5 reasons for low contractor profit margins

Construction is a high-risk, low-margin business, with some sectors faring better than others. According to Tyler Paré, principal with FMI Corp., a construction-focused consulting and investment banking firm, when barriers to entry are high, margins improve. Data from Risk Management Associates supports this view. Average profit margin before tax was 6% or higher among electrical contractors, highway contractors and utilities in 2019. General contractors had the lowest profit margin before tax of just over 4%. “There are inherent risks in construction work that can negatively impact overall net profitability,” says Paré.  Contractors know all too well how labor shortages, supply chain delays, design errors, underutilization of equipment, jobsite accidents and change orders can negatively impact profitability.  

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