Profit Margins are Talking — Are You Listening?

The Core Message: Margins Are Shrinking — and Costs Are the Culprit Again.

The fundamental dynamic at work is straightforward: costs in the construction industry are once again rising faster than builders are recovering them. Aggregate input costs — encompassing materials, labour, fuel, superannuation, insurance, interest, and government charges — are increasing at an average 7% to 7.5%. Yet the prices being charged to clients, particularly in the SME segment have not kept pace.

The numbers speak clearly. Residential gross profit margins have declined to between 18% and 25%. Net profit margins have fallen to single digits — approximately 7% to 8% for a significant number of builders. Subbies are doing marginally better and still operating at 2025 levels. For a business owner who invested post Covid in better costing and management systems, that work is paying dividends. However for some, a repeat of 2022/2023 years has commenced. 

“Gross profit margins are shrinking because costs are going up faster than builders are recovering them. Net profit can be as low as 7 or 8%. This does not bode well for those trying to sell.”

Critically, these observations are supported by the Reserve Bank of Australia. The RBA’s May 2026 Bulletin explicitly acknowledges the decline in residential construction margins over 2025 under softening demand and rising input costs. I want to be clear that I am speaking specifically about the small to medium enterprise market — not the large construction companies, whose corporate profits are in fact rising. For the SME builder and contractor, the picture is considerably more volatile.

And whilst the ABS reports that construction corporate profits rose 7.9% in the most recent quarter, this almost exclusively reflects the performance of larger, better-capitalised survivors. It does not reflect the day-to-day reality of the closely-held and smaller owner-operated building business.

What is equally worrying is that significantly fewer businesses are consistently achieving the margins they set out to achieve at the outset of their projects. The gap between intention and outcome is widening — and that gap does have a compounding cost over time.

What This Means Practically — and What You Must Do About It

The response to margin compression is not passive observation or resigned acceptance. It is active, disciplined management. The businesses that learnt these lessons in the not distant past will navigate this period and emerge stronger. Those who manage their numbers, and act promptly, will do better than their competitors.

I urge every construction business owner to focus immediately on the following:

• Strengthen your pricing systems so that materials and supplies cost increases are captured and recovered before they are absorbed into your margins. The legacy of fixed-price contracts signed before recent cost spikes continues to claim businesses today — do not let the next cycle catch you the same way.
• Track your margins at least monthly, not annually or quarterly. A business that discovers a margin problem six months after it emerges is already in a reactive position, with far fewer options available.
• Document your procurement, subcontractor, and project cost control processes. The data is consistent: builders with documented systems report significantly stronger gross markups than those without. Systems are not bureaucracy — they are the mechanism by which you protect your profitability.

The brief respite of 2025 is in all likelihood behind us. The businesses that invest now in tighter operational discipline will be those in a position of strength when conditions stabilise.

Distressed Businesses — An Opportunity, if Framed Carefully

With insolvencies in the construction sector running at approximately 3,596 in FY2025 — accounting for roughly 25% of all Australian corporate failures — there is a meaningful pipeline of distressed or pre-distressed businesses in the market.

For the right buyer, this does represent an opportunity: the possibility of acquiring a viable business, or a pipeline of contracted work, at below-market pricing before formal administration is reached. I need to be measured in how I present this. I am not in the business of facilitating the sale of failed businesses. What this data does signal is that motivated sellers exist, and that structured, well-advised M&A deals are achievable for buyers with the capital and the appetite to move decisively.

M&A Activity — Active at the Top End, But Not Reaching Down to Your Market

You may have read headlines about significant transactions in the Australian construction sector in 2025 and 2026. Large transactions like the recent sale of Multiplex to Japan’s Obayashi Corporation, Saint-Gobain’s acquisition of CSR, and other reported strong private equity activity exists. I believe it is being driven by organisations positioning themselves ahead of the Olympic Games and federal government infrastructure initiatives — particularly in Queensland. This is confirmation that well-capitalised buyers are still active.

In the mid-market, it may indeed be possible to acquire a pipeline of work beneath historic market averages. Private equity deal volume in construction hit a record quarterly high in early 2026, and mid-market deal values are rising.

“Mid-market is the active deal zone — but to the best of our knowledge, this activity is not reaching downward into the small to medium market of closely-held businesses.”

Bluntly put, the large-scale deal activity we are reading about is not really in the housing market. Buyers at this level exist, but they are selective and they are scrutinising margins carefully. A business presenting compressed margins without a credible operational narrative will face valuation pressure. A business that can demonstrate systemised operations, consistent performance, and controlled costs is an altogether different proposition.

If You Are Thinking of Selling — Do This.

For owners who have been considering an exit — whether in the next 12 months or the next three years — the current environment carries a clear message: the time to obtain a proper, independent valuation and understand your options is now, not after margins have compressed further.

A valuation conducted today, under IVS-compliant methodology, gives you a defensible baseline. It tells you where you stand, what a buyer will see, and what steps — operational or structural — might materially improve your outcome before you come to market. Waiting until financial results deteriorate further does not preserve your options; it reduces them.

At Negotia Group, we work with construction and trade business owners across Australia to provide independent, IVS-compliant valuations and structured exit strategies. We provide evidence-based analysis, grounded in real market data, that enables you to make informed decisions at a time that matters.

“The businesses that will look back on 2026 as a turning point are those that chose to act on the data — not those that chose “she’ll be right” 

Speak with Kevin Lovewell Directly

If you would like an honest, confidential conversation about the value of your construction business and your options in the current market, I welcome your call.

Kevin Lovewell

Direct:  0401 308 385