Construction Profit Margin: Average Margins, Types, Formulas

What Are the Different Types of Profit Margins in Construction?

Profit margins in construction refer to the percentage difference between the total amount spent on a project and the amount remaining after all costs have been incurred and the project is completed. 

Let's say a construction company is paid $50,000 for a small project and uses $45,000 to complete it. The profit margin is 10%.

In other words, the profit margin is what remains after you’ve paid for labor, materials, equipment, and overhead, in dollar or percentage terms.

This margin is what fuels business growth. Without it, you can’t reinvest in better tools, expand your workforce, or cover unexpected expenses.

Profit margin is subdivided into three areas:

• Gross profit margin: The difference between the total revenue from a project and the direct costs (like materials, labor, and equipment) used to complete that project.

• Operating profit margin: Revenue minus all operating expenses (everything from office rent to administrative salaries), including overhead.

• Net profit margin: After you subtract all direct and indirect expenses, including taxes and interest, from your total revenue, what's left is your net profit. This is the most accurate representation of your business’s profitability.

These types of profit margins help you understand the financial health of your construction business. 

But how do you calculate each of these types? Keep reading.

How Can You Calculate Construction Profit Margins?

To calculate construction profit margins, you must know the values of variables that are part of the profit margin calculation formula. 

1. Determine your overhead expenses: These are the costs spent on running your business, from administration to electricity, water, and daily operation costs.

2. Determine your monthly revenue: This is the total amount you receive for all projects each month; the overall amount of money that comes into your business every month. 

3. Determine direct costs: These are job costs directly incurred on the project. Labor costs, equipment, and inventory costs fall here. 

Once you know the values for all these variables, you can calculate the different profit margins for your company.

How to calculate the gross profit margin in construction

Here’s the formula used by construction contractors to calculate the gross profit margin:

Let’s say you’re working on a $500,000 residential project. Your direct project costs, including labor and materials, total $300,000. The calculation will be:

• Gross Profit = $500,000 - $300,000 = $200,000

• Gross Profit Margin = $200,000 / $500,000 × 100 = 40%

A gross margin of 40% means that for every dollar you make on this project, 40 cents is available to reinvest into your business or cover indirect costs.

How to calculate the operating profit margin in construction

The formula to calculate the operating profit margin as a construction contractor is given as: 

Continuing our example from earlier, if your operating expenses (including overhead) are $150,000, the operating profit will be:

• Operating Profit = $200,000 - $150,000 = $50,000

• Operating Profit Margin = $50,000 / $500,000 × 100 = 10%

This margin represents the percentage of profit you’re generating after covering all your ongoing business expenses.

How to calculate the net profit margin in construction

The formula for calculating the net profit margin is given as:

If your operating costs are $150,000, direct costs are $300,000, interest and taxes arrive at $20,000, while your revenue is $600,000, your net profit margin will be:

• Net Profit = Revenue - Total Costs = $600,000 - $470,000 = $130,000

• Net Profit Margin = (Net Profit / Revenue) * 100% = ($130,000 / $600,000) * 100% = 21.67%

This means you're left with 22 cents for every dollar earned after all costs are factored in.

What Is the Average Gross Profit Margin in the Construction Industry?

The average general contractor’s gross profit margin typically falls between 15% and 20%. However, profit margins can vary significantly depending on the type of construction and the project's size. Here's a closer look at the breakdown:

• Residential construction gross profit margin: Typically ranges from 18% to 25%. Residential projects often have higher margins because they’re smaller in scale and have a more predictable cost structure.

• Commercial construction gross profit margin: Generally falls between 10% and 20%. Commercial projects tend to be larger and more complex, leading to narrower margins due to higher operational and project-specific costs.

When asking “What is a reasonable profit margin for construction?”, consider these industry benchmarks and evaluate how they apply to your project’s scope, size, and complexity. Keeping within these margins ensures you're on track and prevents you from overcharging or undercharging.

The factors influencing profit margins in the construction industry, regardless of the type, include:

• Project complexity and scale: More complex projects, such as large commercial buildings or custom-designed residential homes, tend to have lower profit margins due to increased operational costs and risk management expenses.

• Location: Profit margins can vary depending on geographical location. For instance, construction projects in high-demand urban areas or regions with higher material costs can result in tighter margins. In contrast, rural or less developed regions may offer higher margins due to lower labor and material costs.

• Economic conditions: Economic factors, including overall market demand, labor shortages, and material price volatility, affect construction margins. During economic downturns, profit margins may shrink due to increased competition and rising material costs.

• Contractor experience and efficiency: More experience helps with higher profit margins, as you can better estimate costs, avoid common pitfalls, and streamline operations using project management tools. You also benefit from established relationships with suppliers and subcontractors, often resulting in better pricing.

The good news? You can take practical steps to control these factors. Here's how.

How Can You Improve Profit Margins in Construction?

Construction contractors can improve profit margins by implementing tried-and-tested strategies like the ones listed below. 

Here’s a detailed breakdown of the eight strategies used by construction professionals to boost profitability.

1. Create more accurate estimates

Construction estimates are detailed forecasts of the total costs required to complete a construction project. They include direct costs, such as materials, labor, and equipment, as well as indirect costs, such as permits, overhead, subcontractor fees, and contingencies. 

A good estimate sets the tone for the entire project, informing your bid, timeline, budget, and profit margin. Inaccurate estimates can negatively impact your bottom line and your chances of winning the bid. 

If you underbid, you’re locked into an unprofitable contract. And if you overbid, you risk losing the project entirely.

That means estimates should be based on data, not guesswork. You need to be able to break down how much revenue would cover labor, material, and overhead with precision, and then buffer for project risks. 

To do this effectively, use the ServiceTitan software. It offers different tools to help with estimate building:

a. Project overview dashboard: Once a project is created, you can use the ServiceTitan mobile app to collect all site information and upload photos and bid documents. You can also utilize the custom forms feature to add notes and ensure every necessary detail about a specific job is included.

These details are organized, preserved in the platform, and immediately accessible via the cloud. Once all the necessary information has been collected, users can click “Build Estimate” from the project overview page to create a high-quality estimate. 

b. ServiceTitan’s job costing software: The job costing feature gives you a quick breakdown of job costs based on materials, equipment, purchase orders, commissions, and labor burden so you can track profitability in real time.

ServiceTitan provides historical cost data to help you plan more accurate estimates. 

c. ServiceTitan pre-built estimate templates: Once you download our free PDF estimate, you can customize it to include your quotes and materials, print it, and send it to the client.

d. Pricebook integration: You don’t need to go out of your way to know the prices of materials and equipment when you use ServiceTitan. Its integration with supplier catalogs allows you to easily confirm the current prices of specific items, ensuring your quotes are accurate.

e. Multiple bid options: Instead of sending one proposal to your clients, you can send estimate options that allow for various degrees of profitability. Don’t know how to do that? ServiceTitan’s proposal builder can help you create detailed proposals using templates.

2. Consider rental equipment

Construction equipment is costly even at the best of times. If you're struggling to maintain profit margins, it might be challenging or downright impossible to purchase new equipment. This may leave you scrambling to complete jobs with outdated equipment.

Instead of taking out costly loans to purchase new equipment, consider renting. This provides you access to new, top-notch equipment without the added expense of maintenance and repairs, ultimately saving you money in the long run.

To improve profit margin through rental equipment, you should:

• Rent high-ticket or project-specific equipment instead of buying. 

• Track equipment utilization to know what’s worth owning vs. outsourcing. You can use ServiceTitan’s job costing reporting feature to track equipment costs per job, log usage rates, and ROI. This way, you can determine which equipment is more cost-effective to rent versus buy based on actual job data.

• Schedule the delivery of rented equipment according to project timelines to minimize idle rental days. You can use ServiceTitan’s dispatch board feature to plan equipment use. That way, you avoid renting equipment on days you don’t need it.

3. Minimize rework costs

Rework typically happens when work was done incorrectly, didn’t meet specifications, or wasn’t inspected properly. This costs you time, labor, and credibility.

To avoid rework, you should:

• Implement a standard quality control checklist.

• Ensure real-time communication between field crews and office staff.

• Demand photo documentation when milestones are completed.

ServiceTitan helps you do the job right the first time through its field service mobile app.

You can monitor your field team, improve communication with the two-way chat feature, simplify inspection processes, and give managers real-time visibility into job progress.

With mobile field reporting, your team can capture site photos, notes, and updates from the field. These reports are instantly available in the office, reducing miscommunication and enabling your teams to catch errors before they become costly.

4. Implement just-in-time inventory

Inventory is one of the most underrated drains on construction profit margins. Holding too much stock means tying up capital and absorbing extra costs for storage and warehousing, insurance, theft, and material degradation.

Just-in-time (JIT) inventory is a material management strategy where materials are delivered only when needed to reduce waste and improve cash flow.

JIT inventory helps you avoid additional costs by keeping your material flow lean and efficient. Instead of buying in bulk out of habit, you align purchases with project timelines, freeing up working capital and reducing financial waste.

Many contractors turn to ServiceTitan to achieve JIT inventory because of its streamlined inventory workflow: 

a. Real-time inventory visibility: See what you have on hand, where it's located, and how much is being used in real time. ServiceTitan’s inventory management feature connects your warehouse, trucks, and job sites into one system so you’re never buying materials you already have.

b. Purchase orders: You can create project-specific purchase orders in ServiceTitan. This way, you only order materials aligned with confirmed work scope, preventing over-ordering due to poor communication between the office and the field.

c. Mobile field reporting: Your technicians and foremen can report missing materials, damaged items, or on-site shortages in real-time. This minimizes delays, eliminates unnecessary buffer stock, and keeps your inventory lean without disrupting operations.

5. Automate timesheets

Timesheets are digital or physical records that track each crew member's work hours, including start and end times, breaks, and completed tasks. 

In construction, accurate time tracking not only affects payroll; it also influences job costing, billing, compliance, and labor forecasting.

However, here’s the problem: when timesheets are filled out manually or not in real-time, they are often inaccurate, delayed, or incomplete, whether it’s buddy punching, forgotten breaks, or simple human error. That leads to lost revenue, inflated labor costs, and inaccurate project data.

ServiceTitan offers automated timesheets and contractor payroll tools that sync time tracking with job costing. Here’s how:

• The platform automatically documents technicians’ drive time, vendor runs, and wrench time on their timesheets.

• Crew members can access their timesheet and digitally sign off on it via the ServiceTitan mobile app at the end of a pay period to ensure it accurately matches the hours logged.

• Your staff can clock in and out right in ServiceTitan. Because the timesheets are synced with the dispatch board, your team always knows who’s available for the next job.

6. Track project progress

Tracking the progress of your construction project involves keeping a close eye on how the construction job is unfolding in relation to the planned timeline and budget. It involves monitoring labor hours, material usage, task completion, subcontractor activities, and change orders in real time.

Not tracking job progress is like driving without a GPS; you might eventually finish the project, but will likely miss deadlines and exceed budget. 

ServiceTitan’s progress tracking software helps track projects, ensuring tasks are executed on time and budget. The dashboard allows you to view the status of every job, crew, and budget item in real time. It also displays the amount spent on each line item compared to the initial budget. This way, you can catch delays early and shift resources to stay on track.

7. Track revenue and costs

It’s easy to assume you’re profitable until you reconcile your books at the end of the month and realize you’re not.

Knowing where you stand helps you make informed decisions, such as stopping an unprofitable job or focusing on a high-margin one.

To track your revenue and costs effectively, use software or job costing tools that sync daily and reconcile labor, material, and change order costs as frequently as possible.

ServiceTitan provides a key performance indicator (KPI) dashboard that tracks real-time job profitability. You can filter by job type, technician, or customer segment to identify where you're thriving and struggling.

ServiceTitan’s dashboard can be customized to display the metrics and KPIs that matter most to your business.

8. Evaluate your pricing

Evaluating your pricing means regularly reviewing and adjusting what you charge for your services based on your actual costs, industry benchmarks, project type, and profit goals. 

When you underprice your service even slightly, you erode your profit margin before the job starts. And when you overprice without justification, you lose bids.

ServiceTitan's construction software offers built-in pricebook functionality or integration with third-party pricebooks to help manage pricing effectively. With it, contractors benefit from:

• The ability to upload, create, and customize a pricebook containing their equipment, materials, and services.

• Direct integration with top industry suppliers HVAC, electrical, and plumbing catalogs.

• Tools to help calculate markups and price services for profitability. 

Now that you know how to improve your profit margins, let’s learn the difference between markup and profit margins.

What Is the Difference Between Markup and Profit Margin in Construction?

One common (and costly) mistake contractors make is confusing profit margin with markup. They sound similar, but in reality, they’re two completely different ways of looking at your pricing and profitability.

The primary difference between markup and profit margin in construction is that markup represents the percentage of the cost price, whereas the profit margin is the percentage of the revenue. 

This difference is also reflected in their respective formulas:

• Markup formula: Cost × (1 + Markup %)

• Profit margin formula: (Profit ÷ Revenue) × 100

For example, if your construction company secures a contract for $100,000 to execute a small renovation project, and your total costs (materials, labor, equipment, overheads) for completing that project amount is $80,000:

• Your markup would be calculated on your costs: ($100,000 - $80,000) / $80,000 = $20,000 / $80,000 = 0.25, or a 25% markup.

• Your profit margin would be calculated on the revenue (the contract value you were paid): ($100,000 - $80,000) / $100,000 = $20,000 / $100,000 = 0.20, or a 20% profit margin.

Knowing this difference will help you better calculate and estimate the values you bid, ensuring you stay within your profit margins.

Power Profitable Growth with ServiceTitan

You need to create a balance between improving your profit margins and winning bids to ensure your business grows and thrives. To achieve such a balance, you should utilize contractor management software like ServiceTitan. 

Automating the construction project management process ensures that you get it right by submitting accurate bids from the pre-construction stage through the construction and post-construction phases without compromising profits. 

Book a demo and discover how ServiceTitan can help you maintain a large profit margin. 

ServiceTitan is a comprehensive software solution designed specifically to help construction companies manage their projects, boost profit margins, and achieve sustainable growth, ultimately increasing bid wins. Join the thousands of shops that use it nationwide.