Can you see the profit for each project? How 'rough estimates' erode a company's strength

I was reading a survey recently released by the Small and Medium Enterprise Agency, and I couldn't help but stop in my tracks. It states that only about half of small and medium-sized enterprises have successfully visualized their 'profitability'—in other words, grasping through numbers exactly how much they are earning from which jobs (Small and Medium Enterprise Agency/KPMG Consulting, 'FY2024 Survey on Profitability Visualization for Small and Medium-sized Enterprises and Small Businesses,' March 2025).

While 49.4% said they are 'working on it,' 24.0% said they are 'not working on it,' and 26.6% said they 'don't know.' This means that about 50% of companies in total do not have an accurate grasp of their profit composition. Furthermore, the industry with the highest number of respondents in this survey was, surprisingly, the construction industry (27.2%). These figures vividly reflect the reality of construction sites.

'We've been doing this for years, so I have a rough idea in my head,' many company presidents might think. But a 'rough idea' and 'numbers' are two very different things. The lower the profit margin of a business, the more that difference gradually takes its toll.

The danger of 'not knowing until it's over'

Construction is inherently a low-margin industry. According to the Basic Survey on Small and Medium Enterprises, the average construction cost ratio is 76.1%. In other words, out of 100 in construction revenue, 76 disappears into costs (materials, subcontracting, labor, etc.), leaving a gross profit (profit after subtracting costs from sales) of roughly one-quarter. Many companies look at this thin profit only 'after the construction is finished' and through a 'rough, company-wide estimate.'

Let's do a simple calculation. If you have a project with 10 million yen in sales and a 25% gross margin, you are left with 2.5 million yen. Suppose your estimate was too optimistic and costs increased by 5%. The 7.5 million yen cost becomes 7.87 million yen. Consequently, your gross profit drops from 2.5 million yen to 2.13 million yen—a loss of more than 10%. In the construction industry, where cost ratios are high, a mere 5% discrepancy significantly erodes profit. That is precisely why you want to look at the numbers while the project is in progress, not after it is finished.

The estimate was a bit too optimistic. Material prices rose mid-project. Rework occurred, and the labor hours for craftsmen increased. Nobody notices these 'loss-making projects' until they are finished. By the time they are noticed, the profit from other profitable projects is used to cover the shortfall, and the total somehow breaks even. This is the true nature of 'rough cost estimation.'

The troublesome part is that the lower the profit margin of the industry, the more this single oversight impacts the bottom line. If your gross profit is only one-quarter, you need three or four profitable projects to cover one loss-making project. The longer it takes to notice, the more the company's strength is quietly eroded. You are bleeding, but you can't feel the pain.

There is a reason why this happens so easily in the construction industry. Multiple sites are running simultaneously. Payments to subcontractors and independent contractors are fragmented. Invoices are still handled on paper or manually entered into Excel. The very structure where numbers do not gather in one place creates the 'won't know until it's over' situation.

What do companies that visualize their data do differently?

The same survey listed examples that serve as hints. They aren't doing anything special.

・A certain transport and construction company (Company M) assigns a number to every project and tallies raw material costs and labor costs in Excel every day. Because their projects have longer durations than other businesses, they can identify sites where profitability is likely to deteriorate early on and take action.

・A certain civil engineering and construction company (Company A) introduced a system to tally profits every month for each small team of about five people. As a result, the burden on each individual decreased, and overtime was reduced. It also became a tool for price negotiations.

The point is not to aim for perfection right away. The same survey organized the visualization of profitability as a process that proceeds in stages. First, look at the company-wide profit and loss using a trial balance. Next, start counting 'costs that are easy to link to each project,' such as material costs and subcontracting costs. Once you get used to it, add your own company's labor costs. The first step is just to write down the material costs and subcontracting costs for a single project. That is enough.

This is not a story about installing a flashy system. What they are doing is 'assigning numbers to projects,' 'writing down the money spent,' and 'counting it every day or every month.' That is all it takes.

And numbers are honest. The same survey shows a trend where companies that visualize their profitability have a higher prospect of being in the black for the current and next term (for companies with corporate clients, 59.7% expect a profit, compared to 46.1% for companies leaning toward a deficit). Companies that can see their numbers are able to take action sooner. It seems obvious, but it is something that is rarely done. Can you answer immediately how much was left from your most recent project?

First, try writing out one 'project ledger'

There is no need to brace yourself by thinking, 'We need to install a system too.' In the survey, the top reasons why the visualization of profitability does not progress are 'don't know the effect' (37.3%), 'costs money' (31.9%), and 'don't know how' (29.8%). Many companies try to start with tools and get stuck at the entrance.

The order is reversed. What you should do first is not choose a tool, but 'write down your operations.' Specifically, try breaking down one project and laying it out on a single sheet like this.

・Material costs (who you paid and how much)
・Subcontracting costs/Labor (by subcontractor/craftsman)
・In-house labor costs (how many people worked on that site for how many days)
・Sales (billed amount)

With just this one sheet, you can see that 'this site was thinner than I thought' while it is in progress, not after it is finished. One Excel sheet is enough. Rather than a fancy system, the habit of 'counting for each construction project' is far more effective.

One more thing. This sheet can also be a weapon for 'price increases.' The strongest thing in price negotiations is not enthusiasm or long-standing relationships, but your company's own numbers showing 'this is how much the cost has gone up for this project.' In fact, many companies that visualized their profitability used it as material for price negotiations. If you leave it as a rough estimate, you can only say 'it's somehow difficult.' But if you have the numbers, you can firmly say, 'That is why the price is this amount.'

Shortage of manpower, price increases not being accepted—the worries of the construction industry are endless. But before that, if you cannot see 'how much is left for which job,' you cannot decide what needs to be fixed. Recruitment and price increases start only after you can see your company's numbers, right? Today, why not try writing out one construction ledger, even if it is just for the most recent project?

Read also

Before increasing staff, the source of funds is created by 'inventorying tasks'.
The 'hardship' of the 83.6% wage increase era—the source of funds is born from 'inventorying tasks'

Before taking on increasing administrative work, 'divide it'.
The year the '1.06 million yen wall' disappears—divide increasing administrative work before taking it on

Do not order as a 'lump sum.' If you order by dividing, you can protect your subcontractors.
Before jumping at 'we can build it cheaply and quickly'—protect IT outsourcing with 'contracts'

――――――

ShakeHands LLC
A business partner that organizes manpower shortages from the structure
We are short on people. But 'recruitment' is not necessarily the right answer.
ShakeHands LLC is a partner that faces the manpower shortages and business expansion of small and medium-sized enterprises, organizes options for recruitment, outsourcing, and AI utilization, and designs the optimal strategy.
We think together about choices as management decisions, not proposals for the sake of selling.

――――――

▶〈Warifuru〉Organizing manpower shortages in the construction industry through 'task decomposition'
Before increasing staff, first divide the work. In a 60-minute free consultation, you can take home your company's 'first draft of the task decomposition sheet (1 sheet)' (consultation and consulting fees are 0 yen).