As a property developer, it is in your best interest to ensure that project margins are realistic and favorable to your business. Profit margins below 5% may hinder company growth. The best project margins should average between 17% and 23%. The average margin is 42% for remodeling projects, while a 34% margin is often observed for specialty-related construction projects.
The greatest worry that many construction managers have is how to increase or maintain an ideal project margin. On paper, figures might look adequate, but certain factors can go wrong, affecting margins as you continue to carry out the project. So what are the main factors that can affect your project margins?
Factors affecting the project margins of a project
There exists a host of unforeseen factors. An excellent example of an unpredictable factor is a natural disaster that damages the foundation of a building. Supplies can also be stolen from the construction site. Other factors affecting product margins are:
Financing constraints
If your construction company cannot fund a project, it will likely acquire funding from commercial lenders such as banks. In this case, interest on payments can be incurred—eating away at your project margins.
Time
When billing clients, you will do so based on how much the entire project will cost. This includes calculating and documenting resources spent over a given period. Therefore, if your labor cost was pegged at 12 months, but the project extends by another five months, you will be paying more. As a result, your project margins will narrow.
Another factor that can affect your profit margin is the cost of supplies. This problem affects contractors who fail to properly estimate supply needs and buy in bulk. If the price of supply increases during this period, it will affect your margins downstream.
So how can a construction company increase its project margins?
6 ways to increase construction project margins
1. Use an AI-powered construction platform
An AI-powered preconstruction solution is designed to make your work easier by enabling you to create multiple simulations based on various designs and cost-cutting strategies. A preconstruction solution makes it easy to reduce risks, help with project recovery, and save money.
Certain AI-powered platforms, such as ALICE Technologies, allow you to input BIM parameters and import data from Excel. Another advantage of using an AI construction platform is that it monitors your project resources. In addition, it will notify you if resources are being over-utilized or if your project is behind schedule.
2. Invest in your employees
Contractors who want to increase their project margins must invest in their employees. The best way to do this is to ensure that they go through useful training modules on what they are expected to do. This way, you can rest assured that your employees are well-trained and that productivity will increase.
Another way to invest in your employees is to ensure that they are rewarded for their hard work and dedication. Developers should also invest in supervisors with a strategic mindset and problem-solving skills. This way, they will be able to adapt to challenges and quickly find solutions.
3. Reduce rework
Rework is when a contractor has to redo a particular task because the initial task was not done correctly. The best way to reduce rework is to ensure that the design process has no errors. In addition, it is important to note that the longer a mistake goes undetected, the greater the rework required.
Rework can also be caused by a change in design. Another leading cause of rework is an omission due to site management issues. It is for this reason that stakeholders regularly inspect the project.
4. Reduce project duration time
Another way to increase your project margins is to reduce the overall project time.This is because you will spend less on labor and other resources.
5. Reduce insurance costs
According to Injury Facts, the construction industry is one of the most dangerous industries to work in. The risk of serious injuries increases if you work on a mega construction project. As a general contractor, you can take traditional insurance and propose subcontractors purchase the policy. This way, you reduce upfront insurance costs.
However, keep in mind that you will still be held liable if the liability exceeds the coverage set by subcontractors. Another way to reduce insurance costs is to consult a risk manager, who will negotiate with insurance companies for a group discount.
You can also reduce insurance costs by using risk-reducing technology, such as those that set entry requirements for certain building areas.
6. Increase your markup
One easy way to increase your project margin is to increase your mark-up. After you have generated your estimates and used a pre-construction solution, you should be able to project expected margins. To cover unforeseen factors, you can increase your markup by at least 1–4%.
Another strategy you can use is opting to rent equipment instead of purchasing it. This comes in handy when you have short-term equipment requirements that will not surpass a year’s time. Buying equipment might appear to be more economical, but you may quickly realize that it is not a viable option when you factor in maintenance costs.