Data to Dollars: What Each Metric Means & How to Use It to Drive More Profits: Series #1 - GPM
When I first started working with builders on their financials, I’d walk into our meetings armed with accurate data, detailed reports, and carefully tracked metrics. I was confident and excited to share what I’d uncovered, knowing these numbers could transform their business.
But there was a problem: I might as well have been speaking another language. It became very clear very quickly that my clients didn’t just struggle to understand the reports—they didn’t know what the metrics meant, let alone what actions to take, if any.
By the time I explained the significance of the metric, I’d already lost their focus. And the worst part? We never got to the best part—the actionable insights that could actually drive their dollars to meet their goals!
Enter: The Data to Dollars Series and The Playbook for Builder Profitability! In this series, we’ve broken down the key metrics residential construction companies need to track, what they mean for your business, and—most importantly—what to do with them to drive profitability and growth. We’re currently taking every metric covered in the series and packaging them altogether into one Playbook especially for Builders. Armed with this Playbook, you’ll know exactly what to do when with what you find in your financial reports.
Let’s dive into this week’s metric and see how it can help you turn some data into dollars.
#1 - Gross Profit Margin (GPM)
What It Is -
Gross Profit is basically how much you were paid for a project minus the direct costs incurred to complete that project. For your overall business, it’s your total revenue minus the cost of goods sold. This money is then used to pay other business costs, like overhead, administrative payroll, etc. so it’s not the bottom line profit (that’s net profit and we’ll talk about that later).
The Gross Profit Margin measures how much money your business keeps from every dollar of revenue after covering direct costs like materials, labor, and subcontractors as a percentage.
How we calculate it -
GPM = (Revenue - Direct Costs) ÷ Revenue × 100
For example, if a project brings in $500,000 in revenue and has $350,000 in direct costs,
Your Gross Profit is $150,000
your GPM is:
($500,000 - $350,000) ÷ $500,000 × 100 = 30%This means your business keeps 30% of the revenue earned after costs (or $0.30 of every $1.00 in revenue).
Why We Track It -
GPM reveals how efficiently you’re managing project costs and pricing.
A higher margin means you’re keeping more revenue to cover overhead and profit. For residential construction companies, GPM benchmarks typically range from 20% to 40%, depending on the type of projects and market conditions.
Why You Need to Know It -
The GPM will tell you if you’re business is healthy to sustain itself and grow.
Good: Your GPM is within your goal range
Indicates you’re pricing jobs appropriately and managing direct costs well.
Suggests there’s enough revenue left to cover overhead, unexpected expenses, and profit.
Bad: A LOW GPM is a huge Red Flag.
Indicates inefficiencies or pricing problems.
May point to underbidding, rising material costs, or poor project management.
Action Steps Based on GPM -
If Your GPM Is Strong (22%-35%):
Celebrate! Your pricing and cost management strategies are working.
Time to plan what will be done with the extra profit. Work with your FP&A Team or fractional CFO to help make strategic decisions that will help you scale or reach your business goals.
Maintain this momentum by continuing to monitor direct costs and adjust pricing for inflation or market changes.
If Your GPM Is Weak (<22%):
Analyze Your Pricing: Are you bidding too low to win jobs? Consider raising your rates, especially if you’re consistently busy.
Review Direct Costs: Look for areas where costs are consistently over budget—labor inefficiencies, material waste, or poor subcontractor performance.
Evaluate Project Management: Ensure project managers are staying on top of budgets and timelines.
Evaluate your systems for clunky, outdated, inaccurate processing: Tackle issues before they become major problems that negatively affect your GPM by streamlining systems and eliminating activities that do not add value
If GPM Varies Wildly Between Projects:
Revisit Estimating Processes: Consistently underestimating costs? Fine-tune your estimating system to align better with actual expenses.
Track Change Orders: Ensure all client-approved changes are billed and factored into revenue.
Track Purchase Orders/Committed Costs: Tracking vendor bills against their committed cost agreements will reduce overpayments and help maintain the agreed upon budget.
Conclusion
Your Gross Profit Margin is more than a benchmark—it’s a guide that reveals where your business stands and where it’s headed. A strong GPM means your pricing and cost management strategies are on point. A weak GPM means you need to dig deeper and make adjustments before profitability slips further.
By tracking GPM consistently and taking the right action steps, you can steer your business toward higher profitability and smarter growth.
At Catalyst Construction Accounting & Consulting (Catalyst CAC), we specialize in helping residential construction businesses just like yours track and understand key metrics like GPM and more. Whether you need help with construction bookkeeping (data accuracy, essential construction financials), construction controllership (holistic oversight over construction financial processes & strategic financial guidance), or a construction CFO advisor (forward-looking, strategic, big-picture financial guidance), we’ll work with you to eliminate financial chaos and give you the tools to drive profitability and growth.
Let us help you turn your data into dollars. Contact us today to learn how we can become your valued partner in building a stronger, more profitable business.
Stay tuned for the next episode in the Data to Dollars Series—your playbook for builder profitability is just getting started!
