Profit Margins

The margins of profit in the construction industry can vary all the way from 0% to 100% and beyond. In general, however, profit margins usually lie somewhere between 5 and 25% of the sum of the direct and indirect costs, with the lower end of the scale applying to projects for which good information is available, and running up the scale as the   quantity and quality of information declines. Profit margins are not intended to allow for poor estimating practices or other mistakes of fact or judgement in the assembly of the figures for the final bid or price negotiated for the construction contract. 

Profit is the residue left to the contractor after all costs have been met and should generally equate to about 20 to 25% of risk capital, before taxes,'where risk capital is defined as amount of money required to operate the construction company as a business. At present, such risk capital should be in the region of 10 to 12% of total annual turnover of the company. For example, if a company has a annual volume of business of Rs. 1 crore, the risk capital would be around Rs. 10 lakhs. The annual profit to be earned should therefore be around or above Rs. 2.5 to provide a proper return on the capital invested. Thus, if a company completed, say, three trouble-free construction contracts in one year, each worth approximately Rs.  30 lakhs, the theoretical profit on each job should be at least Rs. 1 lakh or about 3.33%. In practice, a figure of 5% to 6% would probably be included. The most appropriate profit margin for any construction company should be established by we company management and accountants. Margins that are too low or too high will inevitably lead to problems, one because of diminishing volume of business (by not getting the contracts awarded). 

Allowances for contingencies can take two forms : first, they can be overly-stated as a condition of the contract; second if (such overt statement is not permitted), they can be hidden within the lump-sum price or item-rates. Such allowances can vary from 0% to 5% with figures of 2% to 3% being common.