Are your profit margins what they should be?

Knowing your numbers is one thing. Knowing how they rate is something else entirely. We pull back the curtain on these elusive but essential benchmarks.

When you reach the end of this year, as you look back over the past twelve hectic, demanding, seemingly endless months, how will you answer this one basic question:

Did your business have a good year?

It’s an easy question, but deceptively difficult for most contractors to answer, even if their financials are relatively well-organized.

There are two main numbers that can help: your gross and net profit margins.

Profit margins are like the vital signs that reveal the health of your business. But knowing your own profit margins only gets you so far. They can’t really tell you if you’re crushing it or being crushed. Those digits alone don’t tell the whole story, because they don’t mean much without being able to answer the second, unspoken part of the question:

… compared to what?

Unless you have a business owner friend in the industry willing to share their numbers, it’s tough to really know where you stand compared to your competitors. Searching online is also unlikely to serve up accurate or specific benchmarks because not many experts have the necessary level of insight or detail on a vast quantity of contractors’ businesses.

Fortunately, we’re not most experts.

After working with over 1500 contractors, Breakthrough Academy is in the unique position to have actual, rock-hard data to help you accurately answer that very question.

In this article, we’ll give you benchmarks across a bunch of trades to provide you a sense of how your business is REALLY doing.

What’s a good profit margin for my trade?

We can tell you that from what we’ve seen, the average contractor out there has a net profit margin of between -2% and 4%. But you’re not content with being average, are you?

We didn’t think so.

Therefore, without further ado, we present… industry-specific profit margin benchmarks.

These are the numbers the motivated contractors we work with size themselves up against to determine whether they fall into the category of being awesome, average or ahhh maybe we could do better...

Trades Profit Margin Benchmarks

Gross Profit Margin vs. Net Profit Margin

A general contractor business plan is a future-focused document that outlines the financial, operational, sales and marketing strategies of a general contracting company to achieve its goals over the next five to ten years.

If the above numbers are making your eyes cross a bit, here’s a brief overview of gross and net profit margins, and exactly what the difference is between them.

First though, it’s worth gaining clarity on a couple other relevant definitions that strongly impact your profit margins. Namely, the various kinds of expenses:

• Overhead – These are the fixed costs that run across everything you do and keep your company humming along day to day, regardless of whether you have any projects going or not. They include things like the lease for your office, your vehicle fleet, business insurance, marketing spend, and staff salaries… including yours!
• Variable Costs – These are the costs you incur directly in relation to your projects. So, things like labor, materials, and subcontractor fees.

Got that sorted out? Here come the heavy hitters:

• Gross profit margin – This is the money you bring in from your projects or services BEFORE you pay any overhead costs.
• Net profit margin – This is what’s left after you’ve paid ALL your expenses, including the variable project-related stuff and your overhead – and, if we’re going to get super technical – taxes. Never forget about taxes. The government sure won’t.

Which profit margin is the better one to focus on? They both have their uses. Net profit is commonly what’s referred to as your “bottom line.” It’s what’s available to reinvest and grow your business. Meanwhile gross profit is the area where you can most easily adjust your spending to move the dial on your margins.

Curious to know more about the ins and outs of financial controls? Take a look at this web class dedicated to the topic.

And… just in case you’re not using a budget (no judgment, two-thirds of the contractors we speak to don’t have one initially), here’s a quick-tool to help you create one.

How to calculate profit margins

Brace yourself cause we’re gonna break out some math and work through a very simple example of how to calculate both gross and net profit margins.

Let’s pretend you’ve done one big job all year (yeah, yeah, we know… we said simple, remember?). You’ve built a new hotel and the customer paid you $1 million to do it. You shelled out $600,000 for materials and crew, and your overhead is about $200,000 a year.

Based on that, here’s how you’d calculate your net and gross profits:

To get your profit margins, you basically just divide the profit numbers above by your revenue, and then turn them into percentages.

Gross and net profit margins are two of the most important key performance indicators you can use to gauge the success of your business. They’re also much easier to keep tabs on if you have a good financial controls system in place.

If your financial practices could use a little sprucing up, this episode of the Contractor Evolution podcast offers some great hacks to make your bookkeeping a little smoother.

Breakthrough Academy has helped thousands of contractors systemize their business. For instance, after implementing an improved job costing system, Cory Byron from VanCity Electric was able to DOUBLE his gross profit margin.

Our contractors generally attain a 69% uptick in their net profit margin within their first year of working with us. Want to join their ranks?

Get in touch today
and prepare to make your profits roar.