Many Texas construction companies are excellent at delivering quality results on their projects, but they struggle with making their business more profitable. Part of this is because most clients, especially those working in the public sector, will select the contractor with the lowest bid. As a result, their experience, work quality, and expertise are little more than an afterthought. However, this is shifting, and clients are looking more at qualifications before selecting the cheapest option to meet their needs.
Since there is so much competition in Texas for construction contracts, many companies have found themselves bidding the absolute bare minimum they need to complete a project, pay their workers, and keep the lights on. In the wake of the COVID-19 pandemic, many construction contractors have had to offer higher wages to both recruit and retain experienced employees. Add in the steady increase in the costs of building materials in recent years, and many contractors are struggling to stay afloat.
While there are many factors that can eat into your profit margin, there are still some things you can do to reduce costs and increase your bottom line. Here, we will take a look at some of the ways that you can increase your Texas construction company’s profit margin.
Know Your Profit Margin Numbers
Is your company hitting its profit goals? Do you know what your profit target is, or if it is where it should be? How does your Texas company determine the net profit markup? In a survey of over 2,500 construction company owners, less than 40 percent had a specific net profit target.
Contractors typically offer the minimum they can get away with on bids because it is hard to win the contracts if you are charging more than others. Unfortunately, this can cut deeply into your profits, making it hard for you to increase your bottom line. With the competition between contractors, it can be difficult to increase your rates to reflect more expensive materials costs and operations costs.
To determine the profit margin to aim for, take a look at the equity in your company, then at your projected overhead for the next yet. Next, examine the financial risks you take to keep your business in operation. Finally, decide the net profit you want to make and actively track your progress. By knowing this number, you will be able to determine what the minimum is that you can afford to bid on a contract and that sometimes you will need to keep it there without lowering it to win a contract. Using accounting software like Quickbooks can not only maintain transparency in your balance sheet books, and it can help you understand what jobs can make you the most money.
Raise Your Markup
If you raise your markup a little bit, you can begin seeing your profits increase pretty quickly. Put together a full cost breakdown list for your costs that you can show your customers. Giving them something tangible that breaks everything down can make them more willing to go with your contract over the bid that is slightly lower. If you increase your markup by three or four percent, it will not impact the price you are charging your customers by much, but it can add up pretty quickly for you, especially if you work on many projects at once.
Bid For Profit
When you win a contract, you need to be able to meet your bottom line. If you decide to bid too low, you will end up cutting costs somewhere and hurting your profit margins. Put together a detailed list of your costs and overhead for every type of job you may do. Then you can put your bids together more accurately, allowing you to use data instead of guesswork. It will also help you keep everything organized so you do not have to scramble to find an answer to something a potential client asks about during the bidding process. Add a little extra to your bids in case something comes up, so you have a little bit of cushioning.
There is automatic estimation software available to help you create a detailed bid that covers all of your planned expenses and factors risk into the bid. By using software like this, you can put your bids together fast, and your employees can spend more time working on more important tasks, which can also increase your productivity.
Do not lower your costs below what is profitable for you; you will waste too much time and money on a project like this, and it will end in frustration for you and your employees. Getting the job is not worth losing money.
Buy or Lease Equipment
Buying heavy machinery outright is expensive, and not every contractor has the capital to buy something right away, which is why leasing or renting the machinery is a better option. If the piece of machinery you need for a job is something you will only need for this one job, or not more than a few times a year, buying it is unnecessary. It will just be taking up space in the months in between, and the money to buy and store it is money that can be better spent in other aspects of your Texas construction company.
If you need the machinery regularly, it is worthwhile to either buy or lease the machinery. Leasing the equipment is a more affordable option than buying since you do not need to come up with the capital right away, and you have a fixed monthly payment.
Sell Equipment You Don’t Use Regularly
If you currently own machinery that you do not use often, you can sell it to help boost your profit margins. You will be saving money on the maintenance of the machine, and you can always rent the machine on the rare occasions that you actually need it. Selling it when the equipment is somewhat newer will get you a lot more money for the sale than waiting will, so if you bought a piece of heavy equipment in the last two years that you rarely use, selling now can be worth thousands more dollars than waiting another year or two will.
Repairing your existing equipment may be cheaper right now, but is it going to need more repairs next year? While using older equipment can be fine, especially since buying new equipment is expensive, constantly having to repair your equipment can get expensive fast. Repairs can cost between $1,560 and $3,120 to replace defective components, and preventative maintenance on heavy equipment can be expensive as well. If your equipment is older and somewhat outdated, the repairs and maintenance costs can go up even more. Sometimes, it is better for your overall profit margin to replace the heavy equipment, and you can lease the heavy equipment for a reasonable price if purchasing it outright is not an option for your Texas construction business.
Measure and Improve Productivity
How productive is your team? There are two key factors to measuring the productivity of your construction team, on-site practices, and technology utilization. Technology can speed up a lot of your processes. For example, rendering software can make designing a building go a little quicker, and project management software can better track and schedule your plans for each job. While these may not seem like they will speed things up much, they can improve productivity by as much as 45 percent! Project management software can also help you make more accurate bids for jobs because you are tracking everything in one simple-to-use space.
To improve productivity on the job site, you will first need to determine the total output per unit of input. Work with your employees to determine how much time they are spending on tasks, and put together streamlined timelines for everything, factoring in the time it will take to get materials delivered, and putting every task into a logical order that gives people time to complete everything in a timely manner without sacrificing quality.
If you find yourself stuck waiting for an invoice to come through so you can order materials, Cultiva Financial can help. We offer invoice factoring to help you get cash now, instead of waiting for a client to pay. We offer financing options to help you purchase materials, so you can order now instead of waiting and risking your timelines getting slowed down.
Another way you can improve your productivity is to offer performance rewards. Sometimes, Texas construction companies will offer a bonus to their employees if they finish the project under the budget or in a faster timeframe than quoted. This will incentivize your employees to keep a steady pace throughout the project so that you can strive to come in under budget in a timely manner, and it encourages your employees to make sure everything is done right the first time — the project has to come in under budget and pass inspection.
If you follow these tips, you will be on your way to making your Texas construction company more profitable. If you need any business financing help, contact Cultiva Financial today. We are here to help businesses like yours get the funding you need to thrive!