Construction companies have to do a careful balancing act in managing their costs. Revenue is not always steady and varies across projects. Also, unexpected setbacks can interrupt work while also increasing expenses. Here are some ways that companies can address challenges and improve their net profits.
Why Is Underbidding an Obstacle to Profitability?
Bidding on projects is usually a very competitive process. Companies have a strong incentive to submit the lowest possible bid. Many prospective clients will select the company that presents the lowest bid and prioritize cost above all other relevant factors that they should consider. Nevertheless, construction companies need to be conscientious about underbidding. Even if submitting an extremely low bid helps a company get a contract, underbidding is probably going to be regrettable.
After taking care of several key expenses such as labor and construction insurance, a big project may not be worthwhile if a company has underbid on it. Furthermore, having to submit change orders is not going to sit well with customers. Frequent or costly change orders can give companies a reputation for being dishonest or unreliable, which could cost a company business in the future.
How Can a Construction Company Be Profitable if It Is Not the Lowest Bidder on Projects?
The best strategy with estimating is to be realistic but fair. Thoroughness is also a key factor in winning contracts. People reviewing a bid typically find it reassuring when companies include as much detail as possible about why certain elements of a scope of work cost what they do. They may be less likely to suspect that costs may be inflated, and they may be skeptical of other bids that do not reflect the same level of attention to detail.
Why Do Accounting Practices Matter?
Accounting over the course of a project can involve a lot of intensive oversight. Keeping ledgers current rather than trying to play catchup a week or two later prevents companies from inadvertently going over budget.
Project management software and apps can help managers keep financial information well-organized. They are useful for segmenting and tracking different types of expenses such as materials, payroll, construction insurance, and subcontractor payments.
How Can Companies Get Timely Payment?
Delayed payments can be frustrating because companies typically need to expend a lot of resources before they can submit requisitions to clients. A few administrative safeguards can help assure timely payment.
Contracts should stipulate clear benchmarks about when clients must make payments. Also, companies should send legal notices as soon as a client indicates that a payment will not be on time.
It is no surprise that many construction companies struggle with profitability. Fortunately, a proactive approach to preventing obstacles can help companies stay profitable.
About Haughn & Associates
Founded by Michael Haughn in 1986, Haughn & Associates is a full-service, family-owned, independent insurance agency based out of Dublin, Ohio. H&A strives to provide the best possible price and unique insurance solutions across a myriad of industries, including construction, IT, Habitation & Commercial Property, Agriculture, and Engineering. Devoted to providing the best of business insurance, life and disability insurance, personal insurance, employee benefits, and bonds, H&A is proof that success lies in long-standing client relations and satisfaction. To learn more about how H&A can be of service to you, contact us at (877) 802-2278.
