In the construction industry, profit margin reveals how well a company is performing financially. Gross profit margin highlights the relationship between direct project costs and revenue, while net profit margin includes all operational expenses. By focusing on gross and net profit margins, you can make informed decisions to improve profitability and ensure your projects are financially viable. Continue reading to learn how profit enhancement solutions can improve your profit margins in the construction industry.
Profit Margin Definition
We will go over two key types of profit margin: gross profit margin and net profit margin.
Gross profit margin focuses on the relationship between your revenue and your direct costs— expenses that can be clearly traced back to a specific job or production. For example, direct costs such as a specialized material or subcontractor are easy to pinpoint. These costs are also referred to as the cost of goods sold (COGS).
To calculate gross profit, subtract COGS from your total revenue. Then, to find the gross profit margin, divide the gross profit by total revenue and express it as a percentage. The result shows how much each dollar earned equates to your profit before other expenses are factored in.
Net profit margin accounts for indirect costs or overhead—expenses that support multiple projects such as office rent, administrative salaries, or software subscriptions. These are not tied to a single job but are essential to running your business.
To calculate net profit, take your gross profit and subtract all operating expenses, including selling, general, and administrative (SG&A) costs. Net profit margin is the percentage of revenue left over after all expenses—both direct and indirect—are accounted for. This is the “real” profit and a clearer indicator of how much money your company is making overall.
Gross Profit Margin vs. Net Profit Margin
Gross profit margin is a more valuable metric than net profit margin when it comes to evaluating financial performance. While net profit might seem important, it doesn’t paint the full picture—especially since many of the expenses factored into net profit, such as selling, general, and administrative (SG&A) costs, are fixed. These costs tend to stay relatively constant regardless of how much work is being done or how much revenue is coming in.
As a result, net profit often remains a fairly static dollar figure, not a reliable percentage of revenue. That can make it misleading when trying to assess the profitability of your operations while considering different profit enhancement solutions.
Gross profit margin, on the other hand, is directly tied to revenue. It represents a consistent percentage relationship between what you earn and what it costs to produce the work. As your revenue increases, your direct costs typically scale with it—so the gross profit margin stays meaningful and reflects job performance.
By focusing on gross profit margin, construction companies can get a clearer, more actionable view of how efficiently they’re operating on a project-by-project basis. Of course, tracking net profit is still important—but the gross profit margin can help guide your day-to-day financial decision-making.
Importance of Tracking Profit Margin
Keeping a close eye on profit margin is crucial for construction companies because it answers a fundamental question: Are you actually making money on your projects? Far too often, builders set their prices too low—either to stay competitive or because they haven’t accurately calculated their costs. The result? They end up losing money on every job.
When a project runs at a loss, the pain doesn’t stop there. Fixed costs like selling, general, and administrative (SG&A) expenses still have to be paid, which only deepens the financial hit. Without a healthy gross profit margin, there’s no room to absorb those additional expenses—making overall profitability virtually impossible.
Closely monitoring gross profit margin ensures that your pricing is aligned with actual costs and that each project contributes positively to your company’s financial health.
Industry Benchmarks for Profit Margins
Figuring out what qualifies as a “good” profit margin in construction isn’t always straightforward. Margins can vary widely depending on your trade, specialization, and business model. A concrete subcontractor will naturally have different margins than a general contractor or a custom home builder.
To get a clearer understanding, many construction companies turn to benchmarking. One particularly useful tool for this is Profit Sense. This platform allows accountants nationwide to upload financial statements, which are then aggregated and analyzed.
By entering your specific NAICS code—a classification number that identifies your exact industry segment—Profit Sense compares your financials to other companies doing what you are doing. It provides insights into average profit margins, revenue trends, and other financial metrics tailored to your trade.
This kind of peer comparison is far more meaningful than relying on general rules of thumb. You will be able to catch a better glimpse of where you stand, identify areas for improvement, and set realistic financial goals based on data from your industry peers. It is one of the most beneficial and insightful profit enhancement solutions.
Common Mistakes That Erode Profit Margins
One of the most common ways construction companies lose profit is through incorrect pricing. Profitability requires a more detailed and disciplined approach.
To protect your margins, you must thoroughly bid out each project phase. That means identifying every cost involved in each step, applying the appropriate markup, and then checking that total against current market rates. This method ensures that your pricing covers your expenses and leaves room for a healthy profit.
If you rely on generic pricing formulas—such as charging by the square foot, linear foot, or yard of concrete—it can lead to serious financial missteps. These shortcuts often ignore the nuances of actual job costs and fail to account for variables like labor, site conditions, or material fluctuations.
Strategies for Improving Profit Margins
One of the most effective profit enhancement solutions for construction companies is changing how they bid on projects. Companies should adopt a process-based bidding approach rather than relying on traditional unit-based pricing—like charging per square foot or per linear foot.
This method involves four strategic steps:
- Bid Based on Processes: Break the project down into specific tasks or phases rather than using broad unit measurements.
- Identify Actual Costs: Calculate the true cost of completing each process by factoring in labor, materials, equipment, and time.
- Apply a Markup: Once you’ve established your costs, add an appropriate markup to ensure profitability.
- Compare to the Market: Evaluate the final price against current market rates to confirm it’s competitive. If needed, adjust the markup without compromising your margin.
Although this approach may differ from what many contractors are used to, it leads to more accurate and informed pricing. By focusing on the details of each process rather than applying one-size-fits-all pricing, you can bid smarter, stay competitive, and structure every job to generate a profit.
One of the most compelling examples of real life profit enhancement solutions I’ve seen comes from a client I recently worked with. When we first met, his company was operating with a 22% gross margin. He was pricing all of his construction jobs based on units—square footage, linear feet, and so on—without clearly understanding how much profit each project was generating. There was no structured bidding process in place.
We helped him implement a new strategy centered on process-based estimating, precise cost tracking, and intentional markups. This profit enhancement solution allowed him to accurately price each phase of his projects and ensure profitability from the start.
The results were dramatic. His gross margin jumped to 46%, nearly doubling. And here’s the kicker: he’s winning more jobs than ever, even with slightly higher bids. Why? Because clients recognize the value of a well-structured, professional proposal—and he’s now bidding with confidence, knowing each job is set up to be profitable.
Improving your profit margin doesn’t mean you have to sacrifice job volume. With the right approach, you can increase both your margins and workload.
Conclusion
Profit margin is a vital indicator of financial success for construction companies, providing valuable insights into how well you are managing costs and pricing projects. By focusing on both gross and net profit margins, you can assess your operational efficiency, make informed pricing decisions, and avoid costly mistakes.
Regularly monitoring profit margins ensures that you cover direct and indirect expenses and also generate sustainable profits. With the right profit enhancement solutions in place, you can position your construction company for long-term success.
If you’re looking for profit enhancement consulting, you’ve come to the right place. At Foundation Accounting & Consulting, we’re here to increase your bottom line. Contact us about our profit enhancement consulting services today!
