Gross Margins in Construction: Industry Benchmarks & Improvement Strategies
What "good" looks like for general contractors, specialty trades, and design-build firms—and proven strategies to improve your margins.
Key Takeaways
- •General contractor gross margins typically range from 18-25%, with best-in-class reaching 30%+
- •Specialty trades (electrical, mechanical, plumbing) achieve higher margins: 25-35% average
- •Design-build firms can reach 35-45% by controlling both design and construction
- •Estimating accuracy and change order management are the biggest margin levers
- •Labor productivity tracking is critical—small efficiency gains have outsized margin impact
Construction is a famously low-margin business. Competitive bidding, material price volatility, and labor challenges create constant pressure on profitability. Yet within these constraints, some construction companies consistently achieve margins 50-100% higher than their competitors.
The difference isn't luck—it's disciplined management of the controllable factors that determine construction profitability. This guide provides benchmarks for different construction segments and actionable strategies for improving your margins.
Construction Gross Margin Benchmarks
Construction margins vary significantly by business model, trade specialty, and project type. Here's what "good" looks like across different segments.
General Contractors (Commercial & Residential)
Below Average
<15%
Average
18-25%
Best-in-Class
30%+
Why these margins: GCs primarily manage projects and coordinate subcontractors, limiting direct value-add. Competitive bidding on commercial work compresses margins. Best-in-class GCs achieve higher margins through negotiated contracts, repeat clients, and superior project management.
Specialty Trades (Electrical, Mechanical, Plumbing)
Below Average
<20%
Average
25-35%
Best-in-Class
40%+
Why these margins: Specialty trades perform skilled work directly, capturing value through labor productivity and technical expertise. Licensing requirements create barriers to entry. Service work (repairs, maintenance) often carries higher margins than new construction.
Residential Remodeling & Custom Home Building
Below Average
<25%
Average
30-40%
Best-in-Class
45%+
Why these margins: Residential work is less price-transparent than commercial, allowing value-based pricing. Homeowners pay for design, convenience, and trust—not just construction cost. Reputation and referrals reduce bidding pressure. Higher-end projects support premium margins.
Design-Build Firms
Below Average
<30%
Average
35-45%
Best-in-Class
50%+
Why these margins: Design-build firms control the entire process, eliminating bidding competition and allowing value engineering. Single-source accountability commands premium pricing. Design fees add high-margin revenue. Client relationships are stickier.
Summary: Construction Margins by Segment
| Segment | Below Avg | Average | Best-in-Class |
|---|---|---|---|
| General Contractors | <15% | 18-25% | 30%+ |
| Specialty Trades | <20% | 25-35% | 40%+ |
| Residential Remodeling | <25% | 30-40% | 45%+ |
| Design-Build | <30% | 35-45% | 50%+ |
Key Margin Drivers in Construction
Understanding what drives construction margins helps focus improvement efforts where they'll have the biggest impact.
Margin Builders
- • Accurate estimating (bid what you can deliver)
- • Strong change order management
- • Labor productivity above bid assumptions
- • Negotiated contracts vs. hard bids
- • Repeat clients with established trust
- • Niche specialization and expertise
- • Prefabrication and efficiency investments
Margin Killers
- • Underbidding to win work
- • Scope creep without change orders
- • Material price increases absorbed
- • Rework from quality issues
- • Crew productivity problems
- • Poor subcontractor management
- • Change order disputes and write-offs
The Estimating-Margin Connection
In construction, most margin problems are estimating problems. If you consistently underbid, no amount of field efficiency will save your margins. The best construction companies track estimated vs. actual costs by line item on every job, using variances to continuously improve estimating accuracy.
Strategies to Improve Construction Margins
1. Improve Estimating Accuracy
- Track estimated vs. actual by line item: Compare every job's actual costs to estimates. Identify which categories you consistently under- or over-estimate.
- Build a historical cost database: Your own data is more valuable than published cost guides. Track costs by project type, size, and conditions.
- Include appropriate contingencies: Don't bid assuming everything goes perfectly. Include realistic contingencies for conditions, scope gaps, and escalation.
- Know your breakeven: Understand your overhead structure so you know the minimum margin you need on every job.
2. Maximize Change Order Recovery
- Document scope clearly: Ambiguous scope creates disputes. Invest in clear contracts and detailed specifications.
- Identify changes promptly: Train field staff to recognize and report scope changes immediately, before work proceeds.
- Price changes fairly but profitably: Include appropriate markup on change orders. Don't give away margin on out-of-scope work.
- Get approvals before proceeding: Never do change order work without written authorization. Verbal agreements create disputes.
3. Improve Labor Productivity
- Track productivity metrics: Hours per unit of work (sq ft installed, linear feet completed) by crew and task. You can't improve what you don't measure.
- Invest in workforce development: Skilled workers are more productive. Training and retention reduce the hidden costs of inexperience.
- Prefabricate where possible: Shop fabrication is typically 2-3x more productive than field installation. Move work off-site where practical.
- Eliminate productivity drags: Poor planning, material delays, and rework destroy productivity. Invest in project management systems.
4. Be Selective About Work
- Know your win rate and margin by project type: Some project types are more profitable for your company. Focus on your strengths.
- Walk away from bad work: Low-margin projects crowd out profitable work. It's better to be a bit slower with healthy margins than fully loaded with losers.
- Cultivate negotiated work: Relationships that lead to negotiated contracts produce better margins than competitive bidding.
- Consider vertical integration: Design-build, self-perform key trades, or develop specializations that reduce bidding pressure.
Red Flags: When Construction Margins Are in Trouble
Watch for these warning signs that indicate margin problems:
Warning Signs
- !Gross margin declining over 12+ months: External factors (material costs) should be passed through. Secular decline indicates pricing or efficiency problems.
- !Jobs consistently finishing over budget: If most projects exceed estimates, you have an estimating problem, not an execution problem.
- !High change order disputes: If you're writing off change orders or fighting with clients over scope, contracts and documentation need work.
- !Rising backlog but flat profit: Growing revenue without growing profit means you're buying work with margin. This isn't sustainable.
- !Key customers demanding price reductions: Margin pressure from major customers signals competitive or relationship problems.
Tracking Construction Margins
Effective margin management requires consistent tracking at multiple levels.
Job-Level Tracking
| Metric | Frequency | Action Threshold |
|---|---|---|
| Job gross margin (% complete method) | Monthly | Below bid margin by >3 points |
| Estimated cost at completion | Monthly | Exceeds budget by >5% |
| Labor hours: actual vs. estimate | Weekly | Over estimate by >10% |
| Change order status | Weekly | Pending COs >30 days old |
Company-Level Tracking
| Metric | Frequency | Action Threshold |
|---|---|---|
| Overall gross margin | Monthly | Below target for 2+ months |
| Gross margin by project type | Quarterly | Any type below breakeven |
| Bid vs. final margin variance | Per completed job | Avg variance >5 points |
| Backlog margin | Monthly | Below historical average |
Frequently Asked Questions
What is a good gross margin for a construction company?
For general contractors, 18-25% gross margin is average, with best-in-class firms achieving 30%+. Specialty trades (electrical, mechanical, plumbing) typically achieve higher margins of 25-35% average. Design-build firms that control both design and construction can reach 35-45%. Your target depends on your business model, project types, and market conditions.
How do I calculate gross margin on a construction project?
Construction gross margin = (Contract Value - Direct Job Costs) / Contract Value × 100. Direct job costs include labor, materials, subcontractor costs, equipment rental, and job-specific overhead (permits, temporary facilities). Don't include general overhead like office rent or administrative salaries—those are operating expenses that come after gross margin.
Why are general contractor margins lower than specialty trade margins?
General contractors manage projects but often subcontract most of the actual construction work. Their margin comes from project management, coordination, and risk management—not direct labor productivity. Specialty trades perform the work directly, allowing them to capture more value through labor efficiency. GCs also face more competitive bidding pressure on larger projects.
How does project type affect construction margins?
Commercial projects typically have lower margins (more competitive, larger scale) than residential remodeling or specialty work. Negotiated contracts allow better margins than hard-bid work. Repeat clients and design-build contracts tend to produce higher margins than one-time competitive bids. Public sector work often has compressed margins due to low-bid requirements.
What causes construction profit margin erosion?
The most common margin killers are poor estimating (underbidding), scope creep without change orders, material price increases not passed through, labor productivity below bid assumptions, rework from quality issues, and change order disputes. Projects that go over budget often had margin problems baked in from unrealistic bids.
How can I improve construction gross margins quickly?
Quick wins include: reviewing estimating accuracy (are you consistently underbidding?), tightening change order documentation to capture scope changes, negotiating better material pricing through supplier consolidation, and being more selective about which projects you bid on. Avoid chasing revenue with low-margin work—it crowds out profitable projects.
What's the relationship between gross margin and net profit in construction?
Construction companies need gross margins high enough to cover overhead and deliver acceptable net profit. If your overhead runs 12-15% of revenue (typical for SMB contractors), you need at least 18-20% gross margin just to break even. Best-practice construction companies target gross margins that leave 5-10% net profit after overhead.
How does labor productivity affect construction margins?
Labor is typically 30-50% of direct construction costs, so productivity swings have huge margin impact. A crew that achieves 80% of estimated productivity destroys margin—on a $1M project, that could be $50-100K of profit. Tracking actual vs. estimated labor hours by task, identifying productivity drags, and investing in workforce development directly improves margins.
Need Help Improving Your Construction Margins?
Eagle Rock CFO works with construction companies to analyze job costing, improve estimating accuracy, and implement systems for margin management. We bring CFO-level financial expertise to contractors ready to improve their profitability.
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