Data to Dollars: What Each Metric Means & How to Use It to Drive More Profits: Series #8 - Profit Fade Analysis
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.
#8 - Profit Fade Analysis
What It Is -
Profit Fade Analysis tracks how much your profit margin changes from the start of a project to its completion. Bid Day Margin is our goal. We want you to achieve the profit margin you planned to get when your homeowner or investor signed your contract.
How we calculate it -
Profit Fade = Estimated Gross Profit Margin - Actual Gross Profit Margin
For example, if your estimated gross profit margin at the start of the project was 30%, but the actual gross profit margin at the end was 22%, you experienced an 8% profit fade.
Why We Track It -
Profit fade is often an indicator of inefficiencies, cost overruns, or estimating errors. It highlights the areas where costs spiral beyond the budget, eating into your profits. For residential construction companies, profit fade can result from untracked change orders, labor inefficiencies, material waste, or underbilling.
By tracking profit fade, you gain insights into:
Estimating Accuracy: Are your initial budgets realistic?
Project Management Effectiveness: Are you managing costs effectively as the project progresses?
Cost Control: Are there consistent patterns in where costs go over budget?
Why You Need to Know It -
Profit fade is a red flag for profitability issues and provides actionable insights into what’s going wrong on projects.
Good: Minimal or no profit fade means your projects are staying on budget and your estimates are accurate.
Bad: Significant profit fade indicates cost overruns, mismanagement, or poor tracking of changes, all of which hurt your bottom line.
Action Steps Based on the Profit Fade Analysis -
If Profit Fade Is Minimal or Nonexistent:
Celebrate! Your estimating process and project management practices are working well.
Use these successful projects as benchmarks for future estimating and management.
If Profit Fade Is Moderate (5%-10%):
Review Change Order Processes: Ensure all approved changes are being properly tracked and billed.
Check Material Costs: Are material overruns or waste contributing to higher costs?
Evaluate Labor Efficiency: Ensure labor hours are being tracked accurately and assigned to the correct job.
If Profit Fade Is Significant (10%+):
Reassess Estimating Processes: Adjust estimates to reflect actual costs more closely.
Audit Job Costing Reports: Look for unbilled expenses, material overages, or unexpected costs.
Implement Real-Time Tracking: Monitor costs and margins throughout the project lifecycle, not just at the end.
Conclusion
Profit Fade Analysis isn’t just about identifying where profits went—it’s about stopping the fade before it happens. By tracking this metric, you’ll catch inefficiencies, refine your estimating process, and ensure that your projects deliver the profitability you expect.
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.
What’s Next -
Stay tuned for the next episode in the Data to Dollars Series as we uncover yet another metric to help you operate smoothly while driving profitability to scale your business!
