How to Understand the Business Side of the Construction Business
- Yvonne Root
- 5 days ago
- 3 min read
This is the second part of a three-part series examining the business side of the construction business. You can see the first part, How to Learn the Business Side of the Construction Business, by using the link.
Know Your Numbers
Understanding the business side of the construction business begins with the vital component of knowing your numbers. It is a core skill for construction company owners. It is:
The foundation for making informed decisions
The walls for understanding your true financial health (profit, cash flow, costs)
The windows for identifying problems (leaks, low-margin projects)
The doors that lead to better forecasting
The mechanicals for driving sustainable growth
The roof that turns guesswork into strategic action.
Without this data, you're building blind, risking financial instability, and missing subsequent opportunities.
Price for Profit
When you understand the business side of the construction business, you can price for profit. Once again, it boils down to knowing your numbers. Here are the key factors for pricing for profit:
Revenue – Total income before any deductions.
Cost of Goods Sold (COGS) – Direct costs of producing goods and services.
Gross Profit – Revenue minus COGS
Gross Profit Margin – How much money is made after covering COGS
Net Income – Revenue minus all expenses (including overhead, taxes, interest)
Net Profit Margin – overall profitability after all costs
Markup vs. Margin – Markup is added to costs; margin is the profit as a percentage of the final price
Here are two articles that will give you a fuller understanding of the often-confused Markup and Margin issues.
Manage Cash Flow
What is cash flow? It is the movement of cash in and out of your construction business. It is another piece of the puzzle that helps you understand the business side of the construction business. And it is pretty straightforward. The three components are:
Accounts Receivable (AR) – Money owed to you by customers.
Accounts Payable (AP) – Money you owe to suppliers or vendors.
Break-Even Point – Sales volume where total revenue equals total costs. In other words, no profit and no loss.
Develop Financial Projections
Construction contractors who understand the business side of the construction business create realistic budgets for expenses and revenue. That allows them to develop financial projections. Here is how it works:
Start with the total project budget
Track actual costs (job costing)
Project costs to completion
Allocate those costs over the project timeline using Work in Progress (WIP) reports
Include revenue recognition, like the percentage of completion
Of course, while all of the above is going on, there are other factors to consider, like:
Contract details
Cash flow
Payment schedules
Retention
Historical data
Use the Business Side of the Construction Business Tools
If all the information above has you feeling nervous (or perhaps overwhelmed), take heart. Specialized construction-centric software makes the business side of the construction business easier to understand and manage. For example, we recommend Knowify because it is designed specifically for construction contractors who need to understand their numbers. Using Knowify automates tracking, enables prompt reporting, and provides real-time insights into metrics such as gross profit and cash flow. And yes, the team at The Profit Constructors includes Certified Knowify Advisors.
What’s Next
In the third part of this three-part series, look for 5 Tips on How to Master the Business Side of a Construction Business.
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
