While construction is a massive industry, the average business operates on surprisingly thin profit margins.
The difference between barely scraping by and building a thriving business comes from understanding the financial mechanics that drive construction business profit and practicing systems that protect your margins.
Whether you’re just starting a construction business or looking to improve your existing operation, this guide breaks down exactly how construction companies generate revenue, what healthy profit margins look like, how successful construction businesses price their work, and strategies that boost your bottom line.
Key Takeaways
- Construction companies typically operate on net profit margins of 5–8%, though top performers can achieve 12% or higher through disciplined financial management.
- Successful pricing requires understanding your true costs, including labor, materials, overhead, and desired profit.
- Technology adoption can reduce administrative costs by 25% while improving job costing accuracy.
- Specializing in high-margin niches allows construction businesses to compete on expertise rather than price.
How Construction Companies Make Money
The path to profitability in construction starts with understanding how money flows through your business and where it tends to disappear along the way.
Understanding profit margins
The profit margin in a construction business reflects the percentage of revenue that remains after all expenses are paid. But things get tricky:
- Your gross profit margin shows what’s left after direct job costs (materials, labor, subcontractors). If you bid a $100,000 job and spend $75,000 on direct costs, you’ve got a 25% gross margin.
- Your net profit margin (the number that actually matters!) comes after overhead expenses like insurance, office rent, and administrative salaries. That healthy-looking 25% gross margin might shrink to just 5% net profit once everything’s accounted for. (For new businesses, understanding all the costs of starting a construction company is a big part of calculating accurate overhead percentages.)
Common profit killers include:
- Underestimation of project timelines.
- Material price spikes mid-project.
- Rework from miscommunication.
- Scope creep without budget adjustments.
- Poor construction quality control plans.
Average profit margins in the construction industry
How much profit should construction businesses expect to make? CSIMarket found that construction services are averaging 6.06% net margins industry-wide. Top performers reach 11.72% net margins, proving there’s significant room for improvement through smart management.
The Construction Financial Management Association (CRMA)’s 2024 Financial Benchmarker reported similar results, finding the construction industry achieved an average pre-tax net income of 6.3% of revenue in 2023, up from 5.0% in 2022. Some construction sectors perform differently:
- Specialty trades lead the pack with 6.9% net income margins. Their specialized skills command premium rates, and they typically carry less overhead than general contractors.
- Heavy highway contractors achieve 7.2% average margins, benefiting from longer-term infrastructure contracts and more predictable revenue streams.
- Industrial and commercial contractors operate on tighter 4.1% net margins. The competitive bidding environment for large projects means volume often compensates for thinner margin percentages.
These industry averages represent mature companies. In your first year or two, profit margins may be lower as you build systems, establish supplier relationships, and refine your estimating accuracy. Focus on breaking even in year 1 and achieving industry-average margins by year 3.
How Profitable Construction Companies Set Their Prices
A key aspect of making a profit with your construction business is getting your pricing right. Here’s how profitable companies do this.
They use a common pricing model
Construction businesses typically select from 3 primary pricing strategies, each suited to different project scopes and levels of risk:
- Fixed bid: They quote a single price for the entire project. This is best for well-defined projects with predictable costs, but it requires excellent estimating skills and healthy contingencies.
- Cost-plus: In this case, the client pays actual costs plus a predetermined fee for overhead and profit. It’s ideal for uncertain scope projects, and shifts the risk to the owner while guaranteeing your margin.
- Time and materials: They charge hourly labor rates plus material costs with markup. It offers flexibility for maintenance work or unknown scope projects.
Pro Tip
Hunter Kosar, President of Twisted Nail Broker Services, learned pricing lessons the hard way: “In the beginning the customer helped me set pricing by giving me access to previous bids they had accepted. Over time, I came to realize that this pricing was very customer-friendly. I established my own pricing, lost that customer, but was able to elevate my services with our new pricing.”
They start with bulletproof estimates
Accurate job costing begins with a detailed scope review. Profitable businesses:
- Walk every square foot, document existing conditions, and identify potential complications.
- Create line-by-line material takeoffs and realistic labor calculations based on their crew’s actual productivity, not industry averages.
- Always include often-overlooked costs like permits, equipment rental, disposal fees, and travel time.
- Build in contingencies deliberately (even perfect estimates hit surprises). They add 10-15% contingency for residential work or 15-20% for commercial projects. This isn’t padding—it’s professional risk management.
They avoiding the race to the bottom
When construction businesses slash prices to win work, everyone loses. You can’t make up losses on volume in construction. One unprofitable project can wipe out gains from 3 profitable ones.
Nicholas Sanson of A-TEX Roofing and Remodeling shares his approach to material pricing: “Start with premium materials and lifetime warranties, even when competing against cheaper contractors. Our average project value increased significantly because customers saw the long-term value.”
They base prices on a clear understanding of their job costs, overhead, and desired profits
Brian Morton, Founder of My Window & Door Guy, emphasizes: “It’s important to know your job costs, such as labor, installation materials, etc. Then, you also need to know your business overhead.” Construction companies combine these costs, then add a desired profit margin, to set prices.
Here’s a basic formula:
Price = Job costs + overhead + desired gross profit
*Desired gross profit = desired profit margin % x [job costs + overhead]
They strategically choose competitive vs. value-based positioning
With competitive pricing, pricing is determined primarily by what other construction businesses are charging for the same or similar work. Companies are asking, “What’s the current market rate for this job, and how can I price myself to win the bid against others?”
It’s best for standardized, commodity-type work, like basic roofing or drywall, where clients are comparing identical bids and price is the main driver.
Value-based pricing sets the price based on the immense value, benefit, or solution the business provides to the client. Here, businesses are asking, “How much is this solution, expertise, or superior outcome worth to my client?”
Businesses apply value-based pricing when their specialized expertise, custom solution, or superior quality is the key selling point. This allows them to price the unique outcome they deliver, rather than just the labor and materials involved.
A hybrid of competitive and value-based pricing, where companies use the market rate as a competitive benchmark for the basic scope of work, is often the most effective. From there, they adjust their price upward to reflect the distinct value they bring, such as a stronger reputation, superior project management, or an industry-leading warranty.
How To Increase Your Construction Business Profit Margins
Setting your prices strategically using the practices outlined above and still missing out on profits? Here are some other methods to boost profitability and grow your construction business.
Strategically manage material expenses
Start by building strong partnerships with 2–3 key suppliers to gain negotiating leverage and unlock bulk purchasing discounts. However, don’t forget the hidden expenses of logistics.
Tate Grafton of Illuminate Electrical notes, “Many contractors fail to account for the time and effort it takes to obtain, store, and deliver materials to a jobsite.” Factoring these logistical costs into your bids is vital.
Maximize labor efficiency
On the labor front, efficiency is paramount, as wasted time directly erodes your profit. Combat this by starting each day with clear tasks, ensuring materials are staged before crews arrive, and cross-training workers to prevent bottlenecks.
Use real-time job costing
Instead of discovering a budget overrun after the project is complete, use modern systems to track labor hours and material usage daily. This allows you to spot problems while there’s still time to correct them, turning potential losses into managed costs. You can also see which types of jobs are most profitable, which clients are worth pursuing, and where your estimates need refinement
Prevent rework and safety incidents
Implement simple quality control checklists to catch errors before they become expensive rework. At the same time, maintain a proactive safety program to mitigate safety hazards in construction, reduce costly work stoppages, and lower insurance premiums.
Create standard operating procedures (SOPs)
Document your processes for essential tasks like estimating, ordering materials, and client communication. SOPs make training new hires faster and help experienced employees work more consistently, reducing mistakes that eat into profits.
Leverage modern construction software
The right technology is the key to implementing and managing these systems effectively.
- Project management tools: Platforms like Connecteam replace chaotic paper systems and spreadsheets with streamlined digital solutions for scheduling, GPS time tracking, team communication, task management, staff training, and even document storage—aligning field and office operations.
- Client management and estimating software: These tools speed up your sales cycle and help you produce accurate, professional bids in minutes.
- Back-office automation: Software for tasks like payroll and billing eliminates manual data entry and improves cash flow by getting invoices out faster.
When you combine these tools, you create a connected ecosystem that prevents costly communication gaps, increases efficiency, and more, significantly improving your profitability.
Did You Know?
Connecteam is an all-in-one construction app with tons of great features for project management, job costing, automation, and more. Plus, it offers a free plan for small teams and highly affordable paid plans.
Get started with Connecteam for free today!
FAQs
What construction business makes the most money?
Heavy highway (7.2% net income) and specialty trade (6.9% net income) contractors are the most profitable sectors, according to CFMA data. Industrial and nonresidential contractors average a lower 4.1% net income before taxes.
How much profit in the construction business is typical?
The typical net profit margin for the construction industry is around 6.3%, but top-performing “Best-in-Class” companies can achieve 11.9%, according to CFMA data.
What is the most important step for construction project profitability?
Accurate job costing is fundamental to project profitability. Track actual costs against estimates in real time, not after project completion. This means recording labor hours daily, monitoring material usage, and documenting scope changes immediately.