What Is Profit Fade?
Profit fade occurs when a business’s profit is less than what was expected. It is a phenomenon that can be found in a wide range of business sectors, but tends to occur frequently among construction companies. Profit fades are common among construction companies because of the dynamic nature of the industry, with projects that are extremely time consuming and complex. Often times, a company’s initial calculation and revenue predictions will not match at the end of a project, thus experiencing profit fade. Often times the root of profit fade lies in external factors, like the increasing price of materials that may hinder a current project. Other common causes of profit fade for construction businesses range from bad estimates, unbillable changes and poor subcontractor performance. Often times, unpredictable weather conditions have been known to cause profit fade for companies that are unprepared without contingency plans in place. Throughout the entire construction process, profits and costs must be monitored regularly. To best curtail profit fade, general contractors, project managers and accountants must work collaboratively with a common goal in mind, and adapt to whatever issues may arise.
How Can Construction Businesses Prevent Profit Fade?
First and foremost, construction businesses must find out what the most common causes of profit fade are, particularly those that have been proven to affect their revenue-earning operations. These can be determined in a number of ways, but recalling past experiences and previous projects is always a good start. Often the conditions among several projects may be similar, providing a list of ideas to start from. By understanding which common incidences may present itself, construction businesses can prioritize the most pressing threats, thus maximizing the return on their invested time and effort.
Construction businesses must also examine their most pressing threats to estimate how these may impact their revenue-earning operations. This is important because they will need numerical estimates to identify how much time and effort they should put into mitigating these threats. Generally speaking, construction companies estimate the impact of potential threats using a combination of their previous experiences along with an understanding of the business environment. If construction businesses lack the institutional capabilities needed to assess their current environment in order to prevent profit fade, they should not hesitate to seek help from third parties. Click the link to look more about how your company can mitigate operational risks.
Once businesses know their most pressing threats, as well as the damage it may cause, they are better positioned to deal with whatever issues may arise. When keeping profit fade in mind, a strategy construction business may use includes mandating more conservative guidelines when estimating costs. Similarly, a construction business that is cautious of unbillable changes might ask for clauses in their contract that limit how much their client can change without having to provide additional compensation. In the end, ways to mitigate pressing threats are specific to any given project and should be handled on a case by case basis.
When thinking about the complexity of construction projects, it is clear that project managers and general contractors with expertise and experience are necessary to not only oversee the entire operation, but produce accurate estimates. Furthermore, construction businesses need leaders who can put their own estimates and plans into action, immersing themselves in all of the expenses and costs of any given project. From the pre-operational stage, construction companies must be able to forecast what areas may experience profit fade, and find ways to compensate these losses or increase revenue in other places. Keeping an open dialogue between project managers and their team will prove to be beneficial as areas of cost-cutting may present itself during the course of any given project, ultimately curbing profit fade. Additionally, construction managers must work closely with their accounting team throughout all projects to make sure that budgets are kept in check, and funds are being used in the most optimal manner.