coffee shops, or even the library. Because the networks have less protection, hackers can use them to gain access to your computer or accounts. If you need to use those networks, be careful about accessing sensitive information or logging into other secure accounts.
Secure YOUR network
Your own WiFi network is just as vulnerable as your local coffee shop’s if it is left unsecured. And if you’re thinking hackers won’t look for your network, think again. Hackers actually drive around in cars outfitted with antennas just to find unsecured networks. It’s called war-driving.
Cool name. Bad practice.
Protect your WiFi by updating its encryption standard and setting a password that is obscure. Don’t set the password, for example, to your business name plus the year. Hackers will crack that in no time.
Work with a cybersecurity partner
Construction is a group effort industry, so don’t stop that philosophy at the job site. Working with a cybersecurity partner, preferably a local business that can meet with you and answer your questions, can help you secure your data and protect your business.
Train your employees
Your employees already know to secure the shop for the night, but are they locking up their data? Implement a cybersecurity training program for your employees and ensure that those policies and best practices are followed.
Bonus Tip: Not sure what that policy would look like? This is a great place to start with a cybersecurity partner.
For additional resources about how to secure your business online, visit the National Cyber Security Alliance’s Stay Safe Online website.
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How does your business calculate the right bid for a job? Do you sort out the job cost and then increase it by a third? Do you use the “10 and 10” method, adding a 10 percent overhead and 10 percent profit? Are you able to differentiate between margin and markup? When is the last time you double checked those figures?
Financial expert George Hedley estimates that at least three-quarters of installation contractors don’t know how to estimate the markup they’ll need to cover job costs plus overhead and still turn their projected profit margins. Larger companies may find that their markup needs to be higher to cover increased overhead costs or to ensure that current or future investors are seeing healthy profit margins.
Understanding the difference between margin and markup is critical for contractors and business owners. We created this helpful Margin vs. Markup guide so you know your numbers are right.
Common terms defined:
Job costs include everything you’ll need to complete the work. This includes labor, materials, leased equipment costs, projected capital costs (if borrowing money for the job), bonding premiums, permits, gas, and other materials and supplies.
Overhead is all the bills and expenses not included in the above job costs that you will need to pay in order to operate your business. While this sometimes varies, it includes things like rent for your office, office-based support staff, some types of insurance, tools, equipment, bookkeeping, accounting, legal costs, owner’s salaries, outstanding debt payments and whatever else it might take to keep the lights on if you don’t have active jobs.
Net profit is the remaining amount after job costs and overhead are subtracted from the price. With net profit you can make capital investments in the company (new office, new equipment or machinery) and take distributions from the business in addition to your salary. A healthy business should be able count a net profit of at least 8%, experts say.
What is the difference between margin and markup?
Markup is the sales price, minus the job costs. Margin is the sales price minus the job costs and minus overhead allocation.
Here’s an example:
Let’s say you’re bidding on a job that will cost your company $200,000 to complete with materials, labor, and equipment, and you plan to bid $250,000. Your total sales forecast for the year is $1 million and your annual expected overhead costs at that level is $80,000. That’s an 8 percent cost of overhead. In other words, you need to tack on more than 8 percent to the cost of the job just to break even.
Many companies don’t take such a close look. Your business may be spending too much on overhead, or in times of growth, may not set aside enough to cover the cost of rent or to pay your own salary.
Your markup would be calculated as follows:
Using the overhead, you can also calculate the margin:
At the end of the day, having too thin of a margin can leave your company vulnerable if something goes wrong on the job, like a weather delay or another trade’s issue. A good bid is never about just tacking on some standard percentage to your job costs. It’s about being precise about your business’s financial needs.
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A natural disaster can put your whole life at risk. For business owners, there is even more to worry about and prepare for. A natural disaster like Hurricane Harvey in Houston, or the recent wildfires of California can lay ruin to your company.
You may think it would never happen to you, but one in three small business owners have been impacted by a natural disaster at some point or another. And worse yet, researchers at the Institute for Business and Home Safety found that one in four small businesses never reopen after they are impacted by a natural disaster.
Here are a few basic ways to protect your business in case disaster strikes:
1. Insurance. Insurance. Insurance.
Especially in the commercial construction sector, it can feel like you need insurance for everything. But consider that on average, a small business loses $3,000 per day once they close due to a major storm. How long could you stay afloat in a situation like that? Disaster Insurance, Business Owner’s Policies (BOP), or Business Interruption Insurance can be the key to saving your business if the worst happens.
When purchasing insurance for new equipment or for your business property, be sure to ask and understand what is covered and what isn’t in case of a disaster. Take some time to reach out to your current insurance provider to ask: “If my area gets hit with a natural disaster like a hurricane, flood, tornado, earthquake or wildfire, am I covered?” Then make sure the language in your contract is consistent with the answer you receive. This will allow you to be aware of any gaps in your insurance coverage so that you can fill them with additional insurance or set up your own funding methods to protect those assets.
2. Invest in a generator.
One relatively easy way to get your business back up and running after a disaster is to have a generator. After all, just because the grid is down doesn’t mean your office should be. Most businesses can’t operate for long without computer access. In case of a longer-term outage, your team will need access to things like overhead lights, power outlets, printers and a working coffee machine. According to one study, just 29% of small business owners have made the investment.
This is one item you should never buy just before an approaching disaster, since you likely won’t be able to find one anyway, and if you do you’ll probably pay double or triple for it. Plan ahead and do you research while the skies are clear. Find the right generator for you needs and purchase it as soon as you can. Another option is to make sure your employees have the tools and access they need to work remotely.
3. Secure key documents.
What documents does your business need to operate? If all of your work history, contracts, insurance agreements, Rolodex, employee and company information is saved in a file on your office computer, or locked away in a filing cabinet in your office, you need a backup.
This can be in the form of a storage company that can store your physical documents, like Iron Mountain—just make sure the facility is at least 50 miles away—or data centers for your electronic files with a company like Flexential.
4. Develop a thorough plan, and communicate it.
If a storm is coming or your job site is at risk of a natural disaster, ensure you are on the same page as the property owner or general contractor. Know when you would tell your employees to go home and make preparations or what to do in case your area is evacuated. In those cases, how should your team handle any equipment, materials or supplies at the job site? Who is responsible for taking and storing photographs of the site before a storm or natural disaster hits?
In areas where there is risk of tornadoes, flash floods or fast-moving wildfires, you should have a set plan in place for your employees to protect themselves on the job site.
In addition to the owner or GC, if your work schedule is interrupted by a natural disaster, you will likely need to contact vendors, suppliers, subs, your bank or lending partners. Be straightforward if this may impact your ability to make a payment on time or your ability to pick up a delivery. Honesty, initiative and responsiveness go a long way in these instances.
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