Protect Your Profit Margin with Greg Wilkes

Greg: [00:00:00] So no guest on the podcast today, but what we’re going to be discussing is your profit margins. It’s such an important subject and I don’t think we’ve really delved into this fully before going into real detail of how you can unlock profit on every single project and how you can master your margins because there’s some real confusion around what it is.

So we want to get you nice and clear on. You know, why your margins are critical in construction. We’re going to talk about some common traps that might reduce your profitability. And we’re going to give you a little bit of a step by step approach on how you can protect those margins, or even increase the margins on every job that you do.

So, first of all, let’s let’s just talk about why this is so important. Because, Your construction business, and we’re thinking about the health of your construction business, if you haven’t got enough cash in the business, and you’re constantly struggling to have a little bit of a buffer there, then you’re really going to struggle to grow, you’re going to struggle to [00:01:00] invest in bringing on better staff you’re going to struggle to invest in Buy new vans or get in a new office, things like that, equipment and even if you’re going through tough times, maybe there’s a period where we get really poor weather and you can’t work, especially in the UK, you get times like that, or maybe there’s periods where you’re a little bit slow in business, or you might get a period where people are not paying you for a certain time, then you really need to have enough cash in the business to be able to get and sustain through those periods.

So this is why if you’ve got enough profit and you’ve got enough profit margin, then it’s going to give you a buffer, help you build a buffer that’s going to get you through those difficult times. So today we’re going to look at what are the biggest margin killers in construction, how do you track your costs effectively, and what you can do right now to improve your profitability.

So let’s just first of all talk about what I call the margin mindset. And the reason I call it a margin mindset is because do you actually even understand what margin is? Have you got the mindset to [00:02:00] understand what the different margins are in your business?

So first of all, let’s just understand what does gross margin mean? Well, gross margin is the money that’s left over after you’ve paid for all the materials and labor on a project.

So just to give you an example of this, let’s imagine that you’re pricing a project and it. you’re putting a price in for a hundred thousand for this project, a hundred thousand pounds, a hundred thousand dollars, and you spend seventy thousand on the labour and the materials. So it’s 100, 000 you’ve charged and you’ve spent 70, 000.

What are you left with? You’re left with 30, 000. So that is your gross profit that’s left and that’s an amount. So you’ve got a gross profit figure of 30, 000. But what we often do is we convert this figure into an actual percentage. So the percentage Of that is clearly 30 percent isn’t it? 30, 000 left out of 100, 000 that you charged is a [00:03:00] 30 percent gross profit margin.

And you really want to remember that and understand that and most of the time we’re trying to affect that percentage figure. We want it to go up as much as we can and even small little tweaks in that can make a huge difference. But let’s just explain that term first. That’s what gross profit margin is.

The next figure you’ve got to understand is your net. profit margin. So the net profit figure, let’s say you’ve still got that 30, 000 pounds that’s left over after the job. Now you’ve got to pay for your vans, you’ve got to pay insurances, you’ve got to pay your phone bills, you’ve got to potentially pay for rent on offices, all that that’s got to come off.

You may have admin workers in the office that you’re paying for, your accountant, project managers potentially that are office based. So all of this has now got to come off of that 30, 000 or dollars. So What is left after that? Well, the figure that’s left, maybe there’s, let’s say [00:04:00] there’s 10, 000 left after you’ve paid out everything.

So you’ve spent 20, 000 on your overheads. That means you’ve got 10, 000 left out of the 100, 000. So your net margin on that project would be 10 percent or 10, 000. So we’ve got gross profit, which is just the labour and materials that you deduct off. And then you’ve got net profit, which is after everything.

Labour and materials plus all your overheads. That gets you your net margin figure or your net profit figure. So now you understand the difference between the margins. And people get this wrong all the time. Believe me, when I ask people how much they’re earning on their revenue, the amount of people that tell me, Oh, I’m earning 30%, and I’ll say, Oh, that’s great.

30%. Is that, is that gross or is that net? And they go, I was just told that I was earning 30%. They don’t actually know what they’re left with. So it’s really important you understand the difference because there’s a huge difference in profit afterwards. And net margin is really the figure. the main figure that you’re left with at the end.

So now we [00:05:00] just want to discuss the next thing, which is what is the difference between profit and markup? And this is really important to understand. And so many business owners confuse this and they think that that again, two of the same thing, but they’re not. And if you get this wrong, it can be really painful for you.

So let’s just give you again, a real life example of this. Now, I. did understand the difference between these two things, profit and markup. And what we’re talking about here is, let’s imagine you’ve priced a project for, again, 100, 000 and you mark it up by, let’s say, 20%. So now you know that your labour and materials are going to cost 100, 000 and you want to put 20 percent on top.

So now you’re going in at that project price Of 120, 000. So you’ve marked it out by 20%, [00:06:00] but if you wanted to work out what the gross profit margin is off of that. You think it’s 20 percent but it’s not. What you’ve now got to do is you’ve got to take the 120, 000 that the job costs and you’ve got to deduct the 100, 000 that you’re going to spend on it and then you’re left with 20, 000 but that’s 20, 000 off of the 120, 000 so it’s no longer a 20 percent margin.

It drops to 15%. And that’s really important to understand because what people can do, and I’ve made this mistake and I’ll tell you a story in a second, is you can price projects and think to yourself, I know in my head, I want to get a 20 percent gross profit margin or whatever it is that you want. And you start pricing jobs and you start marking out by 20%, but the reality is when you finish the job, you’re only left with 15 because you’ve worked it out wrong.

And we did this. We, we had, it was really painful. Actually, we had a huge million pound project and We priced it right, the markup was right, the margin was right, [00:07:00] everything was going good. And we had a project manager come in who was looking after the project for us, and I didn’t explain to him the difference between markup and margin.

And what we were doing is all the extras that we were going for, we were saying, right, make sure you put a nice 30% 30 percent we want a 30 percent gross profit margin on these extras and he was just marking them up by 30 percent which meant we weren’t getting 30 percent at all. I think we’re actually getting, I can’t remember the exact figure, but I think it means you only get 25 percent or 20%.

Yeah, so just to be clear on what that is, if you actually mark up by 30 percent only, then you’re actually left with a 23 percent gross profit margin. So it drops by 7%. So really important to understand those values. You can use calculators online that will work all this out for you, but what you really want to do is you want to understand what is the gross profit margin that you need.

And then you can work out what you should be marking up every single project. It’s probably just easier to work [00:08:00] that out. Once you’ve got that figure in your head, it’s nice and easy to do. So that was really painful for us on this million pound project. We had the project manager marking everything up by 30 percent instead of more than that and we, and then we only got 23 percent and we couldn’t work out why we were not making as much money as what we should have been.

And that’s a huge amount to lose on a big million pound project. So bear that in mind. You’re talking, you know, tens of thousands of pounds that can be lost if you get this wrong. And if you’re doing this over the course of a year, it can be hugely painful. So keep that in mind. So now you know the difference between gross profit margin, net profit margin, and you know the difference between markup and margin.

So let’s now talk about the margin killers in construction. Because there’s a lot of things that can absolutely destroy your margins and we want to work out what that is and what really kills profitability, the common things. So let’s start with the obvious. The first thing [00:09:00] that kills your margin is an underpriced or an undervalued project to start with.

So a bad estimation. Now, if you put an inaccurate quote out there, and you’ve got thin margins from the start, then you’re, you’re already in trouble. You know, you’ve got obviously your labour, you’ve got your overheads, your materials, and your contingency, but you’re already in the red straight away before you even start that project sometimes.

So if you underprice a project and you get the project wrong it’s very difficult to pull that margin back out. The only way you can do it is by securing really cheap material prices and cheap labor and that’s very hard to do if you’re starting off on the back foot. You’ve got to get your pricing right.

What some people do as a tactic, which is not advisable, is they’ll go in cheap on their pricing and then they’ll try and make up that margin with overheads and sorry, with extras and variations. It’s a really dangerous tactic to play and clients don’t like [00:10:00] it either. If you go in cheap on the main project and then you’re stinging them for extras and you’re going for huge margins on the extras, it’s.

Just not a good tactic. Clients don’t like it. You get a bad reputation and it’s also very risky for you because there’s no guarantee they’re actually going to go for those extras or variations in the first place. So, I wouldn’t use that as a strategy. You just want to get your estimation right from the beginning.

So try not to underprice project. That’s a big, big margin killer. The second margin killer is scope creep. So what this means is where You’ve got a scope of works and all of a sudden you don’t realize but maybe They’ve said right we want you to do a thousand square meters of plastering and all of a sudden There’s a little bit of scope creep.

It’s not just plastering, but the walls are in such bad condition that you’ve got maybe Do some extra dry lining or you’ve got a hack off some of the the sand and cement before you put on the plastering So there could be scope creep. Clients can also cause scope creep as [00:11:00] well They can ask for extra things to be done and you think oh that won’t take long.

I’ll just get that done So what we’re talking about with Scope Creep is really just additional work that was never originally priced for and not properly quoted for. Now, every small add on on a project chips away at your gross profit margin. If you’re not capturing it in a variation order or a change order, then it’s going to chip away at it and just keep that in mind.

Everything you do for someone. Obviously, we want to keep clients happy. And, you know, there may be occasions when you think, Oh, but, you know. I’ll just include that and let them do it. Let them know though, if you are going to do that, because it is going to creep into your margins. So just bear that in mind.

The next thing you need to think about with your margins is poor job costing and tracking from the beginning. So what we mean by your, your cost tracking is that you’re not fully tracking your labor hours. You’re not tracking the materials being used. You’re not tracking your subcontractor costs. And by the time you [00:12:00] realize it, You’re over budget and your margin has been eaten into.

So it’s really important that, okay, you may have priced the job right to begin with, you may not allow the client to have any scope creep, but if you’re just accepting prices from subcontractors and you’re not costing them in properly, or maybe your guys are overrunning on labor and maybe you’re not really checking the materials, then if you’re not tracking these things and you’ve got poor job cost tracking, you’re not going to pay them.

be able to maintain those margins and also it just leaves you blind because if you get to the end of the project And you think to yourself, ah, you know, I know overall I made this amount on the project Do you actually know what you made per phase? You know, could you say on the foundations? I made this much and on the brickwork I made this much and on the roof I made that much and that’s when you really got Powerful data at your hands and the amount of people that realise that they make a huge amount on maybe ground works, but don’t make any money on the second fixed joinery.

That happens all the time because they’re [00:13:00] not pricing those elements in properly and they’re not job costing to actually have, you know, real informed decisions on their tracking. So keep that in mind too. We want to track everything also. We also want to think about inefficient resource allocation.

Sometimes when we’ve not programmed jobs the right way, and people are waiting around for materials, or maybe they can’t get on with a certain phase of the work because they’re waiting around for another phase to be finished. If you’re paying for idle workers, or you’re missing deadlines because of your scheduling conflicts, that’s just going to eat away at your margins and that’s painful too.

So late completions may also trigger penalty clauses as well if you’re in those in contracts and so that’s going to eat away at your margins also, which is horrible. The other thing too that you may not realise it, but this can eat away into your margins, is weak payment terms. So if you’ve got really unfavourable terms, so you’re getting paid really late [00:14:00] or those are not aligned with your project milestones, if your client’s paying too slowly, then what happens then is you’re the one financing the project.

And I know you’ll get this money eventually, or hope that you do, but if you’re having to pay interest in that or you’re dipping into your overdraft or you’re having to get a loan out to just cover your cash flow, or maybe you’re doing invoice factoring or invoice financing where someone’s paying you every time you raise an invoice until the client pays, then that’s just going to eat you out of the margin also.

So bear that in mind. If you’re paying any interest. Because you’re financing a project, you don’t want to be doing that. The client needs to finance the project, not you. So they’re the margin killers. Bear them in mind because we want to avoid them at all costs…

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So let’s now talk about steps to master your margin.

Well, we’ve touched on some of these already, but clearly you need accurate estimating. And the way to accurately estimate is to use historical data. So go back to previous estimates, just sense check the estimates that you’re putting in. Maybe look at the price per square meter that you’re submitting for this estimate.

Is it in line with your other prices per square meter? Use historical data to analyze the phases like we’ve just discussed, you know, do you actually make money on the joinery works or do you need to up your price on that? Are you, you know, going in too cheap or is your estimator underpricing these things?

So make sure you’re Accurately estimating using the historical data, always factor in a [00:16:00] contingency, a lot of projects will factor in maybe a 5 percent contingency, put that in for sure because it never goes quite to plan and you need a contingency in there and also you want to think about like a standardized estimate process or software that you can use if you’ve got something nice and standard, so you’re pricing it.

this much per square meter on your brickwork and this much per square meter on your your your joinery. It’s just easier to price that way and if you’ve got a nice standardized process that you can look back on on a either a spreadsheet or some software that’s going to make things much easier and trying to stick with the same QS and estimator if possible.

When you build up a good rapport with an estimator and a QS over time, then they understand how you price and they also understand the historical data if you’re feeding that back to them. So that’s step number one to master your margins is get your accurate pricing right. The second thing you need to make sure you have is really clear contracts.

So [00:17:00] understand if there are penalty clauses in there, understand the payment terms, make sure it’s nice and clear so that you can manage the contract right. But also, you’ve got to manage the change order process too. So if there are, if there is scope creep, if there is Variations. You need to document everything.

If the client wants an extra, have a change order process in place. Make sure you’re paid for it. Also make sure you’re letting them know of the additional time it takes to do that change order. Because what often happens is people put prelims in for a project. They might think, right, my prelims for a project are at 10%.

Let’s just say it’s 10, 000 for the prelims. And the client’s added. 50, 000 worth of extras, but you don’t actually add the extra prelims on top of those extras. It’s really crucial that you do that because those extras are taking you time and therefore those prelims need to be included as well. So make sure you’ve got like a weekly prelim cost in there and you can add that to the change orders if needed.

So [00:18:00] document everything. Document the change order and document the extra time it takes you to deliver that also. The third thing we want to do is have real time job tracking or job costing as you’re going. So, we spoke about this earlier. Track the labour hours daily. Track the materials instantly. So when someone goes in to buy something, make sure you’ve got purchase orders that are set up instantly.

There’s software that can do this. And really you want to if you can, Allocate an overhead cost per project. It’s a little bit more advanced, but if you know what your overheads are as an entire company you really want to allocate that per project if possible. So you could either divide it by the amount of projects or you could divide it by the revenue per project, but you really want to understand your job costing in real time.

So If you realize that you’re running over on a project, let’s just say, well, we’ve realized that the foundations have cost much more, then you’ve got an entire project to try and pull that back. So when you’ve [00:19:00] got real time costing there, you can just make really informed decisions on that. You can use apps to track your workers, to get time sheets on board.

We have apps that we use in our mastermind program. We use one called Cost Tracker, that’s an in house program that our members use. There’s things like Build a Trend. Procore, all apps like that, they can manage the labour hours and you can track their schedules real time, which is really important.

And then you need to review and adjust weekly. So monitor your timelines weekly. Make sure you’re finishing on time and on budget and monitor that. When we used to have meetings with our project managers, there’d be two main things we’d discuss. Are you still on track and are you on time with the Gantt chart?

So that’s the main thing. What extra resources do you need? How do we pull it back? Because, as we’ve said before, if a job overruns, massive profit killer. And the second thing we’d review with our project managers is, are you on track for this phase with the budget? So, [00:20:00] are we ahead? Are we winning? Are we on track?

You’ve got to adjust and review weekly, because if there’s any amendments needed, you need to spot that early and potentially change it up. Another thing you can do to really master your margins is to negotiate better payment terms with your suppliers. So, don’t be afraid to do this because they need your business more than you need them, often times.

So, get a rep out what we used to do is we used to get a rep out, we used to get them to supply us on an Excel spreadsheet what we’re currently paying for all our materials. We then put that into a master document and then we’d get another rep out and say right here’s what we’re paying for our materials Can you beat that and then they would try and beat those prices They’re not going to beat them all, and then we’d get another one out and we’d do it, and we’d do it for about five different companies to play them off of each other.

What we’d then realise in this master document is that, you know, not every supplier is going to be cheaper on everything, but if we were going to maybe put in a big order for some timber, we would immediately be able to look at [00:21:00] this document and think, who is the cheapest supplier for those materials?

So make sure you’re constantly negotiating better payment terms and supplier rates because they will creep them up without you realising, and you want to make sure that. you’re getting charged the right amount. And also think about if possible, which can help you margins is think about bulk buying. And that can often work well too.

If you have got storage space or you’ve got a site that’s got room, can you bulk buy that will bring the prices down too. Alright, so and maybe the last thing just to mention in there is, is think about having a little bit of a margin buffer. So if you’ve got a minimum amount that you need to make each month, so maybe you think to yourself, I have to make 25 percent gross profit.

you know, just to hit my figures, then maybe have a buffer in there. Maybe aim for an extra 2345 percent extra when you’re pricing things just so that you’ve got a bit of a buffer and a contingency in there if there’s any slip. So that could just help you for any [00:22:00] surprises. So I told you example before of how we suffered this on the big million pounds.

Contract that we had. You really want to be careful of that and watch out for your projects. Just make sure that you’re monitoring every project but also make sure your team members understand this too. So if you’ve got project managers or contract managers that are responsible for pricing or they’re responsible for delivering certain phases, be open with the numbers with them.

It doesn’t hurt to show them the numbers. Show them the targets that you’re going to set for the month and then hold them accountable if that’s part of their job role. It’s really Really important to do that. We had a company that started with us that was doing about 2 million turnover. One of our clients come on board and they were doing great turnover but were just not making any money.

They couldn’t work out why. When we actually analysed them, their overheads were okay actually. They were actually running a really lean outfit. But it was just their gross profit margin that they were getting wrong. They were just under pricing work [00:23:00] and they didn’t realise that they could actually charge so much more.

And what they were charging for jobs, they thought that’s just what the margin was. And the danger is, is that a lot of people look at some of the bigger companies, you know, the big Balfour Beaties and the huge you know companies that are out there, and they know that they’re only charging small margins.

They might only have 10 or Even on their margins. So a lot of people, smaller firms think, well, I could charge that as well. I’ll charge 10 or 15%. It’s not enough. It’s not enough for you to charge that. You’re not a big company with, you know, billions in turnover. So I would really recommend that. I’ve done other podcasts about this before.

Try and get your gross profit margins. to 25 to 30 percent. We’ve got members doing much more than 30 percent. If you’ve got a really skilled trade that’s unusual, maybe you do like ground works for example, or you do something that’s really unique and niche, you can actually get even more than 30 percent.

And you need to, like for example ground workers. You need to charge more than 30 [00:24:00] percent because you’ve got so many overheads that are higher than other businesses because you’ve got all that plant to look after and machinery. So you’ve really got to understand the margins for yourself and work out what’s going to work for your business.

And that is going to be unique for every single company out there. So, top three things you need to do, some action items for you. Make sure you understand your margins on your jobs. Identify your biggest margin killers. Is it underestimating? Is it scope creep for you? Or is it maybe your payment terms that you’re having to pay interest because your client’s not paying you?

Work out what your margin killer is and resolve that immediately. Absolutely important. The second thing you should really do is set up a consistent job costing and job tracking every single project that you do and that wants to be a weekly review that you do on that. with your project managers or just review it yourself.

Make sure you’re consistently tracking it and reviewing it. And maybe the third thing you can do with your. [00:25:00] Margins is really negotiate those supply terms. It’s amazing what a difference it makes when you can drive your supplies down by five or 10%. And that is doable, especially when you play them off of each other.

So they’re the takeaways, the top threes for really protecting your, your margins and your making sure you don’t suffer in that area because it is just painful if you’re delivering a huge project and you get to the end and there’s no money, it’s, it’s absolutely horrible. So pick one area. That’s easiest to tackle this week.

Dive into it. Talk to your management team about it. Talk to your workers and commit to doing it. Try it for a month and see what a difference that makes when you review it at the end. Alright, so I hope that episode helps. Make sure you subscribe. Leave us a review if you’re getting any value out of these podcasts.

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