Play to win: Profitability tips for today’s construction companies

by David M. Wolfenden, CPA, CVA, MS, Managing Director

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In the construction business, like most others, the focus is on “being competitive.” But what does this really mean? For many contractors, it means staying in the game — turning a profit when you can but at the very least breaking even. This is particularly the case when jobs are scarce or perhaps you run into a string of bad luck.

Yet being competitive should mean so much more. To be truly successful, you’ve got to play to win. And that means always looking to improve the many aspects of your business that either hurt or help profitability. Here are some tips on keeping those margins strong.

Stick to your price
When it comes to pricing, contractors face a challenge that doesn’t affect many other business owners. Take widget sellers, for example. They can slash the prices of their widgets from time to time in the hope of selling a higher volume and, thus, maintaining or even improving their profit margins. Or they can make a special kind of widget and raise the price to sell to a certain market. And they can do all of this with little impact on overhead.

This isn’t the case for construction companies, because you don’t produce widgets — or any other specific (and real) product. You complete projects, each of which is slightly or, in some cases, drastically different. Modulating your prices (or artificially increasing or decreasing them in response to customer feedback) will likely only result in the risk of taking a loss on a job (because you underbid) or not getting the job at all (because you overbid).

What’s interesting is that many project owners, particularly homeowners looking to build new, don’t list “price” as their top concern. They tend to put quality, timeliness and, yes, even customer service before dollars and cents. On the flip side, there are many owners in the private sector who do gravitate toward the lowest price — but these are often the ones who can’t pay their bills on time or at all. (Public jobs are a different matter because many government agencies do look specifically for the lowest bidder.)

The bottom line is that construction is a cost-based, not price-based, business. Look carefully at your direct and indirect project costs, as well as your overhead, and establish a fair price from there. Although the cost-based dollar amount will probably vary somewhat from project to project, you’ll still likely be within a certain range. That’s your price — stick to it and sell your services based on the aforementioned factors (quality, timeliness, service). If you try to cut prices to beat a competitor, your profitability may very well suffer.

Don’t give away changes (usually)
The randomness and unpredictability that often makes construction projects so difficult can also serve as a means to boost profits. We’re referring, of course, to change orders. Contractors who don’t address this process with owners upfront and early may find themselves losing dollars as the job goes on or concludes.

There are two main factors in play here: communication and rates. First, communicate clearly with the owner what constitutes a change and how it should be handled under the contract. Emphasize that you’ll need written (or digital) authorization before proceeding on a change.

Second, review your change order rates. Have you checked them recently against local benchmarks and considered updates? If you use a rate sheet with your job, ensure it’s up to date and complete — and that the listed prices reflect the current economic environment. Charging inadequate amounts can leave you disappointed when the project is finished and you’re reviewing your financials.

Generally, you should almost never give away anything for free. There are, however, very limited instances when a “no-cost” change order could be to your advantage. For instance, if you’re dealing with a customer whom you could work with again, performing certain tasks at no extra charge could help cement a relationship that brings additional profitable jobs in the future. Just keep track of these “hidden costs” so you’ll be aware of them as the relationship develops.

Know thyself, contractor
Yes, to succeed in today’s construction business, you’ve got to play to win. But, unlike sports, where scouting the competition is usually a key to victory, contractors can’t get too focused on who else might be bidding on a job. Know your own costs and what it takes to get a job done right — no matter what might change in progress — and you’ll put yourself in a strong position to turn a profit.

Bonus Tip: Professional development boosts profitability
Among the leading causes of lack of prosperity in construction companies, which tends to get relatively little attention, is simply getting left behind. Contractors who get too set in their ways and don’t dedicate the time (and a little money) to professional development often find themselves outmaneuvered and outperformed in the marketplace.

As a construction company owner, you have to lead the charge toward a brighter future for your business. Unfortunately, it’s all too easy to feel like you’ve hit a dead end when it comes to profit margin and can go no further. But there’s always hope, and additional ideas, out there.

If you haven’t already, join local and national trade associations to keep up with the latest developments in your specialty. But don’t make this a passive activity. Get involved by reading what’s published, watching what’s broadcast and participating in discussions (whether online or in real life). And pass along this same fervor for professional development to your executives and project managers.

We welcome the opportunity to put our construction industry expertise to work for you. To learn more about how our firm can help advance your success, please contact Dave Wolfenden at (302) 254-8240.

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