Gross profit is revenue minus the direct costs of earning it. On a construction job, that means contract revenue minus labor, material, equipment, subcontract and job-specific costs, including general conditions. Gross profit margin is gross profit divided by revenue. Company overhead (office rent, executive salaries, accounting) is paid out of gross profit, and what’s left is net profit.
Why it matters
Gross profit is the scoreboard for every job. Contractors track it three ways: projected gross profit at completion, gross profit earned to date and gross profit recognized this period. A healthy company needs total gross profit across all jobs to cover overhead with room to spare, which is why fade on a few large jobs can wipe out a year.
Worked example
Illustrative: Riverside Medical Center.
- Contract: $49.3M; estimated total cost: $43.68M
- Projected gross profit: $5.62M (11.4%)
- Percent complete: 72.6%; earned revenue: $35.78M; cost to date: $31.7M
- Gross profit earned to date: $35.78M minus $31.7M = $4.08M (still 11.4% of earned revenue)
Under cost-to-cost, gross profit is recognized at the projected margin as cost is incurred, unless a loss is expected, in which case the full loss is recognized immediately.
Common mistakes
- Comparing margins across companies without checking whether general conditions are in job cost or overhead.
- Recognizing gross profit on a job that is now forecast to lose money.
- Confusing markup (on cost) with margin (on revenue). A 15% markup is a 13.0% margin.
How os.construction handles it
We’re building gross profit views that roll up from each job’s live forecast, so portfolio margin reflects the latest PM numbers rather than last month’s export.