Regardless of the size of the construction business, we all face the same issue of getting the balance correct.  Maximising the builder profit margin and minimising overheads are key factors to managing a profitable construction business.

Furthermore understanding the difference between “cash flow” and “builder profit margin” is crucial to the financial success of any construction business.

Maintaining builder profit margin in the construction industry

How often do we hear the term “Cash flow is king”?  Less often, but more important is the term “Profit is King”

Cash flow is simply the flow of money into and out of the business.  Money comes into the business from clients and money goes out of the business to pay the overheads and project costs.  As a result when a construction company decides that cash flow is king they can often find themselves stagnating.  With the focus on cash flow, a construction business often finds they use the next job to pay for the previous job.

It’s when a construction business understands that “Profit is King” that the business will grow.  Most noteworthy for this type of business is the understanding of overheads.  As a result, the correct builder’s profit margin is then added to jobs.  Consequently, cash flow comes into the business, overheads are paid, yet there is still money left over in the bank account.  The money left in the bank account is the builder profit margin and is what is used to help expand the business.

Here are 4 tips to maximise builder profit margin:

1. Know your builder “base costs”

• Knowing the company’s overheads and, more importantly, understanding them is critical.  Without this information adding the builder profit margin to any job is  like adding a number and crossing your fingers.  Overheads include things such as leases, rent, utilities and office administration costs such as the printing, stationery, phones, the website and marketing and more.
• Make a list of all overheads and how much they cost each year.  Calculating this amount gives you a base figure to work from.
• Maintain an up to date electronic price list from your material suppliers
• Cultivate and maintain a good relationship with both your suppliers and your sub-contractors.  Treat them with respect and ensure prompt payments and clearly documented communication.  These guys can be critical when it comes to making or losing money on a project.

2. Include base costs into every building estimate

• Divide the total overheads cost by the number of projects you expect to undertake each year.  This simple exercise shows how much in overheads to add into every quotation you undertake.  When the project is won a proportion of the overheads are being paid for by each project, not out of the builder’s hip pocket.
• Don’t just use “bulk figures”.  Make time to add materials and items and sub-contractor quotes into your estimate.  When using “bulk figures” the builder profit margin becomes hard to trace.  Consequently, when forecasting similar projects, the same mistakes can be made and builder profit margin reduced or, even worse, lost.

3. Forecast any risks or hazards

• Be prepared for financial risks within a certain type of project.   Successful builders do this well.
• Identify contingencies within a project.  More noteworthy, be sure you have a financial buffer within the job costs for such contingencies.
• Implement quality processes when preparing project documentation to ensure compliance.   In this particular instance, we are referring to the Variation document.
• Prior to the variation document being signed, review the document to ensure it meets contractual requirements. Too many builders have “gone bust” because there was a loophole in the variation. As a result of the client legally refused to pay for the additional work.

4. Total business management

• Good builders will always build quality while staying afloat.
• Wealthy builders grasp how to successfully manage the “business of building”.  In addition, wealthy builders understand “Profit is King” and the need to use the right tool to manage their business.  More importantly, they understand that to protect the builder profit margin, effective management of actual job costs against the estimated job costs is imperative.
• Wealthy builders will review costs in “real time” not “after completion”.

It’s vital to realise the builder profit margin for each and every project. And that requires the correct construction management business tool.  The best construction management software package must be fully integrated to produce the best results.

Wealthy builders empower themselves with the correct business tool because:

• They can estimate using an up to date” price list.
• As a project manager, they can closely manage committed project costs against the budgeted costs.  This includes staff costs.
• They can see overruns as they arise because they manage job costing in real time.
• The project manager is proactive in executing a variation of the original contract.  Builder profit margin is protected because the project manager has the foresight during the project.
• Management of Suppliers and Sub-Contractors is simple.
• Management of the contract and retentions is automatic.
• Reduced data entry frees up 5 – 10 hours per week. 240 – 480 hours per year (based on 48 working weeks).

If you could save 240 to 480 hours per year what would that equate to in dollar value to your business?  Now add into the equation the builder profit margin you are now realising for each project.

Do you want to be a “Good builder”? Or do you want to be a “Wealthy builder”