The construction industry is a vital part of the economy, accounting for billions of dollars in revenue each year. It’s also a highly competitive industry, with companies vying for lucrative contracts to build everything from bridges and roads to schools and hospitals.
One important factor that separates successful construction companies from the also-rans is their profit margins. This article will look at the average profit margins for construction companies and how you can use this information to set your own markup rates.
Average Revenue And Profit Margins Of Construction Companies
According to the U.S. Census Bureau, the construction industry had annual revenue of $1.2 trillion in 2017. The industry is broken down into three main segments:
Residential construction, which accounted for 47% of industry revenue in 2017
Nonresidential construction, which made up 41% of industry revenue in 2017
Specialty trade contractors, which generated 12% of industry revenue in 2017
The average profit margin for construction companies varies depending on their segment. For example, according to the 2017 Financial Performance Survey by construction consulting firm FMI Corporation, the average profit margin for specialty trade contractors was 4.4%.
In contrast, the average profit margin for nonresidential construction firms was just 2.3%. This means that for every dollar of revenue generated, specialty trade contractors made an average of 4.4 cents in profit, while nonresidential construction firms only made 2.3 cents in profit.
How to Set Your Markup Rates
The truth is you need to mark up your services to make a profit. But how do you calculate this? Follow along for a step-by-step guide.
Step 1: Calculate Your Expenses
The first step is to calculate your costs. Expenses include the cost of materials, labor, equipment, permits, and other spending required to complete the job. Once you have all of your costs calculated, you can start working on your markup rates.
Step 2: Determine Your Profit Margin Goal
The second step is to determine your profit margin goal. This is the percentage of profit you want to make on each job. For example, if you’re going to make a 10% profit margin, you’ll need to generate 10¢ in profit for every dollar of revenue.
Step 3: Calculate Your Markup
Once you know your costs and your desired profit margin, you can calculate your markup rate. Take your costs and multiply them by 1+ your profit margin goal.
For example, if it costs $5,000 to complete a job and you have a profit margin goal of 15%, you would multiply $5,000 * (1+1.15) to get $5,750.
Step 4: Consider the Competition
Now that you know what you’re aiming for, review your competitors’ prices. You don’t want to charge way less than everyone else in the industry, or you’ll undersell yourself. Meanwhile, if you charge too much, prospects will opt to buy from the competition.
Take the price model of your competitors into consideration when setting your prices. If you need to lower your prices, you’ll also want to explore ways to reduce your costs by ordering lower-quality materials or hiring less-experienced workers. However, if you choose to raise your prices, you may increase your profit margin significantly.
Set Competitive Construction Rates
The construction industry is highly competitive, so it’s essential that you price your services correctly. By understanding the average profit margins for construction companies and using this information to set your markup rates, you can ensure that your construction business is profitable.