Protocol for Profitability Analysis Using Internal Entities in Organizational Structure of Construction Companies

Abstract

Construction companies bid on projects and expect to obtain a profit by implementing awarded projects. As profit-generating entities, the construction companies are composed of cost and profit centers. The cost centers within the organization provide services required to fulfill the activities of the profit centers. The profit centers create billable work that is reimbursed by the owners of the projects. However, construction companies have had difficulty in winning new construction projects because of high competition, economic recession, and so forth. Also, many construction companies are not obtaining the profits they expect from the awarded projects. Therefore, a protocol to analyze profitability should be developed to understand the gaps between actual and estimated profit and the origins of loss of profit on construction projects. The purpose of this paper is to present a protocol for profitability analysis for the construction companies. The construction companies can utilize the protocol to identify relationships among entities of the cost and profit centers so that they can (1) recognize the changes in profit margins of projects, (2) improve their overall profitability by eliminating problems from the relationships that affect prospective projects, and (3) be selective of more profitable projects in the bidding phase. This paper applies the developed protocol to three construction projects executed by a midsize construction company with a functional organizational structure.