The US construction market is estimated to be around $1.5 trillion in 2021. Although the pandemic has led to economic shutdown and supply chain disruptions in 2020, private sector construction spending has maintained an upward trend, which is now around $1.14 trillion.
Indeed, construction is a potentially lucrative industry to be in – and in the center of it all are the general contractors. Considering the market size of the construction industry, many are wondering whether general contracting is profitable.
How Profitable is General Contracting?
On average, a general contracting company can earn around 15-45 percent gross margin making it a profitable business. If managed properly, a construction business can be a lucrative income source.
Contractors at AFS General Contracting emphasize that just like other businesses, the profitability of a company depends on how efficiently the overhead expenses are managed. To be profitable, a construction company needs to maintain a competitive finance efficiency, business model, and pricing structure. This is in the face of a myriad of challenges like stiff competition, economic downturns, and labor shortages.
General contractors need to be competitive, not just in terms of expertise and quality of work, but in the pricing structure. Many clients, both in the public and private sector, prefer to award projects to the lowest bidder.
The recent economic slowdown has also affected the potential earnings of general contractors. With fewer opportunities and tougher competition, it is not uncommon for contractors to lower their bids to stay competitive and land contracts even with razor-thin margins.
Although the construction industry is starting to recover, the shortage of experienced workers is driving manpower costs. It has become even more difficult to recruit and retain skilled labor. Alongside, the cost of construction materials, equipment, and machines had been consistently going up. These external factors can all affect the company’s profit margin. Although you can’t control these aspects, you can still boost earnings by submitting competitive bids, cutting on costs, improving efficiency, and ensuring quality work.
How to Keep Your General Contracting Business Profitable?
Here are some ways to make your general contracting business financially successful.
- If possible, start your contracting business by yourself. By doing so, you will avoid splitting the earnings with partners or investors. While your projects are still small, you can manage the business by yourself. You can eventually hire additional employees as you get more contracts.
- Keep overhead low. Look for experienced workers and subcontractors who already have the tools and equipment. You don’t want to spend thousands of dollars purchasing equipment.
- Vet potential clients. Before visiting the site and submitting an estimate, be sure that the client is aware of the potential project cost. You don’t want to end up spending time and effort on a prospect who is not financially ready.
- Grow your network. General contracting is all about having reliable workers ready in case of a project. Maintain your connections with dependable and experienced workers and suppliers.
- Promote your business. The secret to a successful and lucrative contracting business is to maintain a steady flow of clients. Many general contracting companies close shop because of the lack of contracts. It is important to invest in various marketing strategies. But more importantly, you need to be reliable, trustworthy, friendly, and personable.
- Improve productivity. In general contracting, maximizing the productivity of your workers is essential to profitability. Completing projects ahead of the deadline and under budget can lead to higher profit margins. To improve productivity, you need a well-planned execution of tasks, teamwork among workers, and availability of supplies.
- Expand to new markets. Evaluate your current earnings and explore potential new territories or markets. For example, if you exclusively in the private sector, you can explore public projects which tend to be larger and with higher potential earnings.
- Set profitability goals. You need to set revenue goals and constantly review them. This allows you to carry out necessary adjustments to grow your profits. It is also important to track costs, so you know where you are spending more and how you can lower the expenses. This is vital in ensuring the profitability of your general contracting business.
In general contracting, profits can be made only if you carefully study the work. It takes hard work, diligence, and consistency to make your general contracting business competitive and lucrative.