How three contractors expanded thin profit margins

Fifty-eight percent of contractors say they are having trouble finishing projects on deadline, according to the National Association of Home Builders.¹

“It’s an issue with everyone I know,” said Richard, general manager of a mid-size building construction contractor. “We used to build a house in 90 days. Now our timeline is pushed out to 180.”

The result is shrinking margins. The longer your timeline, the more chances there are for cost overruns and uncertainties to creep into your project, potentially squeezing companies when they can least afford it.

58% of contractors say they are having trouble finishing projects on deadline¹

“We’re in an industry where net income as a percent of revenue is not high compared to a lot of other industries,” said Barry, the president of a private home building company that does about $50 million in annual revenue. “We need to be smarter than ever to make our numbers.”

The culprit behind shrinking margins in the construction industry is, ironically, the rebounding economy. Dropping unemployment rates have led to a lack of skilled labor. Without enough construction workers to lay foundations, frame houses, and do finishing work, jobs are taking longer to complete. But an unexpected challenge demands a different kind of solution, one that allows construction companies to ease financial pressure without compromising the quality of projects.

Here are three ideas for protecting your margins in a tough market.

Get Strategic About Purchasing

Giving yourself the ability to quickly pull the trigger on purchases in time-sensitive situations can help keep profit margins healthy and your project on schedule.

Frequently, construction firms are also able to get great time-sensitive discounts when they’ve made bulk purchases.

Jumping on these types of opportunities, however, can require significant expenditures at a moment’s notice. Having a corporate card program backing up your business is crucial, so you can move quickly.

The key to keeping your cash flow positive in shifting circumstances is flexibility.

Similarly, strategically timing purchases to ensure that you’re not financing projects for owners will limit the amount that delays eat into your profit margins. “If I’m being delayed on a job because of weather, my bills are still rolling in,” said Joe.

The job site is never a static place. Things are changing constantly, and new challenges are always arising. The key to keeping your cash flow positive in shifting circumstances is flexibility.

Centralize and Digitize Your Expenses

Runaway expenses can take a big bite out of your profit margins. Loose cash almost always saps profits. It’s hard to account for and is time-consuming to track.

As a result, project managers and superintendents are increasingly looking to centralize their billing structures to create efficiencies and eliminate as much paper as possible. The more paper floating about, the more likely it is that information is being lostor seen out of context. Central offices want the ability to see the combined spending in one spot.

Additionally, centralizing your billing helps with post-project analysis. Applying the lessons learned from spending and expenses on one project helps to forecast the next project much more accurately.

Applying the lessons learned from spending and expenses on one project helps to forecast the next project much more accurately.

This is particularly relevant for firms that operate in multiple states. They often need custom financial solutions that are tailored to their ongoing project needs.

“Controlling costs by knowing what the spend is going to be every day can make the difference in knowing whether a job is going to be profitable --- or not,” said Richard.

Take Advantage of Rewards

In the construction business, taking advantage of every tool at your disposal to ease the squeeze on your margins is just good business sense. This is why a robust rewards program is increasingly attractive to contractors and firms.*

“Frankly,” said home building company president Barry, “we’re looking to save money wherever we can.”

That’s why most of the small private builders Barry knows take advantage of business credit card rewards programs by plowing those rewards straight back into the business.* After all, gaining a percentage point on thin profit margins, can make a difference to your bottom line.

¹National Association of Home Builders, "More Builders Report Labor/Subcontractor Shortages"

*Not all products are eligible for rewards.