In the construction industry, a gross margin analysis is a reliable and efficient way to determine what your fees should be, while also making certain you maintain a consistent profit level. As a result, gross margin should be calculated for each construction project you consider taking on.
What is Gross Margin?
Gross margin refers to the difference between the selling price and your direct costs. In simple terms, gross margin is your gross profit as a percentage of your sales price. Gross profit refers to the money you have left over after you have paid out all your direct costs, such as the costs of equipment and materials.
From Gross Profit to Net Profit
Later, your gross profit will be used to your pay your indirect costs, including employee salaries, general insurance premiums, office overhead expenses, and vehicle operating expenses. After you have paid all of your direct and indirect costs, you will be left with your net profit. In other words, net profit is the money you make after paying all costs and expenses.
What is the Average Gross Margin in the Construction Industry?
According to the National House Builders Association (NAHB), for the fiscal year 2014, the average gross margin was 18.9% . When asked most established contractors reported that their overall goal was to achieve a gross margin of 16% or higher. Some were even able to regularly achieve a gross margin of 20% or more.
How to Plan Your Gross Margin?
The best way to plan your gross margin is by starting at the very bottom. This means that you will need to decide what your profit goal is before you do anything else. Remember, this is what you want to end up putting in your pocket when the project is complete. It is vital to be realistic and reasonable when deciding on this number. Yes, you want to make money, but if your estimate is too high, prospective clients will keep looking until they find a construction company who offers them a better price.
Then, work your way backward by determining what gross margin you will need to achieve. Be aware that there may be some instances when lowering or increasing your gross margin is appropriate. For example, you may want to reduce your gross margin when the client is carrying the cost of the construction loan, which reduces your responsibility or depending on the price and size of the property you will be building. On the other hand, if the project has difficult details to deal with or the land is especially hard to work with, you may want to increase your gross margin.
Once you have established your gross margin, you will be able to finalize the estimate you will present to your prospective client.
If you are in the construction industry, it is recommended that you attend seminars designed to help you understand profitability vs. cash flow management, as well as how to spot potential problems in your estimates and how to fix them. After all, understanding profitability is crucial if your goal is to have a successful construction company that makes money. Contact STAC Bizness Solutions to see how we can help you understand your Gross Margin.
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