Construction profits can be difficult to predict, especially as circumstances in the market continue to change. To manage your profit margins and business growth, you’ll need to become acquainted with your business's various costs and how these can help you improve your business’s efficiency and overall profit, bolstering growth.
This article will cover costs, challenges and how you can calculate a construction company profit margin.
But let's get started by answering the most basic question of all!
What is a Construction Profit Margin?
In short, a profit margin is how much money your business has made.
In long, a construction company's profit margin is the percentage of profit related to revenue: it’s the percentage of revenue left over after all the costs have been deducted. It is one of the most important metrics your business needs to keep track of.
Your construction company's profit margin will fluctuate. Still, it’s vital to analyse how your business is performing, how it compares to construction companies' average profit margin, and how to manage costs and cash flow. It’s also necessary for cash flow forecasting to make the best use of future income and opportunities.
Of course, there’s a lot more to construction company profit margin, and we’ll cover what goes into calculating one and what it involves below.
What is the average profit margin for construction?
While the average gross profit margin for construction companies is around 20%, the net profit margin differs. In 2024, the average construction company profit margin fluctuated between 5% and 6%.
The difference in gross profit to net profit results from your construction company’s overhead costs.
Cost of Goods Sold vs Overhead Costs
Before we calculate construction profit margins, we need to understand the variables. Revenues, profit, cost of goods sold (COGS) and overhead costs are all involved.
If you’re planning a job, you may need to use cost estimates to produce an estimated gross and net profit to calculate the value of your business and if a job is viable. If you want to start keeping track of your cost estimates, we have the ultimate cost estimate template ready!
It can be tricky to differentiate the COGS (cost of goods sold) and the Overhead costs, so we’ve outlined some examples in the following:
COST TYPE
Costs of Goods/Services – COGS are also known as direct costs required for the job to get underway and be completed. These are the costs associated directly with the job/service your construction business provides.
Direct labor costs – These are the labour costs of a job, including the hours and salaries of employees. Your business can calculate rough costs in an estimate and reflect the total cost after completion.
Equipment – Equipment required for the job. This covers hiring or purchasing costs depending on the needed equipment.
Supplies/materials – All the supplies and materials you use; also include the transportation costs of moving the materials to a job site.
Overhead costs – Also known as indirect costs, these costs don’t fall under the costs of goods sold and are not directly linked to any one job, but they are the costs that keep everything running. Regarding company construction profit margins, these things can cut into your take-home.
Equipment maintenance – In construction, up-to-date equipment maintenance is essential.The last thing you want is crucial equipment failing on the job and running you over budget and time.
Training and development – Your employees require safety training or skills development, which may change depending on the project. Worksites may also require targeted safety modules to ensure workplace safety requirements such as first aid certification or correct PPE usage.
Skills development includes new workplace software, documentation and reporting.
Insurance fees – Compare plans and offerings from different companies, but this is a necessary expense to cover yourself and your business.Liability, equipment, vehicle, and employee insurance are vital.
Licensing and permit fees – The kinds of licenses and permits required for each job will change. This is a case-by-case evaluation of what you’ll need to account for and if it will be included when calculating an invoice.
Indirect labour – Indirect labour covers admin, customer outreach, safety reports and accounting.
Bookkeeping can take a lot of time, which becomes an opportunity cost or the cost of hiring an accountant to manage the books. Improving administration efficiency can streamline time-intensive processes and save you extra costs.
Marketing and advertising – This can be disproportionately large for your budget at first. As a business gets off the ground or expands into new areas, you’ll want to advertise this to customers and adjust your marketing to reach a wider audience. As you build a client base, marketing will require a smaller proportion of your budget. In construction, getting an initial foothold will be when the advertising bites most, but it will be worth reviewing what marketing your business needs as time goes on.
Taxes – One of the inevitable things in life. These include taxes on your income and employee wages.
How to Calculate Profit Margins
Now that you have an overview of the potential overhead costs, we’ll cover the different profit margins and how they are calculated.
It’s important to consider both Gross and Net Profit, as they can provide valuable insights into what is affecting your business profit and where to start improving your margins.
This will involve a lot of numbers to keep track of, and with a smaller/growing business, you, as the owner, will likely be the one doing this. Bookkeeping is essential for business owners, and tradies can check out our bookkeeping guide for extra help getting started.
Costs of sold goods (COGS)
Before calculating a construction company profit margin, you need the total cost of goods sold. This number is necessary for the raw, direct cost of jobs and provides your business with an overview of the margins for different types of projects.
Let’s say John has a construction company, let’s call it… ConstructionFlo! John sits down and adds all the direct costs of a recent construction project.
ConstructionFlo’s Direct Costs (COGS):
Direct labour costs: $180,000
Equipment: $60,000
Supplies/Materials: $110,000
180,000 + 60,000 + 110,000 = $350,000
Therefore, the COGS for this project was $350,000
Next, we’ll use this figure to calculate ConstructionFlo’s Gross Profit Margin.
Gross Profit Margin
To calculate and accurately calculate a construction company profit margin, the next step is to find the project’s Gross Profit Margin (GPM.)
Your construction company’s gross profit is your total revenue minus the expenses of providing a service. This includes materials, supplies and equipment, as outlined in the table.
Gross Profit (GP) Formula
To calculate Gross Profit (GP,) take your total Revenues (RV) and subtract the direct costs of the goods/services (COGS) rendered.
For the following examples, we’ll use John’s company, ConstructionFlo, and the costs he calculated.
In a formula, this looks like:
Revenues - Cost of Goods Sold = Gross Profit
Simplified for ease:
RV - COGS = GP
Say ConstructionFlo earned total revenues (RV) of $550,000.
Revenues are $550,000, and COGS is $350,000
550,000 - 350,000 = 200,000
GP = $200,000
Gross Profit Margin (GPM) Formula
To calculate the Gross Profit Margin (GPM), we need to figure out its percentage of the Revenue (RV). To do this, you need to take the GP and divide it by the R, then times this Result (Re) by 100.
In a formula, this looks like:
Gross Profit / Revenue = Result
GP / RV = Re
The following formula is:
Result x 100 = Gross Profit Margin
Re x 100 = GPM
Using our example numbers for John’s company ConstructionFlo:
350,000 / 550,000 = 0.64
0.64 x 100 = 64%
So, using these numbers, the Gross Profit Margin (GPM) for ConstructionFlo is 64%
Net Profit Margin
The next step to calculate company profit margin is to find the Net Profit Margin.
Total Expenses (TE) and Net Profit (NP) Formulas
Net profit differs from gross profit in considering all overhead costs, not just the direct deductions from the services/job. It’s a more realistic reflection of your construction company's profit margin and business performance and can highlight what expenses could be eating into overall profits.
First, get the total cost of the project.
Total Expenses (TE) are the Overhead Costs (OH) and the costs of goods sold (COGS) added together.
In a formula:
Overhead Costs + Costs of Goods Sold = Total Expenses
Simplified:
OH + COGS = TE
For example, John calculates his total overhead/indirect costs are $150,000. So to calculate Total Expenses:
OH + COGS = TE
150,000 + 350,000 = 500,000
So Total Expenses (TE) are $500,000
In a formula, this looks like:
Gross Profit - Total Expenses = Net Profit
GP - TE = NP
We’ll use ConstructionFlo’s numbers to calculate this one. GP is $550,000, TE is $500,000
$550,000 - $500,000 = $50,000
So Net Profit (NP) = $50,000
Net Profit Margin (NPM) Formula
Now, we calculate the net profit margin the same way we did for gross profit. Take the Net Profit (NP) and divide it by the Revenues (RV) to get a decimal Result (Re).
Net Profit / Revenues = Result
NP / RV = Re
In the case of ConstructionFlo:
50,000 / 550,000 = 0.09
So, we take that result and add it to our formula to get the Net Profit Margin (NPM).
Decimal Result x 100 = Net Profit Margin
Re x 100 = NPM
0.09 X 100 = 9
NPM = 9%
Therefore, in this example, the net profit margin after all costs are considered is 9%.
Our breakdown uses simpler numbers, and the percentages may not reflect the results your construction company gets. In this case, ConstructionFlo did better than the current average, but has room to improve.
Effective Estimations using NPM and GPM
Estimations and job projections can help you calculate the rough numbers your business might expect from any job. AroFlo’s job estimation software is one of the tools we offer to help streamline this process. The more accurately you can estimate and the better your construction profit margins, the more confident you can become in your business cash flow and plans for growth.
Suppose you notice a significant percentage difference in your gross and net construction profit margins. In that case, it might be time to look into your overheads and see if any areas need adjusting or can be streamlined. There will always be a difference as your business will incur various overhead costs, but it doesn’t hurt to review and change flexibility, which is essential for your business!
What’s the difference between construction markup and margin?
Wrapping your head around costs, formulas, and margins can be confusing enough, and then markups are thrown into the mix. So what’s the difference?
Margin is the ratio of profit compared to costs.
Markup is how your construction company increases profits. It’s an addition to the direct costs (COGS) to ensure you can clear the overhead costs. It’s why others might question why you’re charging more for a particular item than it ‘costs’: because your invoice needs to reflect total expenses, and those expenses need to be addressed.
Check out our Markup vs Margin guide for an in-depth look.
Your Construction Profit Margin and Staying Competitive with AroFlo
It can be challenging to keep ahead of all these moving parts, maintain construction company profit margins, and keep up with the competition. Still, with the right tools, your business can remain efficient, competitive, and flexible to weather whatever the market throws your way.
AroFlo’s construction management software is an all-in-one package that consolidates all the paperwork and admin and gives you access to your business’s needs anywhere. This flexibility and access can give your business streamlined and timely responses to any challenge. For example, AroFlo’s purchase order management software is one of many available tools, streamlining the process of acquiring inventory and connecting with suppliers.
There’s a lot of competition out there, but by working hard and smart, you can gain market share and look to the future for business growth. Try AroFlo today!
