For many real estate developers and construction firms, determining actual profitability is an elusive task. Budgeting issues, change orders, unexpected variances, and fluctuating costs often cloud the view. The key to unlocking true profitability lies in building the right processes and applying disciplined financial management — two elements many construction firms & developers miss, especially as they grow. Here are eight ways your construction business can better understand its true profitability.
1. Start with a Realistic, Firm Budget — But Know It’s a Baseline
Large projects tend to run 20% behind schedule and go as much as 80% over budget.
Your original budget should act as the financial foundation of any project. However, a budget is only as good as the assumptions you make when creating it. For firms struggling with profitability, it’s often because their budgets are based on incomplete data or overly optimistic assumptions. Construction & developer firms should start with a detailed and realistic budget grounded in historical performance and actual costs. Just remember — this is only a baseline. You’ll want to remain flexible to adjust and revise budgets as conditions change, but never lose sight of your original estimate.
2. Build a Change Order Process that Works
“While the financial reporting eventually shows how much is lost to unrecognized changes, it is often too late for the project team to recover lost profits due to unplanned and unmanaged expenses.” Managing the True Cost of Change Orders, CFMA.org
One of the biggest pitfalls for development firms is the lack of a formal change order process. When changes occur — and they inevitably will — without robust construction management software to manage them, costs quickly spiral out of control, and you lose track of your true profitability. Implement a formal change order system that captures changes, tracks the impact on both schedule and budget, and allows for informed decision-making. This will help keep variances under control and make sure you’re quoting the next job based on reality, not outdated estimates.
3. Spot Variances Early Enough to Course-Correct
The Deloitte Construction Data Survey uncovered that only one in seven (13%) construction businesses have access to daily insights on their projects.
Many firms fall into the trap of spotting project variances too late in the game. By the time overruns are evident, it’s often too late to adjust course, and profitability takes a hit. Use real-time data to spot variances as soon as they emerge. Whether it’s labor costs, material shortages, or unforeseen complications, early detection allows you to make immediate adjustments, protect your margins, and get the project back on track. Construction management software tools like Sage Intacct Construction provide real-time visibility, so you can see variances as they happen.
4. Separate Original and Revised Budgets
While budgets may need to be updated, it’s critical not to lose sight of the original plan. Maintaining separate original and revised budgets allows you to track how the project has evolved and where variances have occurred. Many construction firms make the mistake of continuously revising their budgets without keeping a record of the initial expectations. This makes it nearly impossible to understand where costs went off track or to course-correct effectively. Versioning is key to tracking changes over the length of your projects.
5. Disciplined Financial Tracking is Crucial as You Grow
Poor cash flow management is one of the biggest causes of insolvency for US construction firms.
Smaller firms may be able to get by without rigorous financial tracking, but this lack of discipline becomes a significant challenge as they scale. Not having the right systems in place leads to missed opportunities, cost overruns, and inaccurate reporting. Real estate development and construction firms need to instill financial discipline early on, using project management software that integrates financial data with project workflows. Sage Intacct Construction management software helps firms as they grow, providing tools that scale alongside your business while providing real-time insights into profitability across projects. (Read how one construction firm expanded its operations profitably.)
6. Leverage Technology to Track Profitability Across Projects
18% of project time is spent searching for data.
As your firm grows, tracking profitability across multiple projects becomes more complex, especially when managing different clients, regions, or business lines. Without the right technology, it’s easy for costs to get lost in the shuffle, leading to unreliable and confusing performance data. Integrated cloud-based construction management tools like Sage Intacct Construction allow you to track profitability in real-time, monitor costs at a granular level, and compare performance across different projects.
7. Understand the Impact of Indirect Costs on Profitability
14% of all rework in construction is caused by bad data.
For many development firms, indirect costs are an overlooked factor in profitability. Indirect costs like overhead, management salaries, and equipment maintenance can eat away at your margins if not properly budgeted, tracked, and accounted for. Make sure that your cost allocation system includes indirect costs so you can see the full picture of your project’s financial performance. With proper visibility, you can allocate resources more effectively and better understand your true profit margins.
8. Quote the Next Job with Confidence Using Real-Time Data
Up to 30% of the initial project data is lost by the end of the design and construction phases.
One of the biggest benefits of tracking true profitability is that it allows you to improve your bids and estimates for future jobs. With historical data on variances, change orders, and final costs, you can confidently quote future projects. Leveraging real-time data from previous projects allows you to give more accurate estimates and avoid underpricing, a common cause of low profitability in construction. (Read how one HVAC contractor client is using real-time data to boost profitability.)
The Bottom Line
Understanding your true profitability is an ongoing process requiring discipline, access to accurate data, and proactive management. For construction and real estate development firms, the lack of a change order process, the inability to spot variances early, and a muddled view of indirect costs often mask real profitability. Implementing these eight strategies, supported by construction management platform like Sage Intacct Construction and an experienced partner like BT Partners, can help you better understand your financial performance and, ultimately, boost your bottom line. Reach out to our consulting team to learn more.
