How does construction companies make money?
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Answer:
Construction companies are in business to do two things: build things and make a profit. So why do so many excel at the first thing but struggle to be profitable? Part of the reason is the way bids are solicited and contracts are awarded.
Construction companies are in business to do two things: build things and make a profit. So why do so many excel at the first thing but struggle to be profitable?
Part of the reason is the way bids are solicited and contracts are awarded. Many clients, especially in the public sector, award projects to the lowest bidder, with the contractor’s expertise, experience, and quality of work an afterthought. That’s what contracts are for after all, right?
That seems to be changing as we are seeing more Request for Proposals, Design-Build, and prequalification requests for bids. Rather than just focusing on price, these methods of solicitation focus more on a contractor’s qualifications and quality of work than the ability to build the project as cheap as possible.
Stiff competition and fewer opportunities during the last recession led many companies to lower bids to be competitive, surviving on razor-thin margins to maintain enough work to stay in business. Now that the economy and construction industry has recovered, labor shortages are forcing some contractors to offer higher wages to recruit and retain experienced workers.
The cost of building materials had been steadily increasing even before factoring in the effects of trade negotiations and tariffs. All of these can eat into a company’s profit margin, but for the most part are outside of a company’s control.
Instead of focusing on things you can’t control, take a look at ways your company can reduce costs, submit better bids, and delivering quality work. Here are a few tips on how you can improve profit margins on your projects.