23 data to include in the business plan of your construction company

This article was written by our expert who is surveying the industry and constantly updating the business plan for a construction company.

Our business plan for a construction company will help you build a profitable project

Ever pondered what the ideal bid-to-win ratio should be to ensure your construction company lands enough projects to stay profitable?

Or how many projects need to be completed on time to maintain your reputation and secure future contracts?

And do you know the optimal equipment utilization rate to maximize efficiency and minimize costs?

These aren’t just interesting figures; they’re the metrics that can determine the success or failure of your business.

If you’re drafting a business plan, investors and lenders will scrutinize these numbers to gauge your strategy and potential for success.

In this article, we’ll explore 23 critical data points every construction company business plan needs to demonstrate your readiness and capability to thrive.

Project management software should account for 1-2% of total project costs to ensure efficient tracking and communication

Project management software should account for 1-2% of total project costs in a construction company to ensure efficient tracking and communication.

This investment is crucial because it helps in managing complex timelines and coordinating multiple teams, which are common in construction projects. By allocating this percentage, companies can ensure they have the right tools to handle unexpected changes and maintain project momentum.

However, the percentage can vary depending on the project's scale and complexity.

For smaller projects, the cost might be on the lower end of the spectrum, as fewer resources are needed. Conversely, larger projects with more stakeholders and intricate requirements might necessitate a higher investment to ensure all aspects are covered efficiently.

Construction labor costs should ideally range between 20-40% of total project expenses to maintain profitability

Construction labor costs should ideally range between 20-40% of total project expenses to maintain profitability because this balance allows companies to cover other essential costs while ensuring a reasonable profit margin.

Labor is a significant component of construction projects, but it must be managed alongside other expenses like materials, equipment, and overhead. If labor costs exceed this range, it can squeeze profit margins, making it difficult for the company to remain competitive and financially healthy.

However, the ideal percentage can vary depending on the specific type of project and its requirements.

For instance, projects that are more labor-intensive, such as custom home builds, might see labor costs on the higher end of the spectrum. Conversely, projects that rely heavily on expensive materials or technology, like commercial buildings with advanced systems, might have labor costs on the lower end to accommodate these other expenses.

Equipment maintenance and depreciation should be budgeted at 5-10% of total project costs annually

In the construction industry, budgeting for equipment maintenance and depreciation at 5-10% of total project costs annually is crucial to ensure the longevity and efficiency of machinery.

This percentage range accounts for the inevitable wear and tear that equipment undergoes during heavy use, as well as the gradual loss of value over time. By setting aside a portion of the budget, companies can proactively address unexpected repairs and replacements, minimizing downtime and maintaining project timelines.

However, the specific percentage within this range can vary based on factors such as the age and condition of the equipment and the nature of the projects undertaken.

For instance, older machinery might require a higher budget allocation due to more frequent repairs, while newer equipment might fall on the lower end of the spectrum. Additionally, projects that involve intensive use of machinery, such as large-scale infrastructure developments, may necessitate a higher percentage to adequately cover maintenance and depreciation costs.

Construction projects should aim for a profit margin of 5-10%, with higher margins in specialized sectors like green building

Construction projects typically aim for a profit margin of 5-10% because this range balances competitiveness with financial sustainability.

Margins in the construction industry are often tight due to high costs and competition, so a 5-10% margin ensures that companies can cover unexpected expenses while still making a profit. In specialized sectors like green building, higher margins are possible because these projects often require unique expertise and materials, allowing companies to charge more.

However, the ideal profit margin can vary depending on the specific project and market conditions.

For instance, projects in urban areas might have higher costs but also higher potential returns, affecting the margin. Conversely, in rural areas, lower costs might allow for a smaller margin while still being profitable.

Change orders can account for 5-15% of project costs, so contingency planning is crucial

Change orders can significantly impact a construction project's budget, often accounting for 5-15% of total costs, which makes contingency planning essential.

These changes can arise from various factors, such as design modifications or unforeseen site conditions, which are sometimes unavoidable. Without a proper plan, these unexpected changes can lead to budget overruns and project delays.

By anticipating potential changes and setting aside a contingency fund, construction companies can better manage these financial impacts.

The percentage of costs attributed to change orders can vary depending on the project's complexity and scope. For instance, a large-scale infrastructure project might experience more frequent changes compared to a smaller residential build, necessitating a larger contingency reserve.

Material costs typically represent 50-60% of total project expenses, requiring strategic sourcing and bulk purchasing

In the construction industry, material costs often account for 50-60% of total project expenses, making them a significant factor in budgeting and planning.

These costs include everything from raw materials like concrete and steel to finishing materials such as paint and fixtures. Because of their substantial impact on the overall budget, construction companies must engage in strategic sourcing and consider bulk purchasing to manage these expenses effectively.

By purchasing materials in bulk, companies can often secure discounted rates, which helps in reducing the overall cost of the project.

However, the percentage of material costs can vary depending on the specific type of construction project. For instance, a residential project might have a different material cost structure compared to a commercial or industrial project, due to differences in design requirements and material specifications.

Construction companies should aim for a break-even point within 12-18 months of project initiation

Construction companies should aim for a break-even point within 12-18 months of project initiation because it ensures financial stability and allows for reinvestment in future projects.

Reaching the break-even point within this timeframe helps to mitigate financial risks associated with prolonged project timelines and fluctuating market conditions. It also provides a buffer against unexpected costs, which are common in the construction industry due to factors like material price changes and labor shortages.

However, the timeline to break-even can vary depending on the scale and complexity of the project.

For instance, larger projects with extensive infrastructure requirements may take longer to reach this point, while smaller, more straightforward projects might achieve it sooner. Additionally, external factors such as regulatory approvals and weather conditions can also impact the timeline, making it crucial for companies to adapt their strategies accordingly.

Project delays can increase costs by 10-20%, emphasizing the need for effective scheduling and risk management

Project delays can significantly increase costs by 10-20% for construction companies, highlighting the importance of effective scheduling and risk management.

When a project is delayed, labor costs can rise due to extended work hours and potential overtime pay. Additionally, material costs may increase if prices fluctuate over time, especially for projects that rely on imported materials.

Effective scheduling helps to minimize these risks by ensuring that resources are allocated efficiently and tasks are completed on time.

However, the impact of delays can vary depending on the project's complexity and the stage of construction at which the delay occurs. For instance, delays in the early stages might be easier to manage, while those occurring later can have a more pronounced effect on the overall budget and timeline.

Insurance and bonding should account for 1-3% of total project costs to mitigate financial risks

Insurance and bonding typically account for 1-3% of total project costs in construction to effectively mitigate financial risks.

These costs are crucial because they provide a safety net against unexpected events such as accidents, natural disasters, or contractor defaults. By investing in insurance and bonds, construction companies can protect themselves from potentially crippling financial losses.

The percentage can vary depending on the project's complexity and the specific risks involved.

For instance, a project in a region prone to natural disasters might require higher insurance costs, while a project with a reliable contractor might have lower bonding costs. Ultimately, the goal is to balance the cost of insurance and bonding with the level of risk, ensuring that the company is adequately protected without overspending.

Construction companies should maintain a current ratio (assets to liabilities) of 1.5:1 for financial stability

Maintaining a current ratio of 1.5:1 is crucial for construction companies to ensure they have enough assets to cover their liabilities, providing a buffer for unexpected expenses.

This ratio indicates that for every dollar of liability, the company has 1.5 dollars in assets, which helps in managing cash flow effectively. Construction projects often involve large upfront costs and delayed payments, so having a healthy current ratio can prevent cash shortages.

However, the ideal current ratio can vary depending on the specific circumstances of the company, such as the size of the projects and the payment terms with clients.

For instance, a company working on long-term projects might need a higher ratio to cover extended periods before receiving payments. Conversely, a company with shorter project cycles and quicker payment terms might operate efficiently with a slightly lower ratio, as their cash flow is more predictable.

Employee turnover in construction averages 21.4%, necessitating investment in recruitment and training

Employee turnover in construction averages 21.4%, which means companies need to invest in recruitment and training to maintain a skilled workforce.

This high turnover rate can be attributed to the physically demanding nature of construction work and the seasonal fluctuations in project availability. Workers often leave for better opportunities or due to job dissatisfaction, making it crucial for companies to have a robust recruitment strategy.

Investing in training not only helps in retaining employees but also ensures that the workforce is up-to-date with safety standards and new technologies.

Turnover rates can vary significantly depending on factors like geographic location and the specific type of construction work involved. For instance, specialized fields like electrical or plumbing may experience lower turnover due to the higher skill level required, while general labor positions might see higher rates.

On-site safety programs can reduce accident-related costs by up to 25% and improve project timelines

On-site safety programs can significantly reduce accident-related costs and improve project timelines for construction companies.

By implementing comprehensive safety measures, companies can minimize the occurrence of workplace accidents, which often lead to costly medical expenses and legal fees. Additionally, fewer accidents mean less downtime, allowing projects to stay on schedule and potentially finish earlier than anticipated.

These benefits can vary depending on the specific nature of the construction project and the effectiveness of the safety program in place.

For instance, projects with high-risk environments may see a more pronounced impact from robust safety measures, while projects with lower inherent risks might experience more modest improvements. Furthermore, the commitment of management and the engagement of workers in adhering to safety protocols can greatly influence the overall success of the program.

Construction waste management should aim to recycle or reuse 75% of materials to reduce disposal costs

Construction waste management should aim to recycle or reuse 75% of materials to significantly reduce disposal costs.

By recycling or reusing materials, a construction company can not only cut down on the expenses associated with waste disposal but also contribute to a more sustainable environment. This approach helps in conserving natural resources and reducing the carbon footprint of the construction industry.

However, the feasibility of achieving this 75% target can vary depending on the specific project and location.

For instance, projects in urban areas might have better access to recycling facilities, making it easier to meet or exceed the target. On the other hand, rural projects might face challenges due to limited infrastructure, requiring more innovative solutions to manage waste effectively.

Equipment utilization rates should be above 80% to maximize return on investment

In the construction industry, maintaining equipment utilization rates above 80% is crucial for maximizing the return on investment (ROI).

When equipment is used efficiently, it means that the company is getting the most out of its capital investment, reducing idle time and ensuring that the machinery is contributing to project completion. High utilization rates also help in spreading the fixed costs of equipment over more projects, which can significantly lower the cost per project.

However, the ideal utilization rate can vary depending on the type of equipment and the specific needs of a project.

For instance, some specialized machinery might be used less frequently but is essential for certain tasks, meaning its utilization rate might naturally be lower. In contrast, more versatile equipment like excavators or loaders should aim for higher utilization to justify their cost and maintenance expenses.

Construction companies should allocate 2-3% of revenue for technology upgrades to stay competitive

Construction companies should allocate 2-3% of revenue for technology upgrades to stay competitive because the industry is rapidly evolving with new tools and software that enhance efficiency and productivity.

Investing in technology can lead to better project management and improved safety measures, which are crucial in maintaining a competitive edge. Additionally, technology upgrades can help in reducing costs over time by minimizing errors and optimizing resource allocation.

However, the specific percentage of revenue allocated can vary depending on the size and scope of the company.

For instance, a large construction firm with multiple ongoing projects might need to invest more heavily in technology to manage complex operations effectively. On the other hand, a smaller company might focus on basic digital tools that address their immediate needs without overextending their budget.

Effective contract negotiation can reduce project costs by 5-10% through favorable terms and conditions

Effective contract negotiation can significantly reduce project costs for a construction company by 5-10% through securing favorable terms and conditions.

By negotiating better terms, a construction company can lower costs related to materials, labor, and timelines, which are major components of project expenses. Additionally, favorable conditions such as flexible payment schedules and penalty clauses for delays can further enhance cost efficiency.

These savings are achieved by minimizing risks and ensuring that the project is completed within the agreed budget and timeframe.

However, the extent of cost reduction can vary depending on the complexity and scale of the project. For instance, larger projects with more variables may offer more opportunities for negotiation, while smaller projects might have less room for cost adjustments.

Permitting and regulatory compliance can account for 1-2% of project costs, requiring proactive management

Permitting and regulatory compliance can account for 1-2% of project costs because they involve a range of necessary approvals and adherence to laws that are essential for the legal execution of construction projects.

These costs can include fees for permits, inspections, and other regulatory requirements, which are often set by local, state, or federal authorities. The complexity and number of these requirements can vary significantly depending on the location and scope of the project, making proactive management crucial to avoid delays and additional expenses.

For instance, a project in an urban area might face more stringent regulations compared to a rural setting, potentially increasing compliance costs.

Additionally, projects that involve environmental considerations or historical preservation may require more extensive permitting processes, further impacting costs. Therefore, understanding the specific regulatory landscape and planning accordingly can help construction companies manage these expenses effectively and keep the project on track.

Construction projects should aim for a cash flow positive status within 6 months to ensure liquidity

Achieving a cash flow positive status within six months is crucial for construction projects to maintain liquidity and ensure the company can meet its financial obligations.

Construction projects often involve significant upfront costs for materials, labor, and permits, which can strain a company's finances if not managed properly. By becoming cash flow positive quickly, a company can replenish its resources and continue operations without resorting to additional borrowing.

This approach helps in minimizing the risk of financial instability that can arise from prolonged negative cash flow.

However, the timeline to achieve cash flow positivity can vary depending on the project size and complexity. Larger projects may require more time due to extended timelines and higher initial investments, while smaller projects might reach this status sooner due to lower overhead costs and quicker completion times.

Quality control measures can reduce rework costs by 10-15%, improving overall project efficiency

Implementing quality control measures in a construction company can significantly reduce rework costs by 10-15%, thereby enhancing overall project efficiency.

By identifying and addressing potential issues early in the construction process, these measures help prevent costly mistakes that would otherwise require rework. This proactive approach not only saves money but also ensures that the project stays on schedule, avoiding delays that can further inflate costs.

However, the extent of cost reduction can vary depending on the specific circumstances of each project.

For instance, projects with complex designs or those involving specialized materials may benefit more from stringent quality control, as the potential for costly errors is higher. Conversely, simpler projects might see a smaller percentage of savings, but the impact on efficiency can still be significant.

Construction companies should reserve 1-2% of project costs for unforeseen site conditions and remediation

Construction companies should reserve 1-2% of project costs for unforeseen site conditions and remediation because unexpected issues can arise that require immediate attention and funding.

These unforeseen conditions might include hidden underground utilities or contaminated soil, which can significantly impact the project's timeline and budget. By setting aside a contingency fund, companies can quickly address these issues without causing major disruptions to the project.

However, the percentage reserved can vary depending on the specific nature of the project and its location.

For instance, projects in areas with a history of geological instability might require a higher reserve due to the increased likelihood of encountering unexpected conditions. Conversely, projects in well-documented and stable areas might be able to allocate a smaller percentage, as the risk of unforeseen issues is lower.

Seasonal workforce adjustments can optimize labor costs by 10-15% during peak and off-peak periods

Seasonal workforce adjustments can help a construction company optimize labor costs by 10-15% during peak and off-peak periods because they allow the company to align its workforce with the fluctuating demand for projects.

During peak periods, when demand for construction projects is high, hiring additional temporary workers ensures that the company can meet project deadlines without overburdening its permanent staff. Conversely, during off-peak periods, reducing the workforce helps the company avoid paying for idle labor, thus saving on unnecessary expenses.

This strategic approach to workforce management allows the company to maintain a balance between labor supply and demand, ensuring that resources are used efficiently.

However, the extent of cost optimization can vary depending on factors such as the size of the company, the types of projects undertaken, and regional labor market conditions. For instance, a company working on large-scale infrastructure projects might experience different labor demands compared to one focusing on residential construction, affecting how seasonal adjustments are implemented.

Strategic partnerships with suppliers can reduce material costs by 5-10% through volume discounts

Strategic partnerships with suppliers can help a construction company reduce material costs by 5-10% through volume discounts.

When a construction company commits to purchasing large quantities of materials, suppliers are often willing to offer discounted rates because it guarantees them a steady stream of business. This arrangement benefits both parties, as the supplier secures a reliable customer, and the construction company enjoys lower material costs.

However, the extent of these savings can vary depending on factors such as the type of materials being purchased and the negotiating power of the construction company.

For instance, a company that frequently buys high-demand materials like steel or concrete might secure better discounts than one purchasing less common items. Additionally, the size and reputation of the construction company can influence the negotiation dynamics, potentially leading to more favorable terms.

Construction companies should aim for a project completion rate of 95% on time and within budget to maintain client satisfaction and reputation.

Construction companies should aim for a project completion rate of 95% on time and within budget to maintain client satisfaction and reputation because it demonstrates reliability and efficiency.

When projects are completed on time, it helps in building trust with clients, which is crucial for long-term relationships. Staying within budget is equally important as it reflects the company's ability to manage resources effectively, which is a key factor in maintaining a strong reputation.

However, this target can vary depending on the complexity and scale of the project.

For instance, larger projects with more variables might have a slightly lower on-time completion rate due to unforeseen challenges. On the other hand, smaller projects might achieve a higher rate because they are easier to manage and control, allowing for more precise planning and execution.