Measuring Construction Profitability

When submitting a tender the anxiety and anxiousness that prevails in anticipation of an award is certainly a tense affair, especially if lots of work has gone into it. The sense of achievement when an award is made in your favour is a wonderful feeling. Not to take anything away from the process, but this only the start of your journey in ensuring the business achieves the intended profit.

The key to success lies in keeping a very close eye on your costs, allowables, productivity and P&G expenditures without compromising quality. This can be achieved by using various procedures and processes namely;

Weekly labour costing (Productivity calculation)
Weekly material costing (Wastage calculations)
Cost coding expenses (Cost allocation in relation to allowable)
Accounting Reports (Cost expenditure reports)
Monthly Cost vs Value reporting (Overall profitability calculation)

Labour costing is carried out on a weekly basis using the tendered productivity allocation which is applied to the quantity per bill activity. This calculates an allowance to measure performance against. By grouping the labour cost for the week incurred into the respective activities one can determine the profit or loss made per activity for the weeks work. This is very helpful in determining any major changes in productivity which allows immediate corrective action.

Similar to labour costing, material or wastage costing takes on the same principle. That is the volume of material allowed per unit of measure including waste as per tender compared to cost. At the end of the week the actual progress is measured and compared against the actual deliveries. This will determine the wastage factor per material element. It is vital to control your wastage on site as material is the most expensive part of a construction project. Control of wastage will ensure profitability.

Then on a monthly basis the projects overall profitability is to be calculated. There are many ways to do this, however the most common method is comparing the cost incurred per Trade / cost code against the tender allowable at that particular time of progress. All major contractors are using their own developed spreadsheet and accounting software to enable this calculation. Such reports are difficult to find unless you have worked for a major contractor during your career. I have however found a website that sells this as part of a Commercial Cost Control template package. This website claims to be selling documents templates used by contractors globally. It certainly seemed very powerful once all the information was loaded into the spreadsheet. One could calculate the cost movement and profitability for the month as well as a projection on allowable to completion. This way the projects profitability is adjusted every month based of the actual progress of the month prior.

These controls are the only way to determine where and how profits or losses were made / incurred. Once this information is understood and recorded it can be utilized and incorporated in the next tender by adjusting your rates to suit. This will ensure your competitiveness and guarantee profitability going forward.