Contractors live and die by gross profit margin. And if you don’t learn how to control that one element in the bidding stage, you will always be chasing after profits.
The contractors I know who have learned to manage gross margin when bidding, nail project profits right from the start, and the result is a construction business that produces a consistent profit.
Gross profit dollars vs. gross profit margin:
Gross profit dollars are the difference between your bid price and your project costs. Often I see that contractors only look at that number before a bid goes out.
The gross profit margin is your rate of return and is measured as a percentage. It’s that percentage that you want to learn to manage in the bidding stage in order to make a more consistent profit in your business.
So how do you manage gross profit margin? In the video and the post below I show you how.
The first step is to set a gross profit margin goal.
How do you do that?
One way that I do this with clients is to look at five years’ worth of profit and loss statements and look at how margin has trended year-to-year.
- Is there a gross profit margin pattern, or is it all over the place?
- Are all the costs related to producing projects reflected in the cost of goods sold?
- Were they making higher margins in the earlier years and now it’s declining with higher volume?
- Is their gross profit margin within industry standards for that type of contracting business?
For yourself, look at your own data and ask these same questions. As for “within industry standards” here are a few ways you can find that out:
- Go ask your CPA. If they work with other similar contractors, they may be able to tell you if your gross profit margin is within the range it should be.
- Go ask another contractor in your field. Your first thought might be, “Why would another contractor share that information with me?” Because successful people want to help other people to be successful. Choose somebody who has built a profitable contracting business, and who’s in your area of specialty.
- Keep in mind – a company that does $2M a year is going to have a higher margin than a company that does $30M a year, so listen for that distinction.
- Check with trade associations or groups specific to your field of work – they may have resources that can help you come up with a gross profit margin goal.
Wherever you look to find your gross profit margin goal, the important thing is to set a goal. Then start to manage your bids against that goal.
The ONE thing…
If you do this ONE thing on every bid before it is finalized, you’ll make a more consistent profit on all your projects, and your bottom line. It’s super easy…
- Once you’ve got a bid price, subtract your cost, that’s your gross profit dollars.
- Then calculate gross profit margin (gross profit dollars, divide it by bid price).
- Then ask yourself this “does that gross profit margin match up with my goal?”
- If not, go back to the drawing board, and see where you may not have marked up enough.
The most profitable contractors that nail their profits and sustain success are those who manage to a gross profit margin goal in the bidding stage. And then they relentlessly manage to that margin throughout the entire project.
Are you ready to be one of them?
Your mission should you choose to accept it…
- Set a gross profit margin goal for your company.
- Verify every bid before it goes out to ensure it’s at or above your goal.
Start managing this one number in your bidding, and you too can stack the odds in your favor of nailing a consistent profit in your business. And who knows, maybe you’ll even be able to stop working so much!
If you’re wanting more information on markup vs. margin, I’ve explained it in my article titled Markup vs. Margin Explained.
As always, if you have any questions or comments to add to the topic – please drop a comment below or feel free to reach out to me on Facebook or LinkedIn. I’m happy to help and very interested to hear how others get on with implementing these tools in their business.
Warmest,
p.s. My book, The Profit Bleed is all about how you grow a sustainably successful contracting business. In it, I give you the thinking and the tools (there are a ton of free resources you can download) that will help you build the business and life you desire. For a limited time you can get it for FREE – check it out.
p.p.s. If you want to see what your correct overhead breakeven percentage is, learn how here.