How do your construction profit margins compare to the industry average?

Find out whether you’re steadily growing or stuck in the muck with the most informative financial metrics around: gross and net profit margins.

You’ve got a delayed project, a broken truck and a team drowning in spreadsheets. A new project manager, truck and tech tool would solve all those problems.

But can you afford them? Is your construction company even profitable?

If you’ve been relying on an accountant to tell you the answers to those questions rather than pulling up a streamlined dashboard and checking for yourself, you probably don’t have as firm a handle on your finances as you’d like.

As a company owner, understanding the current state of your profits is essential to be able to make strategic business decisions, such as hiring staff and purchasing equipment. 

If your ambitions stretch further – like being an industry leader – you also need a sense of how you stand compared to your competitors.

Knowing your gross and net profit margins, as well as those of the typical construction industry, will give you the guidelines you need to position your business for massive growth.

What is a construction profit margin?

A construction profit margin is a financial metric that indicates how well your business is doing. It can tell you how much revenue has been generated from your projects and what’s available to invest into future growth.

Gross profit margin versus net profit margin

There are two main profit margin metrics to understand:

📈Gross profit margin – This is the money you bring in from your projects or services BEFORE you pay any overhead costs, such as salaries (including your own!) and office expenses. Keeping close tabs on this number is one of the best ways to increase your profitability. 

📈Net profit margin – This is what’s commonly referred to as your “bottom line.” It’s what’s left after you’ve paid ALL your expenses, including project-related costs and overhead. Your net profits can be reinvested into your business to fuel growth.

What are good construction profit margins?

We’re going to hit you with a bunch of numbers. These are the average profit margins we’ve found from working with hundreds of residential and commercial construction businesses.

You’ll notice there’s not just one benchmark for whether a business’ profit margins are good or not. We realize there are contractors out there who aren’t satisfied with just being average, so we’ve separated out the “Awesome” and the “Ahhh, we could do better…”

For those of you with higher ambitions, we present a meatier goal to strive for. One which can absolutely be realized. We see motivated construction contractors achieve it all the time.

If you’d like to learn more about why we split the industry the way we did, Benji walks through all the numbers in this video.

How to calculate profit margins

In case you don’t happen to know your gross and net profit margins, first off, don’t feel bad! Most contractors we work with don’t either at the beginning.

Here’s a simple example that explains how to calculate them:

Let’s pretend you’ve done a bunch of home reno projects during the year and brought in $1 million for all that hard work. You shelled out $600,000 for materials and labor, and your overhead for the year was $100,000.

We’ll start by calculating the actual net and gross profits:

In this example, your actual gross profit would be $400K and your net profit would be $300K.

To get your profit margins, you now divide the profit numbers above by your revenue ($1M), and turn them into percentages.

Your gross profit margin would be 40% and your net profit margin comes in at 30%, which would put you in the “Awesome” range compared to typical renovators.

Why do I need to track my profit margins?

Simply put, you can’t create metrics on what you don’t measure. You need visibility and control over every facet of your finances, from your budgets, to your expenses, to your profit margins.

If you don’t currently have a defined budget, this Quick Tool can sort you out. Then you want to be tracking all your expenses, both variable project-related ones and your overhead.

Once you’ve got those numbers, you can start calculating metrics, like your profit margins, to determine the success level of your business. Over time, as you have more historical data to work from, you’ll be able to see trendlines and get a picture of your growth rate and future potential, which will form an essential element of your strategic planning.

Factors that impact construction profit margins

There are a number of circumstances that can impact your profit margins, some of which you can control, others… not so much.

A couple that leave you at the mercy of the market include:

😡Material costs: Rampant supply shortages and tariff wars are well beyond your pay grade, no matter how profitable you are. These hits can get passed onto the customer to some extent, but regardless of how you divey them up, they can wreak havoc on your profit margins.

😡Labor costs: This seemingly never-ending frustration puts you in a tough bind because talent costs money, especially when there’s so little of it to go around. But those dollars can eat into your profit margins. This is where diligent financial tracking and a solid hiring funnel can really do wonders for your business.

Fortunately, there are also a couple factors you do have some control over, particularly with your gross profit. This is one area where intelligent decisions can move the needle on your margins.

💡Job costing: Get this wrong and you blow your markup, eroding your profit. It’s worth taking guesswork out of it as much as possible with a dependable job costing system that can help to protect your margins.

💡Job selection: Put some thought into the jobs you agree to take on. More than likely, you’ve reached a stage with your business where you no longer need to jump on every opportunity that comes through the door. So choose wisely… and profitably.

Practical tips to improve construction profit margins

Following these general strategies can provide some serious uplift to your gross and net profit margins. 

Ignore them or treat these aspects of your business too casually and they can easily become profit margin pitfalls.

• Implement a financial tracking system that gives you the numbers you need at a glance.
• Hire talented staff and crew that know how to work efficiently. 
• Run organized projects. Doing things right the first time saves money.
• Use a tech stack that’s appropriate for your business.
• Keep a close eye on your overhead. Don’t let admin costs get out of control.
• Have a cashflow and payments schedule that can carry you through your projects.

5X Growth in less than 5 years

After finally having enough of the daily grind, Charlie Bethell of Plus Construction made the life-changing decision to join Breakthrough Academy and started systemizing his operations. 

With a close eye on his costs, he managed to QUINTUPLE his net profits and achieved his revenue, work hours AND personal savings goals within three years – two years ahead of schedule.

Don’t let anyone tell you digits are dull. They are the gateway to greatness.

Ready to raise your construction profit margins and lower your stress levels?
Learn more.

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