Running a construction business can be a daunting task with its own unique set of complexities, as many business owners struggle to make a profit once they’ve taken into account their fixed and variable costs.
Below are three ways to help raise that bottom line!
Fixed vs. Variable costs
Fixed costs are those that need to be paid, no matter if you’re getting jobs or not. These include payments such as auto, telephone, rent, and insurance. Make sure you’re fully aware of what your fixed costs are, as this will help when deciding if you should take a job or not (more on this below).
Variable costs, on the other hand, are directly related to income. A big variable is your Cost of Goods Sold (COGS). COGS are the direct costs associated with the production of goods sold including materials used and labour, but not distribution and sales cost.
In an ideal world, COGS should only be costing you 50% of your total income. You can work towards achieving this through marking up the cost of materials by about 10-15% in order to cover both their variable and fixed costs over the long-term.
Subcontractors vs. Payroll
Many construction business owners are reluctant to put workers on payroll and opt for subcontractors instead. Although it varies from company to company, it’s worth considering payroll. The price of subcontractors can add up, as many business owners end up absorbing the costs of WCB (if their subcontractors don’t have a number). Subcontractors have to pay their own taxes so tend to charge the busines owner a higher hourly rate.
However, putting employees on payroll also comes with its own set of taxes and additional charges (you’ll need to hire an accountant to take care of it).
Look at the bigger picture
Although it’s a hard decision to make, sometimes it’s better to turn down a job if it’s not worth it — the income barely covers the variable costs or you’re breaking even. In these situations, it’s wiser to use your energies towards finding a more profitable job.
If you look at your income and expenses on a month to month basis, rather than a job to job basis, it’s easier to see the bigger picture and make these decisions. It’s helpful to look beyond whether the money you’re making on a job covers the expenses for that particular job. Although you’re making a profit in that case, it doesn’t necessarily mean it’ll be enough of a profit to cover your fixed costs as well.
Check out a great example of a construction company’s P&L statement here. It should be noted that this particular business has three partners.
