What is an Average Profit Margin for the Australian Construction Industry? And How To Increase Profit Margins In Construction
Profit margins are notoriously low in the Australian construction industry, with the average construction profit margin sitting at just 5%.
This impacts companies at every tier in the sector, with a ‘race to the bottom’ culture in tendering leading to many companies struggling to turn a profit.
In this article, we look at the causes of low profit margins in the Australian construction industry, and what can be done to increase profit in the construction sector.
What Is The Average Construction Profit Margin In Australia?
According to the Australian Master Builders 2023 industry report, the average profit margin across all building and construction businesses in Australia tends to fluctuate around 5%. This can diminish even further with high inflation and fixed-price contracts, common in residential building.
Profit margins in the construction industry have been steadily decreasing over the past decade, exacerbated by challenging market conditions including the COVID-19 crisis and high interest rates contributing to rocketing materials prices and loss of profit in the sector.
Why Are Construction Profit Margins So Low?
- Optimism Bias
- Insufficient Planning
- Poor Basic Data
- Risk Management
- Emergent Work and Rework
- Scope Creep
- Cost Increases
- Changes In Legislation
Optimism Bias
Essentially, construction project managers need to be more realistic when it comes to deadlines and resources. The current significant skills gap in the Australian construction industry means skilled workers are in high demand.
The effects of optimism bias in Australian construction projects is evident across the country. The New South Wales state government’s Sydney Metro City & Southwest project is a recent example, where optimism bias in the planning stages was cited as a factor in the project’s $21billion budget blow-out - $9 billion over the initial budget.
Insufficient Planning
Planning and pre-construction is the most vital part of any construction project, and not spending enough time on cost estimating, procurement and scheduling will lead to blocks and delays later in the project, which eats into profit.
Poor Basic Data
The construction industry is one of the least digitised in Australia. Where other industries embrace digital transformation, construction’s reliance on outdated tools such as Excel spreadsheets leads to poor data, poor communication, and poor collaboration.
The result? Delays, cost overruns and a loss of profits.
Construction companies need to think long-term when it comes to generating profits and investing in collaborative software such as a construction ERP.
Risk Management
Alongside the issue of optimism bias, the industry can also lack the foresight to assess projects for risks. While some risks, such as the COVID-19 crisis, simply cannot be predicted, others can be foreseen using high quality data and collaborative software to provide a vital ‘single source of truth’.
One of the advantages of the digitalisation of the construction industry is technology’s power of spotting patterns and outliers, such as huge price increases, major availability gaps and inaccurate estimates.
Emergent Work and Rework
While some rework is simply unavoidable, an Australian research report in 2018 revealed rework reduced yearly profits by 28 per cent.
Most rework can be avoided through ensuring excellent collaboration in construction to avoid miscommunications, and once again spending more time on the pre-construction phase of a project.
Read more about How to Avoid Rework in Construction >
Scope Creep
Project managers in every industry are aware of the dangers of ‘scope creep’, where a client may push a project beyond its original parameters. With costs so high and profit so low in construction, scope creep can quickly translate to profit loss.
While scope creep can be unavoidable, as with risk assessment, it is worth investing in experienced construction project managers and estimators who can apply their experience to spotting and fighting scope creep at the beginning of a project.
Cost Increases
While growth in construction costs across the nation have continued to ease from pandemic-charged highs, price levels remain high.
Current building costs are still more than 27 per cent higher than at the start of the pandemic, which is still putting serious pressure on profit margins.
Budgets have struggled to catch up, with project overspend blighting more projects than ever since the economic shock of COVID-19.
While recovery will come, it is vital for construction companies to consider price shocks during the estimating and pre-construction stage to protect profits.
Labour prices have also increased in response to the construction skills gap, and need to be accounted for in the estimating and pre-construction phase.
Read more about the Biggest Issues in the Australian Construction Industry >
Changes in Legislation
While legislation can move slowly, changes that happen in the middle of a project can impact on profits.
In Queensland, Project Trust Account (PTA) legislation has been introduced, requiring projects to establish statutory trusts designed to protect subcontractor payments. Each eligible project needs its own dedicated bank account to support this trust.
It’s expected this legislation will be rolled out across all Australian states and territories in the future, impacting the construction industry across the board.
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How To Increase Construction Profit Margins?
There are some key actions a construction business can do to help protect and boost profit margins.
- Avoid The ‘Race To The Bottom’ When Tendering
- Take Advantage of Digital Transformation
- Focus On People
- Build A Culture of Collaboration
Avoid The ‘Race To The Bottom’ When Tendering
The so-called ‘commoditisation trap’ has led to a ‘race to the bottom’ culture in construction, with some contractors sending in the lowest price possible while not taking risks, price rises, rework and scope creep into consideration. While it is tempting to win projects with low prices, this can result in rock-bottom profit margins and losses across the sector.
It helps to highlight your business’s point-of-difference, expertise and professionalism while tendering projects. While you may not have the lowest price, quality and good relationships matter.
It also pays to be strategic with project tenders. If a prospective customer is clear they will accept the lowest price, then consider if it’s worth investing the time and money in the tendering process and move onto the next opportunity. This will lead to healthy profits in the long term.
Take Advantage of Digital Transformation
The advantages of getting ahead in your construction digital transformation journey are countless. A construction ERP will help you with budgeting and forecasting to control costs, project management and your procurement process.
Having all of your data in a single connected system also helps with risk management, calculating costs, encourages collaboration and shares a single version of the truth within your team, avoiding the miscommunications which can lead to rework.
Technology also helps cut out hundreds of hours of manual administration work across a project through automation, leaving teams with more time to focus on vital growth-focused activity.
Australian construction is still behind when it comes to digitisation.
The new wave of technology, including cloud computing, AI, and big data, are all useful tools help with planning, productivity and profit.
Read more about the Benefits of using ERP in the Construction Industry >
Focus On People
In Australia, it was estimated that 105,000 roles went unfilled in 2023 across public infrastructure projects.
This means the staff in your business are some of the most vital resources you have.
Recruitment, training, and retainment can quickly cut into budgets on every level from the back office to on-site workers.
It is worth investing in health and safety training and focusing on building a positive culture within your company to ensure your most important asset remains with you and keep up the high productivity levels required in construction.
Build A Culture of Collaboration
Having a team on the same page and accessing the same information, especially in the planning and preconstruction phase, will lead to a project running smoothly through to the successful and profitable endpoint.
Introducing consistent project management processes and having your entire team working on the same tools will help with the collaboration, which is vital for protecting your profit margins.
Building this culture can take time, but if you want to improve your profit margins in the long term, it is well worth investing time and money into giving your team the tools and expertise they need to work collaboratively.
Read our Buyer’s Guide to Construction Management Software >
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