5 Tips for Avoiding Profit Fade

Profit fade can be a serious problem for construction companies. It’s not only a red flag for sureties and lenders, but also a harbinger of doom for the overall financial performance of the business.

As the name suggests, profit fade simply means a decline in expected gross profits over the course of a project. There are many potential causes, including overly optimistic estimates, inaccurate job costs, unbillable change orders, unexpected job-site conditions and supply chain issues.

If profit fade affects only a couple projects a year, you might be able to make up the dollars lost on other jobs. But if it becomes a systemic problem, the impact on your bottom line can be devastating. Here are five tips for avoiding profit fade:

1. Create a budget. It’s difficult if not impossible to identify and manage profit fade without a realistic budget for each job based on the original bid.

2. Monitor work in progress. A budget is ineffective if you simply put it on a shelf, or file it away on a hard drive, and forget about it. Monitor each job’s progress closely and follow up on any discrepancies between budgeted and actual performance. Prepare regular work-in-progress reports to track:

  • Contract prices,
  • Amounts billed and costs incurred to date,
  • Projected final costs, and
  • Estimated gross profits.

Tracking this information in real time alerts you to problems early and allows you to address them before it’s too late.

3. Get a handle on job costs. Evaluate your estimating and job costing systems and processes to be sure they’re accurate and complete. If profit fade is an issue, build more conservative assumptions into your estimates. Include contingent costs to provide a cushion against potential delays and other unanticipated expenses.

4. Build protections into your contracts. It’s hard to avoid profit fade if your contracts are vaguely worded or make it easy for the owner to change the project’s scope. To minimize unanticipated costs, double-check that your contracts clearly define the nature and scope of work and set forth straightforward change-order procedures that ensure you’re compensated for extra work.

5. Learn from your completed jobs. Analyze completed jobs to look for patterns and trends. Determine whether profit fade is associated with certain types of jobs, locations, customers or personnel. If you identify a clear cause, address it immediately.

Unfortunately, in today’s uncertain economy, there’s no way to eliminate the risk of profit fade altogether. However, by identifying factors associated with this common problem, you can take steps to prevent it from adversely affecting your financial performance on future jobs.

© 2022

Information provided on this web site “Site” by Thompson Greenspon is intended for reference only. The information contained herein is designed solely to provide guidance to the user, and is not intended to be a substitute for the user seeking personalized professional advice based on specific factual situations. This Site may contain references to certain laws and regulations which may change over time and should be interpreted only in light of particular circumstances. As such, information on this Site does NOT constitute professional accounting, tax or legal advice and should not be interpreted as such.

Although Thompson Greenspon has made every reasonable effort to ensure that the information provided is accurate, Thompson Greenspon, and its shareholders, managers and staff, make no warranties, expressed or implied, on the information provided on this Site, or about any other website which you may access through this Site. The user accepts the information as is and assumes all responsibility for the use of such information. Thompson Greenspon also does not warrant that this Site, various services provided through this Site, and any information, software or other material downloaded from this Site, will be uninterrupted, error-free, omission-free or free of viruses or other harmful components.

Information contained on this Site is protected by copyright and may not be reproduced in any form without the expressed, written consent of Thompson Greenspon. All rights are reserved.

Share: