Most businesses lease out a commercial rental space such as an office, warehouse, or retail space. Typically, the space is bare and requires improvements. So, before a business can start operating, they need to customize the interior of the commercial rental space. This is known as tenant build-out.
The cost of leasehold improvement and who pays for it is negotiated between the landlord and tenant before signing the contract. It is a vital part of the commercial lease agreement. Whether the landlord or the tenant pays for the construction costs, the project is normally entrusted to a contractor.
Perhaps you’re wondering if leasehold improvement projects are profitable. Some contractors specialize in tenant build-out projects. Let’s explore the profitability of tenant build-out contracting.
How Profitable Are Tenant Build-out Projects?
The profitability of tenant build-out contractors depends largely on how efficiently the business runs. The general contractor’s ability to consciously calculate profit margin and overhead is crucial for any construction company.
Earnings in the construction sector don’t come instantly – it just doesn’t work that way. Like any other construction company, profits are not generic – much less easy to estimate. The profitability of a general contracting company depends on a myriad of factors, regardless of whether you specialize in commercial build-outs or residential projects.
Some important factors that can affect productivity include cost-efficiency, productivity, financial obligations, human resources costs, access to affordable sub-contractors, suppliers, and providers, and business management. Starting in the tenant build-out sector, you can begin with low-profit margins. Eventually, as your contracting business grows, you can increase your profitability.
But this doesn’t mean that specializing in leasehold improvement projects does not have advantages. Tenant build-out contractors enjoy several benefits that can help them grow their business.
Unlike general contractors, there is less competition in the tenant build-out niche. This is particularly true in some regions where contracting companies mainly focus on residential projects. It is easier to find new contracts with fewer competitors.
Lower start-up cost
Since leasehold improvement projects tend to have a smaller scope, they often require fewer resources and capitalization. They can start bidding for tenant build-out projects with less capital investment. It enables contractors to start taking several build-up projects even during their first few months.
Shorter project duration
Compared to other construction projects, leasehold improvements can take a few weeks to a couple of months to complete. As such, contractors can handle more tasks in a short period. They can even work on several contracts at the same time.
Fewer workforce to maintain
Leasehold improvement requires a dedicated team of workers like painters, carpenters, glass installers, and artisan workers to complete projects. Usually, contractors retain a small number of skilled laborers or individual contributors to tap for specific aspects of the project. This saves them from the recurring costs associated with retaining human resources.
Highly specialized projects
Usually, tenant improvements involve highly specialized and customized work that meets the design requirements. And since tenant build-out contractors offer high-level work, they often charge a rate a little higher than the average gross margin in the construction sector. This is because contractors pay a higher wage per hour to specialists.
Considering these advantages, tenant build-out contractors can earn more than their generalist counterparts. However, managing the overheads and costs is crucial in ensuring a favorable cash flow and higher profitability.
There are also other secrets to increase profits from your lease improvement projects (or whatever construction work for that matter). Tenant build-outs experts from AFS General share some helpful tips.
· Determine project cost estimate accurately
· Establishing networks with affordable suppliers and sub-contractors
· Setting a price or margin that works for the company
· Carefully vet potential customers
· Constant communication among team members and the client
· Protect your payment by setting escrow mechanics and timely billing
· Continuously tracking your financials help ensure healthy cashflow
IT for small businesses is a growing trend in the construction sector. It can help streamline many aspects of running a tenant build-out contracting business, such as accounting, scheduling, payroll, and communication. Investing in IT solutions can further improve the profitability of your business by ensuring efficiency and cutting unnecessary expenses.
Finally, learning and adapting to current trends in the contracting industry is vital to a profitable tenant build-out contracting business. Whatever construction industry segment you choose, profitability largely depends on how efficiently you run the day-to-day business operations and allocate the resources.