What Is the Average Profit Margin for Construction Industry?

You can calculate profit margin by dividing the company’s net income or pre-tax income by sales. When you compare pre-tax income, it allows you to examine operations without discrepancies. This is due to the varying tax rates the company may receive.

Furthermore, there isn’t a typical profit margin in construction. As such, you can divide the profit percentage into several primary and sub-categories. You can also divide construction profit margins into several subdivided construction businesses.

And regardless of the type of industry, large companies usually have more capital and purchasing influence. Therefore, they can generate a greater profit goal compared to small companies operating within the very same market.

Here’s What We’ll Cover:

Industry Basics

Key Takeaways

Industry Basics

The construction industry is somewhat unique. Its private general and subcontractors don’t need to share their financial performance.

And then there are construction business owners with public companies. These may not be able to account for the performance of other industries.

The RMA (Risk Management Association) offers detailed financial indicators. These are classified by industry through its annual report research. The RMA directly compiles information and data from financial statements. And these are based on large numbers of both small and medium companies.

Profit Margins

Let’s look at some 2013 data from the North American Industry Classification System. Below are the median pretax profit rates of various industries that fiscal year.

• New single-family residential buildings: 3.2%
• Road, street, and bridge construction: 3.0%
• Commercial & industrial buildings: 2.1%
• Industrial buildings: 3.8%
• Land subdivision: 8.7%

The profit margins of each construction industry are relatively consistent. Land subdivision produces the highest margins. There are signs that the profitability of the construction industry continues to grow after the fiscal year of 2013.

Moreover, studies show that the typical net profit margin of residential construction businesses is 6%. This rate is consistent with the trend designated in the RMA’s reports. There, all observed sectors revealed that there was an upward trend.

New residential contractors reported their pre-tax profit margins were 1.4% and 1.7% in the fiscal year 2011 and fiscal year 2012, respectively.

It’s interesting to note that there is almost no relationship between profitability and return on equity. Why? Because the average return on equity of land subdivision companies is 6.7%.

This is much lower compared to the other four industries, which have ROEs of 11.3% to 23.9% during the very same period. The RMA groups these companies by sales in the following sizes:

• 0 to 1 million
• 1 to 3 million
• 3 to 5 million
• 5 to 10 million
• 10 to 25 million
• 25 million +

Generally speaking, as a company grows from small to large, profitability will increase. There is an important note to mention. Companies making less than $1 million have higher margins. These are compared to large organizations operating within the same industry.

Want to learn the best way to make money working as a general contractor? You need to understand how to calculate the construction profit margins for contractors.

• First, add up all the administrative expenses for a period of time (preferably one month).
• Calculate your sales or income during the same period.
• Calculate your rate of overhead. Divide the overhead by the sales for the same period. This provides you with a decimal number, which is your overhead rate.
• Multiply the decimal point figure by 100. This will give you the percentage of administrative expenses and show you how much of your income typically goes to overhead.

When calculating this financial ratio, you will see how much your company applies to overhead expenses for every dollar you earn.

For example, suppose you spend $15,000 on overhead each month, such as:

• Administrator salary
• Estimating software
• Telephone bill
• Truck Leasing
• Internet
• Gas

Now let’s say your company finished four jobs for the month and earned $40,000 in revenue. You would calculate your overhead by using the following equation:

15,000 ÷ 40,000 = 0.375 (or 37.5%).

This means every dollar you bring in allocates $0.357 on overhead expenses. Want to calculate how much you spent on overhead for a particular job? You need to multiply your company’s overhead rate by that revenue of the construction job.

If the job’s revenue were $5,000, you would need to set aside $1,875 for overhead to ensure that your business remains stable.

Key Takeaways

The construction industry’s profit margin is a lot different compared to most other fields. But knowing how to calculate your average profit for jobs will help your company maintain a success rate of operations. To enhance your construction business’s financial efficiency, you can explore our guide on best Construction Accounting Software tailored to streamline your accounting processes and boost your bottom line.

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