The construction industry is a vital sector that shapes the urban landscape and drives economic growth. So, why do many construction businesses struggle to turn a profit?
Before we answer how to improve profitability in construction, it’s important to first investigate the project-based nature of the business. Without projects in the pipeline, companies fail to generate a sustainable revenue stream. Newer construction companies may also find it difficult to compete for projects with established names. Naturally, clients prefer companies with experience in the type of project they want, be it in the private or public sector.
Additionally, the low-bid culture in construction forces companies to make inaccurate estimates. Businesses try to come up with attractive bids for clients at the cost of profit. This intense competition puts lots of pressure on businesses to deliberately cut costs, inadequately prepare for risks and inefficiently manage projects.
So, how to improve profitability in construction, a notoriously competitive industry — is it even possible? While we don’t offer easy, get-rich-quick schemes, we have a few sustainable strategies that may help.
How to improve profitability in construction: 3 long-term strategies
1. Improve financial management
- Make realistic project estimations: Precision in estimating project costs is the foundation of sound financial management in construction. Use historical data, conduct comprehensive site assessments and consult with experienced estimators. All of these can help you come up with accurate, realistic and profitable project estimates.
- Control costs effectively: Implement effective cost control measures to maintain profitability. Monitor project expenses meticulously, identify cost-saving opportunities and establish strategies to mitigate budget overruns.
- Improve cash flow: You can’t ignore cash flow when looking at how to improve profitability in construction. Projects typically have long payment cycles that affect the company’s ability to cover expenses and invest in their growth. To combat those challenges, negotiate favourable payment terms with suppliers, subcontractors and clients to sustain a healthy cash flow. Then, institute efficient invoicing and payment collection processes.
2. Enhance operational efficiency
- Improve project management practices: Standardising processes across projects can significantly boost operational efficiency. Develop standardised workflows and procedures to streamline project execution. Also, consider leveraging project management software and methodologies to facilitate effective communication, project tracking and collaboration among team members. Embrace solutions that automate routine tasks, such as sending invoices, reducing the likelihood of errors and delays.
3. Boost revenue generation
- Implement value-based pricing: Rather than relying solely on cost-plus pricing models, assess the unique value your construction services bring to clients. Price your services based on your perceived value and the benefits you deliver, allowing for more competitive yet profitable pricing. Implementing value-based pricing is one answer to the nagging ‘how to improve profitability in construction’ question.
- Diversify revenue streams: Explore opportunities in adjacent markets or offer complementary services that align with your core competencies. This not only broadens your client base but also mitigates risks associated with depending on specific project types or clients.
- Build strong client relationships: When considering how to improve profitability in construction, think about the relationships you have with clients. These are key to your sustained growth, as satisfied clients can refer you to others or rehire you in the future for another project. Prioritise client satisfaction by delivering quality projects on time. Additionally, communicating proactively, resolving issues promptly and being approachable can result in a positive experience for your clients.
Improve the profitability of your construction business — reach out to CFO On Call
Wondering how to improve profitability in construction? Learn to implement these strategies with expert guidance by CFO On Call, home to virtual CFOs in Australia and New Zealand. Our CFO services in construction range from temporary or interim CFOs to cash flow forecasting, management and profit planning — all are designed to help you sustain the growth of your construction business.
Get in touch with us to claim your free consultation. Move beyond surviving to thriving in a competitive landscape with CFO On Call.