Construction profit margins have always been thin. What’s changed in 2025 is how many pressures are hitting at once.
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Labor costs are up 4% year-over-year, with field craft professionals averaging $36.54/hour—an 18% premium over typical private-sector wages. Material costs have risen 5-7% on top of already elevated post-pandemic levels. Tariffs on steel and aluminum pushed the effective rate on construction goods to a 40-year high of 25-30%. And total U.S. construction spending fell roughly 3% year-over-year by mid-2025, meaning contractors are competing harder for fewer projects while their costs keep climbing.
The result is margin compression across the industry. Deloitte’s 2026 E&C Outlook notes that many firms are “sacrificing profit margins to help keep prices stable”—a defensive strategy that works in the short term but isn’t sustainable. When your margins are already single digits, a few percentage points of unanticipated cost inflation can turn a profitable job into a break-even or worse.
Understanding where margins stand, what’s pressuring them, and which levers you actually control has become essential for operations leaders heading into 2026.
Average construction profit margins by sector in 2025
Construction profit margins vary significantly by sector, project type, and whether you’re measuring gross or net. The benchmarks below reflect 2025 industry data, though individual firm performance varies based on market position, project mix, and operational efficiency.
| Sector | Net profit margin | Gross profit margin | Notes |
|---|---|---|---|
| Residential (single-family) | 8-11% | 18-25% | Highest margins; peaked at 8.7% net in 2023 |
| Commercial | 5-10% | 10-20% | Narrower due to scale and complexity |
| General contractors (overall) | 5-6% average; 8-10% healthy | 12-16% | Specialty trades run higher (15-25% gross) |
| Infrastructure | 2-5% | Data limited | Tighter margins, longer payment cycles |
Sources: NAHB 2025 study, ServiceTitan industry analysis, Atlas CFO benchmarks
The difference between gross and net matters more than many contractors realize. Gross profit margin measures what’s left after direct project costs—materials, labor, equipment, subcontractors. It tells you whether your pricing covers the cost of doing the work. Net profit margin accounts for everything else: overhead, G&A, interest, taxes. It tells you what you actually keep.
A contractor with 15% gross margins but heavy overhead can easily end up at 3% net. Another contractor with the same gross margins but leaner operations might hit 8% net. The gross margin gets you in the game; the net margin determines whether you’re building wealth or just staying busy. Industry guidance suggests that healthy general contractors should target 8-10% net margins, though many operate below that threshold, particularly in competitive markets or during economic uncertainty.
Residential builders have historically enjoyed the strongest margins in construction, with single-family net margins reaching 8.7% in 2023—the highest in decades according to NAHB data. But 2024-2025 has introduced new pressures: rate buydowns, price cuts, and incentives to move inventory have compressed those margins back toward historical norms. Commercial contractors typically operate in a tighter band, with net margins of 5-10% reflecting the scale, complexity, and competitive bidding dynamics of larger projects.
What’s compressing construction profit margins in 2025
The margin pressures hitting construction in 2025 aren’t coming from one direction. They’re compounding.
Labor cost escalation. Construction wages have risen approximately 4% year-over-year through 2025, driven by persistent skilled trade shortages and competition for limited talent. When labor represents 20-35% of total project costs—as it does for most general contractors and many trades—a 4-5% increase in that line item comes almost entirely out of profit unless contracts allow recovery. The math is unforgiving: if your gross margin is 15% and labor is 30% of project cost, a 4% labor increase consumes nearly a full point of margin.
Material cost volatility and tariffs. Steel prices are up 13% year-over-year. Aluminum is up 23%. The effective tariff rate on construction materials hit a 40-year high of 25-30% in 2025, with steel and aluminum tariffs reaching 50% on imports. These increases hit project economics immediately on competitively bid or lump-sum work where pricing was set before tariffs took effect. JLL’s construction outlook warns that tariff uncertainty continues to complicate procurement planning and margin forecasting.
Fixed-price contract exposure. The fundamental problem with margin compression is that cost increases don’t automatically translate to price increases—not when you’ve already signed a contract. On lump-sum work, labor and material inflation comes directly out of gross profit. Contractors who bid projects 12-18 months before construction starts are particularly exposed, as their pricing assumptions may bear little resemblance to actual costs by the time crews mobilize. The 88% year-over-year increase in project abandonment reported by ConstructConnect reflects developers and owners reassessing project feasibility as cost escalations make previously viable work uneconomic.
Competitive pressure on pricing. When demand softens—as U.S. construction spending has in 2025—contractors compete more aggressively on price, even when their costs haven’t dropped. This dynamic accelerates margin erosion: costs rise while revenue per project stagnates or declines. Smaller contractors without the balance sheet to absorb losses may underbid to maintain cash flow, further pressuring market pricing.
Segment and firm variation. Margin pressure isn’t uniform. Specialty contractors with higher structural margins (15-25% gross) have more cushion, but because their cost structure is labor-heavy, they’re also highly exposed to wage increases. Contractors focused on data centers, manufacturing, and complex infrastructure—where owners are willing to pay for expertise and schedule certainty—are maintaining margins better than those competing on commodity commercial work.
How to calculate construction profit margins
The formulas are straightforward. Applying them consistently and honestly is where most contractors struggle.
Gross profit margin measures profitability on direct project costs:
Gross Profit Margin = (Revenue – Direct Costs) / Revenue × 100%
Direct costs include materials, labor (including burden), equipment, and subcontractor costs—everything directly attributable to the project. If a $10M project has $8.5M in direct costs, gross margin is 15%.
Net profit margin measures what you actually keep after all expenses:
Net Profit Margin = Net Income / Revenue × 100%
Net income is what remains after deducting overhead, G&A, interest, depreciation, and taxes from gross profit. If that same $10M project contributes $150K to the bottom line after all allocations, net margin is 1.5%—even with a healthy-looking gross margin.
The discipline is in accurate cost allocation. Many contractors underestimate true project costs by failing to fully burden labor rates (benefits, insurance, taxes add 30-40% to base wages), under-allocating equipment costs, or ignoring the overhead absorption required to keep the business running. A job that looks profitable on paper can turn out to be break-even when you account for the estimator’s time, the PM’s salary allocation, and the office rent attributable to that project.
Understanding both metrics matters because they tell you different things. Gross margin problems suggest pricing or field efficiency issues—you’re not charging enough or you’re not executing efficiently. Net margin problems with healthy gross margins suggest overhead issues—your back office is too expensive relative to your revenue base. Most margin improvement efforts fail because contractors don’t diagnose which problem they’re actually solving.
Protecting construction profit margins through workforce planning
Labor is typically the largest controllable cost on a construction project. Materials arrive at market prices you can hedge but not fundamentally change. Subcontractors price their work based on their own cost structures. But how you staff projects—who you assign, how efficiently you utilize your workforce, whether you’re carrying people between projects—directly affects your margins.
This is where workforce planning connects to profitability in ways that aren’t immediately obvious.
Utilization drives overhead recovery. Your salaried field staff—superintendents, project managers, project engineers—represent fixed costs that need to be absorbed by projects. When utilization drops below target, that overhead burden gets spread across fewer revenue dollars, compressing margins. A superintendent sitting on the bench for two weeks between projects costs real money: not just their salary, but the overhead they’re not helping to absorb. Contractors who track utilization systematically can identify gaps before they become expensive and make proactive adjustments—accelerating assignments, rebalancing workloads across regions, or timing pursuits to fill projected capacity holes.
Right-sizing teams prevents overstaffing. The instinct to staff projects conservatively is understandable—nobody wants to be short-handed on a critical job. But overstaffing erodes margins just as surely as underbidding. If you assign a senior PM to a straightforward tenant improvement, you’re paying for experience that isn’t necessary. If you stack multiple PEs on a job that needs one, you’re carrying labor cost without commensurate value. The Bridgit Forecasting Dashboard helps operations teams see supply against demand across the portfolio, enabling more precise staffing decisions that match team size to actual project requirements.
Experience matching reduces rework and overruns. Mis-staffing doesn’t just mean the wrong number of people—it means the wrong people. A PM who’s run fifteen healthcare projects will ramp faster and make fewer mistakes on their sixteenth than someone learning the building type for the first time. That learning curve costs money: slower RFI response, coordination gaps, punch list blowouts. Internal Resumes capture project history, build types, and client relationships so staffing decisions can be based on qualification data rather than whoever comes to mind first.
Forecasting enables proactive hiring. Reactive hiring is expensive hiring. When you need someone urgently, you pay premium rates, accept candidates you wouldn’t otherwise, and absorb the productivity loss of onboarding under pressure. Contractors who can see their labor demand 6-12 months out can hire strategically: at normal market rates, with proper vetting, with time to integrate new hires before throwing them on critical work. That planning horizon directly protects margins by avoiding the cost premium of urgency.
The 2025 State of Workforce Planning report found that 99% of top-performing contractors use workforce planning software to manage and allocate resources. The correlation between planning sophistication and performance isn’t coincidental—it reflects the margin impact of getting staffing decisions right.
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We partnered with Construction Dive to outline the steps any contractor can take to be more strategic with their workforce management.
What contractors can control heading into 2026
Margin pressure in 2025 is real, and some of it is outside your control. You can’t negotiate away tariffs. You can’t manufacture skilled workers who don’t exist. You can’t unilaterally raise prices in a competitive market.
But you can control how you respond.
Contract structure. Build escalation clauses into contracts where possible. Use indexed pricing tied to published benchmarks. Negotiate risk-sharing mechanisms that prevent you from bearing 100% of cost overruns caused by factors outside your control. The contractors maintaining margins in 2025 are those who built protection into their agreements before problems emerged.
Estimating discipline. Model labor costs separately from materials, with explicit escalation assumptions. Build 4-5% annual labor inflation into multi-year projects. Size contingencies to actual risk profiles rather than arbitrary percentages. Underbidding to win work is a margin problem disguised as a revenue solution.
Workforce optimization. Track utilization, forecast demand, and match experience to projects. Labor is your largest controllable cost—controlling it requires visibility you can’t get from spreadsheets.
Project selectivity. Some work isn’t worth winning. Low-margin commodity projects in competitive markets may keep crews busy but won’t build the business. Contractors focused on higher-margin niches—complex work, repeat clients, specialized building types—are maintaining profitability while others race to the bottom.
The margin environment in 2025 isn’t forgiving. The contractors protecting their profitability aren’t finding magic solutions—they’re executing fundamentals with more precision than their competitors.
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Construction profit margins FAQ
How does the cost of materials influence construction profit margins?
Profit margins in construction are tied to the cost of materials, labor, and other overhead expenses. Materials represent a significant portion of a project’s expenses. Unfortunately, material costs can and do fluctuate which can directly impact profit margins. For example, a shortage in steel could cause an increase in prices which affects downstream project costs. Finding cost-effective material sources or benefiting from a decrease in material costs can improve profit margins considerably.
How can construction companies reduce overhead expenses?
Construction costs impact the bottom line. To reduce overhead expenses, construction companies need to adopt an iterative approach. This could include regularly evaluating new technologies and software that can save time, effort, and money. Seeking to negotiate on rates with supplies to reduce material costs can have a big impact, while outsourcing some job functions may reduce labor costs. No matter the approach, regularly reviewing overhead expenses is a key component of identifying and eliminating unnecessary expenses.
Can software play a role in increasing construction profit margins?
Software technology can have a big impact on profit margins. Using software like construction workforce planning software helps improve efficiency, decrease project slowdowns, and keeps everyone on the same page. There’s nothing worse than paying for idle workers and contractors in construction. Software extends beyond workforce management, too; software can be used for financial analysis, material analysis, project management, and much more.
