If you're reading this, you probably already know something's off with your project finances. You're not making the money you expected, or worse, you're losing money. So, what do you do?
The answer starts with gross profit, the money you make after subtracting the direct costs of delivering your projects. The labour, materials, and subcontractor fees that make up the bulk of your project costs.
Forget about overheads for a moment; admin costs, rent, software subscriptions - they matter, but they're not the root cause of your current margin squeeze.
In this article, we'll take a closer look at how your gross profit might be affecting your bottom line and share some practical ways to get your margins back on track.
Your gross profit is essentially the heartbeat of each project. It tells you whether the project is performing as expected or whether something's off. If your gross profit isn't landing where you thought it would, that's where you need to start digging.
Gross profit = Revenue - Direct Project Costs
Direct project costs include things like:
On the other hand, overheads - things like rent, admin salaries, and software subscriptions - come later. But for now, the focus is on getting the project engine running smoothly.
If your gross profit isn't where it needs to be, it's likely because your costs are running higher than you anticipated.
Here are five actionable steps to help you identify where your gross profit is slipping and what you can do to improve your margins.
Once the project is complete, it's time to assess why your actuals didn't match your budget. Back-costing is all about comparing the actual costs versus your original estimates.
Here's the real value:
Back-costing should never be just a tick-box exercise. To be useful, you need to apply those learnings to your future jobs. Whether it's improving your estimating accuracy or understanding scope more clearly, the goal is to continuously refine your process.
2. Cost to complete: Keep an eye on what's left
For projects still in progress, you need to know what's left to spend. Calculating a Cost to Complete tells you how much more it will cost to finish the job, which helps you track if you're on target for your margin.
Here's why it matters:
The earlier you catch changes, the easier it is to adjust forecasts and keep your margins in line. Lentune lets you update these forecasts live, giving you the most accurate picture of your financial status.
Sometimes, the best way to fix underperforming parts of a job is by subcontracting those areas. If there's a particular element of the job that keeps blowing out - whether it's plumbing, electrical, or drywall - subcontracting can turn that variable labour cost into a fixed cost.
This means you don't have to worry about whether your subcontractors are hitting the estimated hours or pricing. You get the clarity and predictability you need in terms of cost, and you can focus on making sure everything else stays on track.
When it makes sense to subcontract, do it. But be strategic about which parts of the job you hand off to others. Focus on fixing the parts of your projects that consistently underperform or cause cost overruns.
The more you understand your scope, the easier it is to handle variations. Untracked or poorly managed variations can quickly eat into your margin and lead to cost blowouts.
When clients change their minds or request additional work, it's important to have a clear and efficient process for managing those variations. Use variation codes to separate these costs from the original project scope, so you know exactly where you stand and how much additional revenue you should expect.
The goal is simple: bill for what you do. If you're eating the costs of extra work without tracking and invoicing those changes, you're ultimately losing money on work that should have been paid for.
Sometimes, it's not the costs, but the methodology behind your build that needs a tweak. If you're consistently going over budget on certain tasks or phases, it's time to take a hard look at your build methodology.
For example:
By adjusting your build methods to meet your budget, you don't just stay on track, you ensure that you get the job done while still meeting the client's expectations.
When your construction business isn't making the money it should, the problem often lies in gross profit - your direct project costs. By focusing on labour, materials, and subcontractors, you can pinpoint exactly where things are going wrong and take action to fix them.
Back-costing helps you understand what happened on past jobs, while Cost to Complete allows you to forecast future costs and identify risks. Subcontracting can help lock in costs where your team may be struggling, and refining your build methodology ensures you're as efficient as possible.
The key is to stay proactive - make sure your projects are running as planned, and if things go off course, make the changes needed before it's too late. By focusing on gross profit and refining your processes, you'll keep your construction projects running smoothly and your margins healthy.
If you want to get your gross profit back on track and reduce financial risks, Lentune can help. Our software gives you the tools you need to track costs in real-time, adjust forecasts and improve your project margins.
Book a demo to see how Lentune can help run your projects with total financial clarity.