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Breaking down the margin mystery: How much margin should you apply as a builder?
With customers’ belts tightening, slashing your profit margin might be tempting to get the building job over the line. But what is the industry average and what should you be aiming for as a builder?
As building and construction business advisers, this is a very common client question — one that is completely valid after the industry has been in a state of flux for years. Let’s break down the details and explore what a ‘healthy’ profit margin looks like as a builder.
What is the average profit margin for building and construction projects?
Before we get into the details, let’s quickly recap on what your profit margin is — especially as often a margin and mark-up can seem interchangeable. Your builder’s margin (or gross profit margin) is what percentage of your final project income is profit, whereas a mark-up is simply the amount you add to your project sell price.
While profit margins vary from industry to industry, in building and construction it also changes contract type to contract type.
| Average cost-plus contracts | Average fixed-price contracts | Our recommended profit margin for growth |
| 15 – 20% | 25 – 30% | 25% |
Why is our recommended higher? This gives you more of a buffer when it comes to unexpected costs and other income risk impacts. Especially with the building and construction heavily impacted by external and economic factors.
What do builders need to consider when setting profit margins?
When setting your gross profit margin, you need to consider both internal business factors and external risks.
- Your type of contact and project: Both fixed-price and cost-price contracts have their pros and cons, each coming with different risks and cost considerations. The size and scale of your project, competition and overall market conditions can also impact what margin you should apply as a builder.
- Material and labour costs: Here, it’s more than simply understanding your Cost of Goods (COGs). You also need to consider how many staff need to be involved and what trades you need. Here, work in progress (WIP) reporting can be highly insightful. Using past project insights you can more accurately predict your associated future costs.
- Projected project overheads: These indirect costs can have a big impact on your final project profitability. Here, we recommend you review your administration expenses (software and tech, admin team salaries, office expenses), operational costs (equipment, vehicles, licenses) and any other financial obligations that could apply.
Your business and administration structure and volume of projects also plays a part.
One of the biggest blind spots we see when working with new builders is lack of reporting. Without keeping your financial, business and WIP reporting up to date, identifying the above can feel more guesswork than accuracy.
Economic and industry factors are another consideration often overlooked, and can be difficult to assess without working with a business advisor or financial expert that is across these trends.
When to mark-up vs add a profit margin
Your mark-up is the sell-price percentage you add to your final project. In comparison, your gross profit margin is the percentage of project income that is gross profit. Your gross profit is also a great indicator for your business health and profitability, which it’s a key metric we monitor and review for clients.
| How to apply a price mark-up | How to apply a gross profit margin |
| Apply it to your final sell price. It should always be bigger than your gross profit margin.
How to calculate it: (sell price – buy price) / Buy price = mark-up price Mark-up price x 100 = mark-up % |
Apply a gross profit margin at the start of your project, taking into consideration all COGs and building and construction costs.
How to calculate it: Gross profit / revenue = gross profit margin amount Gross profit amount x 100 = gross profit margin % |
Is your current builder’s margin below 25%?
Whether your well below or just under our recommend 25% builder’s margin, there’s simply steps you can take to increase it over time. In fact, sometimes jumping straight to this new profit margin percentage could heavily impact your project pipeline. Especially if changing this detail could mean you need to reposition yourself in the market.
Instead, we often advise our building and construction clients to take a more incremental approach and increase their profit margins over time. While this might seem like a strange approach, sometimes small 1% changes can make a big difference.
Let’s look at this example:
| Average job revenue | Average gross profit margin | Average job gross profit |
| $1,000,000 | 10% (current margin) | $100,000 |
| 11% (+1%) | $110,000 (+10K) | |
| 13% (+3%) | $130,000 (+30K) | |
| 15% (+5%) | $150,000 (+50K) |
Over the course of a year, you could be walking away with thousands. We use this incremental approach for another reason: It helps you assess what’s going to work for your customer base and target market.
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