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Construction Profit Margins: Calculate and Track Your Business Growth

May 24, 2024 6 min. read
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As a small business owner, you know that your construction projects have to be profitable in order for you to succeed. But how do you ensure that you’re making enough money from each job to cover costs, stay afloat and grow your business?

By calculating and setting healthy construction profit margins.

Keep reading to learn how to calculate your profit margin, what profit margin you should aim for, and how to keep your margins on track.

What is a construction profit margin?

A construction profit margin is the money that you have left after all the costs associated with running your business have been paid. It’s made up of two main elements: overhead and markup.

  • Your overhead consists of any expenses you have to pay to keep your construction business up and running. Think about labor cost (wages for your employees), material cost, utility bills, office rent, and insurance.
  • Markup is how much you charge on top of your overhead expense to ensure you make a healthy profit. Deciding how much markup to charge depends on your industry, costs, and competitor prices.

When combined, overhead and markup determine your construction profit margin on each job. For example, if you spend $20,000 on a project—including all labor, material and overhead costs—and add a 20% markup, you would charge $24,000. The extra $4,000 is your profit margin.

You can make sure your construction projects are profitable and your business stays successful by carefully managing your overhead expense and setting the right markup.

You figure out how much expenses you have, and then you figure out how much money you want to make, and then you charge the difference. It’s that simple,

Adam Sylvester Charlottesville Gutter Pros

How to calculate your construction profit margin

This is the formula you’ll use to calculate your construction profit margin:

( (Service price – Cost) / Service price ) x 100 = Your profit margin percentage

Step 1 – Determine your total service price
Step 2 – Subtract the cost of the service for your business (including labor, materials, and overhead expenses)
Step 3 – Divide this number by your service price to get a decimal
Step 4 – Multiply the answer by 100 to find the percentage

For example, if your service price is $15,000 and the total cost of service is $10,000 (including labor, overhead, and materials), your formula would look like this:

( ($15,000 – $10,000) / $15,000 ) x 100 = 33%

Your profit margin for that particular job would be 33%.

Pro Tip: To calculate your contractor profit margin, markup, and pricing on a specific job, use our free profit margin calculator.

If your profit margins aren’t where they should be, there are a number of ways to increase profit and introduce new cash flow strategies to your construction business. As mentioned, stay on top of your profitability to ensure you can pivot and adapt before a minor adjustment becomes a major problem.

“If you actually do it that way, you might realize how much you actually need to charge,” adds Sylvester. “ Like ‘wow, I need to charge $300 an hour, oh my gosh.’ Well, that might be how much it costs to run a profitable, legitimate business.”

What is overhead in construction?

Overhead includes all the expenses needed to complete a construction project and run your business. You probably have a mix of fixed, semi-variable, and variable costs, such as:

  • Rent
  • Salaries
  • Subcontractor wages and labor costs
  • Utility costs
  • Gas
  • Cell phone bills
  • Materials
  • Insurance
  • Vehicle leases
  • Repairs and maintenance
  • Construction management software

These overhead costs include both direct and indirect costs. For example, subcontractor wages and materials are direct costs because they are tied to specific jobs and clients.

On the other hand, office rent and utility costs are indirect costs because they aren’t tied to specific jobs, but are still necessary for running a successful construction company.

Knowing your overhead costs is essential for determining your construction profit margin. Make a list of all your monthly expenses and add them up so you know what you spend each month. This will help you set the right prices to ensure your projects are profitable.

READ MORE: Choose the right construction management software for your team and budget

You need to make sure that you’re covering your rent, your licensing, your insurance, the trucks, the gas, the consumables, the shirts, business cards, marketing efforts, absolutely everything. That all goes into the overhead,

Zach Jurkowski Montreal Contracting

What’s a good construction industry profit margin?

Construction Services Industry shows the average gross profit margin for construction business at the beginning of 2024 was around 24%, while the average net profit margin was 7.6%. 

However, what counts as a healthy construction profit margin depends on a variety of factors, such as:

  • The services you offer
  • Where your business is located
  • The average wages for general contractors
  • Whether you offer commercial or residential services

That being said, you should try to aim for an average gross profit margin of 10-35%. That leaves you with enough room to make a reasonable profit, even if your expenses fluctuate here and there.

Low profit margins can mean you end up covering expenses out of pocket, so it’s important to set and enforce healthy gross profit margin and net profit margin goals from the get-go.

As you grow, it might seem like your  profit margins decrease, but when your total revenue rises your costs go up as a result—including paying out more in salaries or an overall increase in overhead.

“I think it’s a trap that a lot of people fall into. They think that they’re more profitable at a lower level and that’s because they’re wearing 15 hats and what they’re doing is they’re paying themselves,” says Donovan Quesenberry from DIV Cleaning Service.

“At a million dollars (in total revenue), as we’re building that team, you’re forced to pay other people that salary and you’re not earning that income yourself.”

Keeping construction profit margins on track

Profit margins play a huge role in the success (or failure) of any business. To make sure that your construction profit margins stay in the green, be sure to:

  • Recalculate your profit margins at least once every three months
  • Keep an eye on changes in expenses, like increased cost of goods
  • Adjust your prices when necessary
  • Negotiate prices with current suppliers, or look for new ones
  • Review expenses and make adjustments or cuts when applicable

Originally published in March 2022. Last updated on May 24, 2024.

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