5 Tips on How to Master the Business Side of a Construction Business

This three-part series on the business side of a construction business began with How to Learn the Business Side of the Construction Business, followed by How to Understand the Business Side of the Construction Business. Today, the topic shifts from learning and understanding to mastering the business side of a construction business.  

By understanding these five areas, construction business owners are better equipped to master the business side of a construction business. They gain control, make better strategic decisions, and build a foundation for improving profits and maintaining sustainable growth. 

1. Job Costing

Mastering the business side of a construction business means understanding that job costing is an accounting method for tracking project-specific costs. Its purpose is to determine profitability, set accurate prices, and improve future estimates. Through job costing, construction contractors better understand the cost of each project, ensuring prices cover expenses and generate profit.

Job costing: 

• Identifies how much is made on a job. 

• Provides a straightforward way to evaluate past jobs. 

• Supplies the information needed to better understand where to improve for future jobs. 

Pro Tip: Evaluate job costing data before, during, and after each job. 

2. WIP Reports

WIP reports are a powerful tool for improving the precision of a construction company’s numbers. In order to master the business side of a construction business, contractors must understand how this tool is used. A Work-in-Progress (WIP) report enables proactive financial control beyond completed projects. It’s a crucial financial and project management document that tracks the status, costs, and profitability of ongoing projects. Their primary purpose is to provide information on a project's financial health by detailing costs incurred, revenue earned, and work completed, ensuring jobs stay on budget and are billed accurately. 

WIP reports are used for:

• Tracking ongoing project financials – showing how far along you are on the job 

• Enabling accurate revenue recognition – demonstrating how much of the contract value has been earned on a project 

• Managing cash flow 

• Identifying cost overruns early 

• Ensuring compliance

• Providing real-time insights into profitability – including identifying over- or under-billing

Pro Tip: Immediately and accurately incorporate Change Orders into WIP reports, as they affect contract value, total estimated costs, and revenue recognition. (Failing to update WIP reports for approved changes leads to inaccurate job costing, under- or over-billing, and skewed profit margins.)

3. Accounting Method

The percentage-of-completion method is the most common method used in the construction industry. This method allows contractors to master the business side of a construction business when they understand how it works. It works by recognizing revenue and expenses over time as the project progresses and a designated percentage of work is completed. 

The benefits of using this method are:

• Provides accurate reporting by showing real-time financial performance, not just lump sums at the end.

• Includes predictability that smooths income over time, avoiding large swings.

• Gains stakeholder confidence by allowing lenders and bonding agents to have better insight into the health of each project.

• Contributes to risk mitigation through allowing billing for work done, reducing risk on long or delayed projects. 

Pro Tip: Communicate with your accounting team by providing accurate, timely job cost data. This includes clarifying billing cycles, submitting approved change orders immediately, and providing regular progress updates.

4. Financial Reporting

Mastering the business side of a construction business requires understanding that key reports, such as Profit and Loss (P&L) and Balance Sheets, are not optional. Instead, these reports provide vital insights into a construction business's financial health, assets and liabilities, and profitability.

P&L shows performance over time, such as revenue vs. expenses, identifying project profitability, and recognizing operational efficiency.  

The Balance Sheet reveals the company's financial health at a given point in time, presenting assets, liabilities, and equity, and indicating solvency and structure. 

Simply put, the P&L shows if money is being made. While the Balance Sheet shows what is owned or owed. Using them together gives a complete picture, revealing cash flow issues or hidden liabilities, both of which are crucial for making informed decisions and securing financing.

Pro Tip: Think of a P&L as a movie showing revenues minus expenses over a period of time (month, quarter, year) to reveal profitability. And think of a Balance Sheet as a snapshot of what a company owns (Assets), owes (Liabilities), and its owners' stake (Equity) at a specific moment in time. 

5. Be a Learner 

One of the most critical ways to master the business side of a construction business is to learn constantly. Construction contractors already use this “always learning” skill to keep up with new tools, equipment, and building methods. By expanding the learning skill into the business side of the construction business, contractors move from Survivor to Thriver. Utilizing financial acumen and systems moves the average contractor beyond just breaking even to high profits and sustainable growth. It means they shift from a technician role to an owner role, thereby driving growth, efficiency, and long-term success. Learning the business side of the construction business moves contractors from "also-ran" to a savvy, strategic, and confident industry leader.  

Some ways to improve business side learning are:

• Integrate learning into daily routines, such as reading, listening to podcasts, or trying new apps. 

• Embrace new experiences by stepping outside a self-imposed comfort zone.

• Cultivate a “quiet ego” that allows for a healthy self-esteem, still acknowledges one’s own limitations, doesn’t resort to defensiveness when the ego is threatened, and has a firm sense of competence. 

• Actively engage with other construction industry leaders through networking, asking questions, and seeking mentorship.

Pro Tip: See change and new tech as opportunities, not disruptions.

Ambitious Construction Contractors look to The Profit Constructors to provide advocacy in dealing with:

• Clients and customers

• Employees and subcontractors

• Vendors and service providers

• Governmental entities 

Working with The Profit Constructors gives Construction Contractors the means to organize their operations in ways that help them:

• Remain informed

• Avoid hassles

• Reduce risks

• Be future-ready

Ready for action? Or want to know more? Get in touch today to schedule a complimentary discovery call. 866-629-7735