Updated: Nov 7
Construction companies do not only build structures, they head for building profits also, of course. Although most of them know how to control their constructive projects pretty well, not many can be that good when it comes to the aspects of structuring their profits. There are reasons for this, but the main factor would come from the operation way of the building industry. Specifically, to be competitive in the market, many business owners have a tendency to focus on bidding on contracts and getting projects rather than creating a profit to be competitive in the market. Many clients, particularly those in the public sector, prefer to give contracts to the lowest bidder, making it difficult for contractors to stay profitable.
Additionally, prices of materials rise, demands for proposals keep going up, and scarcely qualified laborers make payable wages spiral upward which also makes it harder for building firms to build their income. These listed factors are faced by all construction companies in the same circumstance and there is no chance to control them. What makes a difference is how effectively they can produce their work to be profitable and there is no better way to master this than pay good attention to the features affecting their business. Try answering these questions meticulously to check if you are aware of them or not and improve your construction company's profitability.
1. Do you know all your costs and count them right?
Do you aware of all expenditures related to the completion of your construction projects, from screws and snaps to the acquisition of new heavy equipment and payrolls?
Are the costs of operations and overhead like office rental, debt, legal fees, support staff payroll, insurance, IT, etc. calculated in your financial balances? If the answers are all yes, cheers for one step in getting closer to know how much you will spend on your projects.
However, those are just a few of the expenditures associated with every construction job and they might differ significantly from one state to the next or from one region to the next. In certain cities, obtaining a permit is more expensive than in rural areas. Wages also vary so be noted to base your labor’s salary on the current state's minimum wage rate to estimate this cost reasonably.
We have just talked about differences in costs by place, but it is not enough. Time passes and changes things, including prices. Do you count this in your estimate?
Yes? Then how? If your answer is calling the suppliers for the current prices of everything needed in a project rather than just relying on Google, you get the perfect score for this question. Make your estimates realistic and precise as much as possible to avoid spending your own money to cover the costs that you miscount.
Do you think that we have listed everything needed to know about the costs?
Well, it is so close. We do have another important cost to list: the cost of risk.
The existence of risk and its consequences are always potential in any action we make so do not forget to count risky costs in your bid. Build in a contingency line to your pricing budget that can absorb additional costs when the risks happen.
To sum up, getting to know all these costs as accurately as possible when reporting to the project owner or you would be shouldering them when you aren’t able to declare an item. Moreover, you also know how to make better bids in the future.
2. Do you know how to manage your profitability?
Appropriately listing and pricing things needed in a project can be tedious and time-consuming but the work gets well paid off: your profits.
We know the profit of building companies comes after subtracting costs from the bidding price of their construction projects. More money earned would be more profit made. That’s why many firms want to win the bidding races and get as many building projects as possible by offering a low-budget estimate. Are you one of them? I hope you would say “no” as it is the right answer in this case.
Lowering bid prices is not the way to grow profits. In fact, it would lessen your potential profit because this means you accept to get paid less for your work. So do your estimates thoughtfully and don’t try to become the lowest bidder, unless you pick up a few good bargains and your costs vastly decrease.
So far, we are aware of costs, profits, and their relations. Anyone doing business wants to maximize their profit. For our bidders, good project management is one of the keys to helping you with this. Do you know how to manage your building projects? Keeping good track of the costs, progress, and deadlines are crucial factors. It’s the modern age so don’t forget to take advantage of available software and technologies because work efficiency will greatly contribute. They may be pricey but they are worthy.
Do you set profit margin targets for your firm? A “yes” answer pushes you ahead to enhance your overall profitability since having goals means having roads that lead to success in the business world. In case you haven’t set your aims, think about these questions. Where do you want to see your company in the following five years? What is your financial goal for this year? In the next two years, how many projects do you hope to complete? If you know the answers, list the steps you need to take to get things achieved. Knowing your long-term business plans means knowing your profit maturity to get it well controlled.
Do you feel that we are missing something that relates heavily to profitability? You are so right. The productivity isn’t mentioned yet. A boosted productivity surely leads to profitability, that’s why we are talking about it next.
3. Does your firm work productively?
Improving profitability is the crowning achievement of any manager. A piece of advice to get this, which came from successful leaders, is increasing work productivity. Productivity rates, by definition, are total output per unit of input. However, with so many moving pieces and materials to handle, manually checking on every aspect of the project and comparing day-to-day accomplishments only to know the project's present status would be challenging. What do we need to do?
Firstly, careful planning and scheduling of work. General contractors and trade contractors must work together to make sure that work is completed in a logical sequence that focuses on maximizing the efficiency of everyone working on the project.
Secondly, you need to get your well-planned work done by qualified labor to increase work efficiency. Because your field workers are such a vital component of your productivity, it's critical that they understand how to accomplish duties correctly and safely. This entails ensuring that each employee has received the necessary training and is provided with the skills and resources to perform their duties effectively, avoiding accidents that require unnecessary rework.
The solution to increase revenue and profit is always something that any business wants to find and spends a lot of effort to research. After all, any business activity is about wanting to achieve the best results. All plans and policies, no matter how good, but the result is that the revenue is not as expected, it is certainly not a good plan. Therefore, business owners should consider every decision thoroughly before activation.
>> Read More: Common risks in Construction Project Accounting
Not sure how much your construction business made? Irvine Bookkeeping tracks every dollar that enters and exits each job so you may accurately determine your income. Construction bookkeeping, financial statements (weekly, monthly, and quarterly), bank account reconciliations, tax preparation, and advisory services are all available from us. A complete financial construction bookkeeping service that enables your construction accounting process to run smoothly and run with confidence.
If you, as a business owner, see that you cannot handle accounting on your own, consider hiring an accountancy service for contractors to help you with it.
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