Your trade, construction or engineering business might be turning over millions of dollars, but how much of that revenue are you actually keeping?
It's easy to focus on winning more projects, increasing turnover and growing your team. But none of those things necessarily mean your business is becoming more profitable.
Understanding your business's profit margins helps you make better decisions about pricing, expenses, staffing and future growth.
So, what is considered a good profit margin for Australian trade, construction and engineering businesses, and how can you improve yours?
Key Takeaways
There is no single ideal profit margin for every Australian trade, construction or engineering business.
Gross profit and net profit margins measure different aspects of financial performance.
The Australian Taxation Office (ATO) provides industry benchmarks that can help businesses compare certain expenses and financial ratios.
Accurate job costing, pricing and expense management are essential for protecting profitability.
Increasing revenue doesn't always mean increasing profit.
What Is a Good Profit Margin for Trade, Construction and Engineering Businesses?
A good profit margin depends on several factors, including the type of work you undertake, business size, operating expenses and project risks.
For example, an electrical contractor may have a very different financial structure from a residential builder, engineering consultancy or specialist subcontractor.
A business achieving a 5% net profit margin retains $5 in profit for every $100 of revenue, while a business achieving 10% retains $10.
However, these percentages are examples, not universal industry targets.
The important question is how much profit your business needs to cover its risks, fund future growth and provide an appropriate return for the owner.
Rather than focusing entirely on turnover, business owners should regularly review their margins to understand how efficiently their business is operating.
Gross Profit Margin vs Net Profit Margin: What's the Difference?
There are two important figures every trade, construction and engineering business owner should understand.
Gross profit margin measures how much revenue remains after deducting direct job or project costs, such as materials, labour, subcontractors and other expenses directly associated with delivering the work.
Net profit margin measures how much revenue remains after accounting for the broader expenses of running the business.
For example, imagine your business generates $1 million in annual revenue.
Annual revenue: $1,000,000
Direct job or project costs: $700,000
Gross profit: $300,000 (30%)
Operating expenses: $220,000
Net profit: $80,000 (8%)
In this simplified example, the business generates $1 million in revenue but retains $80,000 in profit before tax. The example assumes operating expenses include an appropriate salary for the owner and all other relevant costs.
Understanding these figures helps you identify where improvements are needed. If gross margins are falling, your pricing or job costs might need attention. If gross margins are healthy but net profit is low, your overheads could be the problem.
How Do Your Profit Margins Compare to Industry Benchmarks?
The Australian Taxation Office publishes small business benchmarks that allow eligible businesses to compare certain financial ratios against similar businesses in their industry.
These benchmarks cover a range of trade and construction-related services, including carpentry, electrical services and plumbing.
They can help business owners identify areas where expenses, pricing or operational costs may need closer attention.
However, ATO benchmarks aren't universal profit margin targets, and they don't cover every specialist trade or engineering business. They primarily compare financial ratios, such as expenses relative to turnover, and should be interpreted alongside your business's circumstances.
You can explore the ATO's small business benchmarks to learn more about industry comparisons.
Why Are Profit Margins So Tight in Trade, Construction and Engineering Businesses?
Trade, construction and engineering businesses face several challenges that can put pressure on profitability.
Rising material costs, labour expenses, project delays, inaccurate quoting, scope changes and unexpected variations can all reduce the profit remaining at the end of a job.
For engineering businesses, additional pressures might include specialist labour costs, project complexity and time spent on design changes or technical requirements that weren't adequately accounted for in the original quote.
Another common issue is taking on additional work without understanding the costs involved.
Hiring more employees, purchasing equipment or expanding into larger projects might increase revenue, but those investments need to generate enough additional profit to justify the expense.
Without accurate job costing and regular financial reporting, it's easy for costs to increase without the business owner recognising the impact.
How Can You Improve Your Business Profit Margins?
Improving profitability doesn't always mean taking on more work. Sometimes, the biggest opportunities are already sitting inside your existing business.
Here are five areas worth reviewing:
Review your quoting and pricing. Make sure your prices reflect current labour, materials, subcontractor costs, project requirements and overheads.
Track individual job profitability. Compare estimated job or project costs against actual expenses to understand which types of work are generating the best returns.
Monitor your overheads. Regularly review vehicles, equipment, software subscriptions, insurance and administration expenses.
Improve operational efficiency. Identify duplicated tasks, communication issues and manual processes that waste time.
Review your financial performance regularly. Monitor margins throughout the year rather than waiting until tax time.
Your business systems can also influence profitability. If employees are spending hours entering the same information across different platforms, those inefficiencies can become expensive.
TradeScale's Tech Stack Assessment helps business owners review their existing systems and processes, identify potential gaps and find opportunities to improve efficiency.
Why Profit Margins Matter When Growing Your Trade, Construction or Engineering Business
Before expanding your business, you need to understand how profitable your current operations are.
Increasing revenue without protecting your margins can create additional financial pressure rather than improving your position.
Knowing your numbers helps you make informed decisions about which jobs or projects to pursue, when to hire, where to invest and how to plan for future growth.
It also gives you a stronger foundation for building a business that can operate successfully without relying entirely on the owner.
Build a More Profitable Trade, Construction or Engineering Business With TradeScale
At TradeScale, we work with trade, construction and engineering business owners who want more than traditional accounting support.
Our approach combines accounting, business strategy and hands-on advisory to help owners understand their numbers, improve profitability and make better decisions about the future.
Through our Subby to CEO™ TradeScale Program, we help business owners build stronger financial foundations, improve systems and create a clear roadmap for sustainable growth.
Because increasing your revenue is one thing. Building a profitable business that lasts is another.
Ready to take a closer look at your business's profitability?
Visit TradeScale to learn more about our strategic business advisory partnerships and book a Business Chat.