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How to Turn a Healthy Profit in Construction

Article-How to Turn a Healthy Profit in Construction

Andrii Yalanskyi/Alamy Stock Photo A man is putting together blocks with a red arrow chart. Build a business and increase profits, achieve success.
Use this simple formula to ensure you’re correctly setting prices for your business.

Most construction companies do not correctly set the prices for the products and/or services they sell to ensure a positive net profit for their business. 

Contrary to common belief, your company’s retail price should be tailored to the unique circumstances of your business. While many companies start off correctly by calculating the direct costs of labor and materials required for the job, they often soon veer off course. Generic formulas—such as multiplying direct costs by 1.5, or doubling labor and material expenses—may not be suitable for every company, leading to situations where business owners realize much too late that they've made minimal or no profit on a project. 

To set accurate pricing, it’s critical to use formulas based on actual and specific costs within the company. Understanding your overhead costs is a key part of this and involves separating sales and marketing costs from general overhead.  

Your marketing expenses may include internet marketing, promotions, display pieces, home show participation and similar endeavors. For sales costs, it's essential to allocate the expense for preparation, prospect visits and follow-up, even if you as the owner handle all the selling activities for your company. In these instances, we recommend companies allocate a percentage similar to what other businesses pay their sales representatives. 

To establish a pricing structure, start with the desired net profit to create a formula that factors in the following components: 

  • Marketing ____% 
  • Sales ____% 
  • Overhead ____% 
  • Net profit ____% 
    • Total   ____% 

The sum of the above percentages, when subtracted from 100% (representing the selling price), reveals the percentage of direct costs (labor and material) required for each contract. This serves as a fundamental formula, and as such may need adjustments based on the project's scale and nature. Major, minor and specialty contracts might also demand additional steps. 

Nevertheless, the critical point remains: If the “total”  adds up to 41%, for example, the cost of labor and materials should not exceed 59% of the selling price to ensure a healthy profit margin. 

Unfortunately, many companies fail to charge what they deserve—not because the finished product lacks value, but because they cannot effectively convey the completed project’s value to clients. Effective communication plays a pivotal role in securing the right price and sustaining profitability. 

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