Even though revenues have climbed over the past few years, most companies’ profit margins in the construction industry aren’t ideal right now. Material costs, labor issues, and other factors continue to exert significant downward pressure on profitability, eating into your construction company’s revenue and profitability.

Indeed, Q1 2023 profit margins for U.S. construction firms dropped nearly 30 percent on average. Numbers from Deloitte say average construction earnings before interest and tax in 2020 were 5.5 percent of sales – a razor-thin position if a big project experiences a notable increase in unplanned costs.

So, what’s a construction company to do in this era of high interest rates, labor shortages, and increased costs? Read on for tips to improve your construction company’s revenue and profitability.

Don’t Cut Corners – Increase Efficiency

It’s not just big companies facing a profit squeeze, either. Smaller construction firms face the same macroeconomic conditions but have fewer resources and market clout to help weather the storm.

While it can be tempting to improve profitability by cutting corners on projects to reduce costs, this is a bad idea.

That’s because cutting corners by hiring under-skilled labor, skimping on training, or succumbing to pressure to finish work within unreasonable timelines usually leads to quality of construction and safety issues. That can, in turn, lead to workers or tenants getting seriously injured or even killed – along with major reputational damage to your company.

Even worse, management’s desire to cut corners often trickles down to every worker at the company, infiltrating the company culture and creating even more risk over the long term.

The good news? There are proven ways to increase profitability that don’t involve lowering your building standards.

Improve Job Estimates

Companies can use software tools that analyze the cost of materials and labor in real-time via past project and commodities data. Such a tool can help inform the job estimate and bidding processes with the most up-to-date information for better accuracy and more reliable project profit margins.

More precise job estimates help eliminate the twin risks of underbidding and losing profit, or overbidding and not winning the contract.

Increase Productivity

We’ve already written about the benefits artificial intelligence (AI) and data analytics can have on construction productivity, along with the upside of offering training and other benefits to keep workers happy and productive during labor shortages.

Employee training also helps workers do their jobs more efficiently by reducing mistakes and accidents.

And AI and data analytics tools can provide insights from massive amounts of unstructured data, such as images and text, much faster than a human. These insights can then be used to identify areas for further efficiencies, improve safety and productivity, and forecast customer demand.

But there are other ways companies can improve productivity. More efficient planning through project management techniques can lead to less wasteful contractor and subcontractor scheduling, helping cut down on idle time or wasted days at job sites. Regular progress reviews and reporting help ensure projects stay on budget and schedule.

Maximize Revenue Recognition

Complications such as project delays, added project expenses, and order changes can cause significant challenges for construction companies to accurately recognize revenue, which is when firms record and report revenue.

Some experts recommend using the percentage-of-completion method of recognizing revenue, which allows companies to record revenue as a project is completed instead of saving it all until the project’s end.

Another way companies can improve revenue recognition is by tracking their cost of goods sold (COGS) more accurately. COGS measures direct expenses such as subcontractor fees, materials, and labor. Accurate COGS analysis can help construction companies pinpoint areas ripe for cost reduction without reducing construction quality.

Additional ways companies can maximize revenue recognition and streamline accounts receivables is to use automated invoice software to ensure timely payments, or implement automated inventory software to guard against excess inventory or stockouts.

Add Additional Revenue

The implementation of technology in the construction business also means companies can sometimes add additional revenue streams to their core business. These revenue streams can include developing products with embedded digital/internet of things (IoT) capabilities, such as sensors in doorways or windows, or subscription services for monitoring building assets.

Some construction firms seeking to boost revenue and profitability have taken on service and maintenance contracts on their buildings, which provide recurring revenue – a bonus in a seasonal industry.

Construction companies have felt the pinch of rising costs and interest rates combined with labor shortages for a few years, and will continue to do so for the foreseeable future. But solutions to improve profitability and revenue generation are out there and can help companies improve their bottom lines while continuing to deliver great products and services.