How profitable are your construction projects? Do you know which ones are making money and which aren’t? If not, a construction job profitability report will give you the information you’re desperately seeking.
Business owners often look at the bottom line on their financial statements. Construction project managers need to look at the bottom line on their projects. We’ll look at what a job profitability report is, how to make one, and some tips for better profitability tracking.
What is a job profitability report?
A job profitability report is a summary of the costs and income for construction projects. Each project will have a line on the report, listing the total costs to date, total income to date, and the difference between these amounts. This report can be run at any time to assess project profitability to date.
The difference between the costs to date and the income to date is the gross profit for each project. This amount is the total profit made on the project, excluding any overhead, indirect costs, or other business expenses. The gross profit is often how construction companies assess the financial success of their projects.
Read more: The Contractor’s Roadmap to Profit
Information from the job profitability report, such as the gross profit, can be used to calculate other key performance indicators (KPIs) that help construction businesses know where they are financially and if their projects are successful. We’ll go over how to calculate some of these KPIs later in this article.
How to create a job profitability report
If you’re going to create a job profitability report by hand, here’s the information you’ll need:
- A job list: You’ll need a list of your active or completed projects for the time period you want to assess.
- Total direct job costs to date for each project: This means only the costs that can be directly assigned to that project.
- Total income to date for each project: This is the amount you have billed your customers to date for each project on the list.
- The difference or gross profit: Subtract the direct job cost total from the income total for each project. The difference is the gross profit for that project.
While creating a job profitability report isn’t difficult, gathering the information can be a struggle if you don’t have it organized. Accounting software — such as QuickBooks or Sage, can make the process a breeze. Costs and invoices are allocated to jobs as you go, and getting a profitability report is as quick as a couple clicks of a mouse.
Read more: Construction Accounting: 5 Quickbooks Tips for Contractors
In addition, using software to create this report allows you to drill down to get detail on the costs or income that has been allocated to each project. This helps if you notice a discrepancy in the profitability report and want to figure out exactly what’s going on. If you’re doing this by hand, you’ll then have to search through your records to find the detail for each project, instead of having it available at your fingertips.
How to calculate job profitability KPIs
There are quite a few KPIs that you can look at to assess job profitability. We’ll go over four of the most useful ones and how to calculate them.
Gross profit
We’ve already discussed this one, but it’s calculated by subtracting the total job costs from the total income on a project. The dollars and cents result is the amount of profit made on the project, without taking into consideration overhead, indirect costs, and other business expenses.
Gross profit margin
This is the percentage of profit you’ve made on the project, without taking into consideration overhead, indirect costs, and other business expenses. It’s calculated by taking the gross profit and dividing it into the total income for the project.
The result is a decimal number, which you then convert into a percentage by multiplying it by 100. This is the percentage of income that is profit for a project.
Net profit
Net profit calculates profitability taking into consideration overhead, indirect costs, and other business expenses. Usually, this is calculated based on all active projects together, although it can be done for an individual project, but the math is more complicated.
To calculate overall net profit using the job profitability report, take the total gross profit for all active projects and subtract your overhead, indirect costs, and other business expenses for the same time period. The amount left over is your net profit for that timeframe. If you want to calculate net profit per project, you’ll have to allocate your overhead, indirect costs, and other business expenses among your active projects. Then you can subtract those expenses from the gross profit for each project to get net profit on a project basis.
Net profit margin
Similar to gross profit margin, this is the percentage of profit you’ve made, but it takes into consideration overhead, indirect costs, and other business expenses. To calculate net profit margin, take the total net profit and divide it into the total sales in the same timeframe.
This will give you a decimal number, which you then convert into a percentage by multiplying it by 100. This is the percentage of income that is net profit for that timeframe.
Tips for better job profitability tracking
If you’re just getting started tracking job profitability, or want to improve your current process, here are some tips:
- Start job costing: If you’re not tracking job costs for separate projects, you should start now. Job costing allows you to compare costs to estimates and income for each project, so you know exactly how you’re doing.
- Break down jobs into phases/codes for easier analysis: Breaking down projects into phases or codes for each type of work allows for a more specific analysis of how a project is doing. Without this breakdown, it’s hard to know what area of the project is over or under budget.
- Use software to make reporting a snap: Using construction-specific accounting software makes job cost reporting, including job profitability, easy. The information is already compiled for you and a report can be created in seconds. Creating reports by hand can be a timely endeavor.
- Track profitability over time, and adjust estimates based on data: If your projects aren’t meeting your profitability goals, it’s probably time to take a hard look at your estimates and how you’re developing them.
Profitability only matters if you get paid
Job profitability reports tell you how much money you’re making on each project. While this is important information for a business to have, it only really matters if you’re receiving the money you’ve billed for. Otherwise, your company is spending money and getting nothing in return. Make sure that you are protecting your payments by sending notices and exercising your right to lien. This will help ensure that you actually earn the profits that your report has predicted.
Construction Accounting Help is Here. Check out the Ultimate Guide to Construction Accounting to learn basics, tips, and tricks to help your business thrive.