This article was originally published by Uncapped Mortgage
In 2010, there were nearly 2.5 million self-employed construction workers in the US. More than half of these workers held the position of construction manager. As the economy continues to thrive, self-employed construction work is on the rise. However, this industry has notoriously tight margins. As a result, construction workers have a lot to gain by saving money and cutting costs. Here are a few ways for independent contract workers in the construction industry to reduce expenses and save money.
Know what tax deductions to claim
Self-employed construction workers can claim deductions both from being part of the construction industry, and from being self-employed. In addition to knowing which deductions to take, experts recommend that self-employed workers set aside roughly 30% of your earnings to go to the IRS each quarter. Construction-related tax deductions that you may take include:
- Construction tools and equipment: compressors, ladders, supplies, and small tools that last less than one year
- Work gear, including hard hats, tool belts and even jeans you wear on-site
- Fees, including trade school tuition, subscriptions to trade journals, or membership fees
As a self-employed working member of our society, you’re also permitted to take certain tax deductions. Mileage deductions for driving between multiple sites, as well as other travel costs (parking and toll charges, hotel stays, and meals) can be claimed on your taxes. Marketing costs, insurance premiums, utilities, and phone expenses are just a few more other write-offs you may be able to claim on your taxes, helping you save money each year.
Negotiate projects in two phases
A good way to improve cash flow (and save some money on big expenses) is to break up big projects into two or more milestones. The experts at Freshbooks suggest for projects over $100,000, split your time into a design phase and a construction phase. Offer to consult alongside the chief architect or designer. You’ll get to review the blueprints and figure out your construction schedule, saving time and money when the the construction phase finally starts.
Pro-tip: when negotiating the price of the project, make sure to focus on the scope, rather than the rate. If the price is $12,000 and the customer’s budget is only $10,000, swap out different materials for others; then, the customer can decide whether the value of the material is worth the splurge, rather than your services.
Use the right pricing method for your projects
There are a couple of ways to price your projects – and knowing which one can give you the best profit margin will help you save money. As construction managers know, this industry is more cost-based than most other markets. Certain fixed costs will never change; therefore, determining a price that will yield the best profit margin can help you save money on overrun costs. Here are three common ways to price your construction projects:
- Cost-based method: the price of the project is the cost of your materials, plus some markup.
- Price method: use this method to provide a healthy margin when generating a cost of good sold. The equation in this case would be price, divided by the markup factor to get your cost.
- Margin method: use this when your expenses increase because of the growth of your business, and you’re interested in setting a new price at which you need to sell a service or project. The equation is price = costs divided by (1 – margin)
Again, the different equations apply to different circumstances. Make sure as your business grows, you’re constantly evaluating whether your pricing scheme is giving you the best value.
Practice agile construction management
Agile development is a concept that began in the software industry and has spread to other design-oriented processes. The gist is that construction projects spend some time in the design phase aligning with the customer requirements. For construction managers, this means involving customers early in the project, encouraging them to define deliverables, reducing uncertainty and proactively managing project risks. Agile construction management can also mean the “greater use of prefabricated assemblies, making construction projects more like manufacturing projects where unpredictable factors like weather have less effect.” Overall, this approach to managing projects can lead to smoother timelines, cost savings, and better relationships with your clients.
Improve your construction scheduling
Contractors know how important it is for construction projects to run on time. Staying on schedule means staying with budget – and for self-employed construction workers, overruns have bigger impact on your cost savings that at a larger firm where costs can be made up in other areas. To nail your scheduling, try one of these methods:
- Bar charts: make a list of activities with a specific start date, duration, and completion date. Plot each activity on a project time scale.
- Critical Path Method: give start and end dates based on how activities must be staggered and sequenced.
- Line of balance scheduling: this works for repetitive events, and allows you to allocate resources for each step or operation, avoiding delays.
- Q scheduling: this method allows you to map out the relationship between the job and the costs incurred with each step.
One of these methods could be the key to improving client satisfaction, avoiding overrun costs, and streamlining the management process, saving money in the process.
Get subcontractor default insurance
Many self-employed construction workers try to cut costs by skimping on things like insurance. However, Subcontractor Default Insurance might be worth investing in, especially if you work with other partners to fulfill your bigger projects. “Subcontractor Default Insurance provides relief for contractors when a subcontractor has its contract terminated by default. This type of insurance provides unique benefits when compared to a traditional default process, that will normally require litigation and delays that will significantly affect contract schedule.” Hopefully there’s no need to have SDI, but it could make or break your business in the event of a disaster.
Create a nest egg
The construction industry gets hit particularly hard when the economy takes a dip. Based on Census data, the number of individual construction ventures decreased by 10% during the economic downturn. Conversely, it increased by 28% during the steady economy from 2002 – 2007. Be prepared to weather the macro conditions of the nation’s economy by building a nest egg for yourself. “Financial experts advise that entrepreneurs make it a goal to live on 50% of their income. The other 50% should be divided between flexible expenses and savings – 30% and 20% respectively.” Saving money for the long term should be the goal of every self-employed worker, especially in the construction field.
With careful management, attention to project schedules, and knowledge of how to make the most of available tax write-offs, self-employed construction workers can save money and cut costs. Don’t let business expenses weigh down your personal budget. These tips are just the start of improving your finances for the future.