You’re in business to make money. Every day you’re working hard for your customers, and working to exceed expectations. So why are you stuck at a profit margin of two to four percent, just like the majority of contractors? With a little work on your process, you can start delivering a 5-10 percent return or more. Maximum contractor profit margin comes from effective strategies focused on your income.
Profits start with solid estimating. You certainly don’t want to lose money on jobs. However, many contractors find themselves occasionally losing money on a job due to poor estimating. Bid too low and cost overruns or unforeseen expenses could eat away your profit.
One factor that increases the risk of underbidding is not knowing what might impact the work. Don’t forget to anticipate the unexpected, or plan for unforeseen difficulties. Weather, illness, hidden surprises in the middle of a job can undo many a bottom line. Building in some room for these scenarios will help protect your profits. The better you are at estimating, the more profitable you will become.
Know your costs
Putting in the time to accurately estimate your costs pays big dividends, and is a key component of proper estimating. Spend time with vendors, discuss supply concerns they may have with key items. Lunch with your team can leads to open discussions about labor shortages, hours, and more. Self-employed contractors have to be just as informed. Your time has value – and you should budget, and pay yourself, for the time spent running your business. It’s important to set aside time for administration, accounting, sales visits, and all of the other areas required to build and run your business. Your margins should cover those hours spent running your business and not only doing your job.
Manage employee and subcontractor time and quality
Redoing work because of mistakes or poor quality eats into your profits. Effective management schedules enough time for subcontractors to complete their work, resolve scheduling conflicts, or incur rainy days – and profits off those challenges. Maintaining a clean job site can seem like just another hassle. However, when subs arrive to see a jobsite clean, with organized materials ready to go, they save you time and money. Assuming the timing will always go perfectly or that every job your electrical subcontractor does will pass inspection cuts into your profit, not theirs.
Know the market
Markets are always changing, and the most profitable contractors anticipate and adapt. Just because customers have been clamoring for one style for years doesn’t mean that will always be the same. You have to stay on top of larger trends, while knowing what the local market demands as well. This helps you find customers who are also looking for the most up to date look, rather than those trying to catch up.
Securing great customers makes a difference for contractors that are generating higher margins. Cultivate relationships with customers who know good design, the value of master craftsmanship, and excellent experience, and you can watch your business grow. Not only do those customers improve your bottom line, but they are more pleasant to work with and give great reviews. A little extra time in developing those quality customers pays off in the most valuable advertising – word of mouth.
Price Your Work
You’ve focused on creating great estimates of the work, but pricing that work has a big impact on margins. What are your competitors charging for their labor? What do you offer that makes you stand out? Is competition stiff in your local market? This might require you to have a higher volume of work to make money. Invest in bringing in more jobs, and focus on shortening your time to job completion. If your competition is outdoing one another on luxury upgrades, then keep a keen eye on quality and the finer details to sell those extra expenses at good profit margins.
Review Your Projects Regularly
Managing for profitability requires keeping an eye on projects both while in progress and upon completion. Often contractors will use one or the other in weekly review meetings. The highest profitability goes to the contractors that know how to use both Work In Progress (WIP) and Completed Project Analysis. You need to be on top of your projects to make sure they don’t get out of control. But, you also need to review them after the fact, and not just move on to the next job. Instead of relying on only one method, use both. Those additional extra minutes can help you learn from your mistakes and successes to achieve the highest efficiency.
Contractor profit margin analysis
What’s the percentage you make when looking at your bottom line? Reviewing your previous successes and failures is key to increasing your profitability in the future. Everyone makes mistakes, especially when starting out in business. It’s how you learn from them that makes you a success or failure.
If you realize that you allowed labor costs to get out of control in the past, then you’ll make different adjustments than if your problem was not following the trends on high end upgrades. Know your numbers to raise your profit margins.
A focus on the nickels and dimes, and the barest tactics of getting it all done, won’t elevate your margins to the higher industry percentages. Instead, a strategy of getting the most out of your time, energy, and resources pays off more. Know when to call in professional business management services. You know when to subcontract on your jobs. Consider that you may also need to subcontract a CPA to better understand your profits and losses. Learning about new techniques saves you time, focuses on the big picture, and allows you to work most effectively.
How much do you want to make? Sure, you know the dollar amount, but do you know your target margin? Many contractors fail to set goals for increasing their margins, only focusing on increasing their gross or net income. To move ahead of your competition, you need to see the bigger picture. Market share is more than just the number of jobs. Challenge yourself to both reduce costs and increase prices, and you can move ahead of the pack.
Profitability is one of the most important keys in running a successful business. Any business owner who fails to maintain profitability risks going out of business altogether. However, it’s also one of the most straightforward ways to leapfrog your competition and achieve success. So set aside the time to do the work of evaluating your business, look for opportunities to improve, and manage your work to achieve a great profit margin. Paying yourself to work on your business can be one of the most financially rewarding uses of your time and money.