On a thin net profit margin, losing a small slice of costs you didn't catch takes a large share of what the business keeps. In the short video above, we run the numbers for a builder turning over, for example, $10 million a year, and show how a gap that sounds small can take nearly half the profit. This article goes further into the arithmetic: what your margin really is, how much extra work it takes to replace lost profit, and how to see the slippage while you can still act.
In the video
- The video quotes an average net profit margin in construction of 5% (source: AroFlo / CFMA 2024, shown on screen).
- For a company turning over $10 million a year, for example, that's $500,000: everything left after labour, materials, subbies and overheads.
- Lose just 2% to costs you didn't catch (for example, on that same company) and nearly half the profit is gone.
- The leak is made up of small things: labour that crept over budget with nobody flagging it, a variation done but never billed, and materials charged to the wrong project.
- By the time they show up in the monthly reports, the money is already spent.
- The fix is connecting what you already have so you see costs as they happen, rather than a bigger team.
What's happening here
Most builders think about margin at tender time. You price the job with a margin on top of cost, and that number feels comfortable. But the margin on a tender is a gross margin: what's left after the direct costs of that job. Your net margin is what's left after you also pay for the office, vehicles, insurance, estimating time on jobs you didn't win, and everything else that keeps the business running.
The net figure is far smaller, and it's the one the video is talking about. Using the video's example of a 5% net margin (source: AroFlo / CFMA 2024), a $10 million builder keeps $500,000. If 2% of turnover leaks away (for example, $200,000 on that builder), the business keeps $300,000 instead. A 2% slip has taken 40% of the year's profit.
That's why small leaks hurt builders more than most businesses. The thinner the margin, the bigger the share each lost dollar takes.
How much extra work it takes to win it back
Here's the part that rarely gets said out loud. If your net margin is 5% (for example), each extra dollar of turnover brings in about five cents of profit. To replace one lost dollar of profit through growth, you'd need about twenty dollars of extra work.
Put against the video's example, replacing $200,000 of leaked costs through new work would mean winning around $4 million more turnover, for example, with all the estimating, staff, cash and risk that comes with it. Stopping the leak is a far cheaper way to get the same result.
This is also why a busy year can end with a disappointing profit. More jobs bring more turnover, but if each job leaks a little, the extra work doesn't add as much to the bottom line as everyone expected.
Where the slippage comes from
The video names three examples, and they share a pattern.
Labour creeping over budget. The crew takes longer than estimated on a stage. Nobody flags it, because the hours reach the job a week or two later through payroll, and by then the stage is finished.
A variation done but never billed. The client asks for a change on site, the crew does it, and the paperwork never catches up. The cost lands on the job; the revenue never arrives. We cover this one in detail in The Variation That Never Got Billed.
Materials charged to the wrong project. A bill is coded to the wrong job or to a general account. One job looks better than it is, another looks worse, and the real overrun is hidden.
None of these are big on their own. What they share is timing: each one becomes visible only after the money has been spent. For the full list of where builders lose margin, and three checks to find your own leaks, see our guide to construction cost leakage.
Why it happens
The information to catch each leak exists, just not in time. Hours sit in a timesheet app until payroll runs. The variation instruction sits in a text message. The supplier bill sits in the accounts, coded by someone who wasn't on site. These are numbers arriving too late and systems that disagree: the job system, payroll and the accounts each hold part of the picture, and nobody sees them together until month-end. By then, as the video says, the money is already spent.
Know your own margin, job by job
Before you can protect your margin, you need to know what it actually is. A few questions worth answering:
- What was your net margin last financial year, after all overheads?
- Which finished jobs made their tender margin, and which fell short?
- On the jobs that fell short, was it labour, materials, subbies or unbilled variations?
- How long after the work did each overrun become visible?
- If two cents in every dollar of turnover leaked away next year, what share of your profit would that be?
Your accountant can help with the first question. The others need job-level data, and if that takes days to pull together, that's the first thing to fix. Our estimate vs actual guide shows how to compare finished jobs against their estimates.
What it looks like when it's fixed
On Monday morning you can see each running job's cost to date, committed costs and forecast margin, using figures no more than a few days old. A stage running over on labour shows up while the crew is still on it. Variations raised on site appear on a register the same week. Bills are coded to the right job when they arrive because they're matched to a purchase order. You still have leaks, but you see them in time to fix them, price the variation or have the conversation with the client.
Frequently asked questions
What is a typical profit margin for a builder in Australia?
It varies with the type of work, size and how overheads are counted, so compare yourself with your own history and your accountant's benchmarks. The video uses an industry average net margin of 5% (source: AroFlo / CFMA 2024) to show how quickly small losses add up. Gross margins on tenders are higher because they come before overheads.
What's the difference between gross margin and net margin for a builder?
Gross margin is what's left on a job after its direct costs: labour, materials, subbies and plant. Net margin is what the business keeps after overheads too. A job can make a healthy gross margin while the business makes a thin net one.
How much extra turnover do I need to make up lost profit?
Divide the lost profit by your net margin. At a 5% net margin, for example, every dollar of lost profit needs about twenty dollars of extra turnover to replace it, which is why stopping leaks usually beats chasing growth.
Do I need a bigger team or new software to stop margin leaks?
Usually neither. Most leaks come from information reaching the job late or not at all. Connecting the systems you already have (timesheets, purchasing, the job system and the accounts) so costs land on the right job sooner does most of the work.
Protect the margin you already win
If you'd like to know where your margin is going, and see it while jobs are still running, book a free initial chat. We'll talk through how costs reach your jobs today and where the biggest delays are.