Profit is essential for business because it determines the company’s stability. Having a significant profit also gives you the ability to grow and expand your construction business in the future. Let’s take a look at ways your construction company can reduce costs, improve productivity, and deliver quality work to make it more profitable.
STEPS TO BOOST YOUR CONSTRUCTION BUSINESS PROFITS
IMPROVE JOB ESTIMATING PROCESS
One of the first areas to consider when improving your construction company’s profitability is the job estimating process. Most jobs or projects in the construction industry require a company to win a bidding process to get the work. This process is done by estimating materials, labor, and overhead costs and then building a profit on top of those. A critical aspect of making a valid bid is ensuring those employees creating it have the tools they need to succeed. These tools could include having accurate pricing for the materials, the number of labor hours the company typically takes to do similar work, and even having the right technology to assist them. Estimators that do not have all the required tools can be set up to fail from the start which may lead to over or under-bidding on estimates, ultimately leading to lower profitability.
Estimators may underbid projects to win the bid and receive the work, even if they know it might not end up being very profitable at the amount. On the other hand, estimators may overbid projects to ensure good profit margins; however, this could lead to not receiving bids. Therefore, we recommend that management create a process to review all estimates in detail, whether they win the work or not. Through this process, both management and the estimators can better understand their job costs, overhead, and profit. Proposals can then be refined to find the happy medium where the company feels comfortable receiving bids and profit from the project.
MAXIMIZE YOUR CASH FLOW
The pandemic has caused significant changes to the construction industry and has forced many to reevaluate factors affecting their businesses. With the potential loss of work, change in timing for contracts, and fewer bid opportunities available, many companies have begun to experience tighter cash flow. We recommend developing a system to manage your cash flow. Carefully track and justify your expenses so your business will not encounter losses. Offer maintenance contracts or an ongoing payment plan to your clients to stabilize cash flow.
IMPLEMENT TRAINING & SAFETY PLANS
Another area to look at when working to improve profitability is the training of on-site employees. The training and education you can provide employees is an investment. By helping to educate your team, you show them you see value in the work they provide for the company, and this may help to improve your retention of employees. As employees become more educated on the work they are doing, ideally, they will also become more efficient and will provide a better quality product to your customers.
An important part of training includes providing a detailed safety plan. Skipped safety protocols on job sites can lead to the loss of both time and profit; a hurt employee hurts the company’s profitability. In addition, a safety plan provides employees with an expectation of what needs to be done on a day-to-day basis on the job site. It can include things such as heavy machinery guidelines, how to lift and handle materials, and how to safely use tools. Make sure to track safety incidents on job sites and use those as future training examples to ensure those types of things do not occur again.
ASSESS SUBCONTRACTOR RISKS
Ensure the subcontractors selected to assist with projects are strong financially and have the required skills to complete the tasks they are hired to do. Consider working with a surety company to assist you in assessing the qualifications of subcontractors to verify they are in good financial standing, have a strong credit history, and have the management capabilities to complete the tasks. Additionally, ensure the company is current on all laws and regulations regarding hiring subcontractors to protect from any lawsuits or fines. Dealing with potential lawsuits and fines takes both time and money and will ultimately hurt overall profitability.
Productivity rates are measured as total output per unit of input. A few ways to improve this are employee training (as mentioned above), better scheduling, and supply chain management. Regarding scheduling, make sure employees and subcontractors are all on the same page, and work is being done in a logical sequence that maximizes efficiency for all parties. For example, if a subcontractor does not know precisely when they are expected to complete a specific task, employees may be left waiting for them to show up before they can move forward with their next assignment.
Another aspect of improving productivity is ensuring employees are completing tasks timely. For example, make sure employees are being supervised, not dragging their feet, and working efficiently. By doing so, you will find that projects will begin to be completed under budget and ahead of schedule, resulting in a higher profit margin. Finally, be sure to reward employees when projects are completed quickly and efficiently to give them the incentive to keep doing so. This can be done through bonuses, promotions, or even by updating the tools they use on a day-to-day basis.
SET GOALS & TRACK YOUR PROGRESS
To increase the profit margin for your construction company, assign a goal to each of the above tips. For example, can you increase your average job margin by one percentage point this quarter? Set goals and then track your progress toward them. Monitor the data after every job, at the end of every month, and the end of the quarter.
In the construction industry, profits do not just happen. It takes diligence and hard work to go from thin margins to being profitable enough to grow and meet your business goals. The above recommendations have only skimmed the surface of what construction companies can do to improve profitability.
Smith Schafer professionals can help. Our Construction & Real Estate Group, comprised of numerous professionals, is committed to serving over 800 Minnesota construction and real estate entities. From large construction companies to specialty contractors, we have the experience to bring you innovative solutions.