The average profit a builder makes on a home depends on the current market and what suppliers they use, among several aspects of a construction business. So whether you’re trying to negotiate with your builder or thinking about becoming a builder yourself, it’s an interesting discussion to determine how much profit a builder can bring home.
The gross profit margin varies between 15% – 23% on custom-built homes and projects, with the net profit often falling between 6-9%. It is estimated that a builder saw an average of $20,000 profit per house in 2021. The profit that a builder brings home depends on the year and the current economy.
Builders must consider their costs when quoting their clients, including expenses such as:
- general overhead
- other factors
Therefore, it will be in the builder’s favor if they have a trusted business sense and if the builder is able to source their materials and labor for a more affordable cost without sacrificing the quality of the construction work.
How Does A Builder Work Out Their Profit?
When working out a builder’s profit, you must understand specific construction aspects to be considered, such as:
- cost of sales
- indirect expenses
- cost of machinery
- other costs
It is vital that a builder understands how to correctly quote for their services. It is the builder’s responsibility to ensure that they have accounted for all potential expenses and risks, including the cost of materials increasing.
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Examples Of Expenses for Builders
There are a variety of expenses to consider. A good builder must be honest about where their money is going if their objective is to grow their business.
#1: Direct And Indirect Builder Costs
There are several requirements for builders to meet that cut into their profit. The most considerable expense is often the cost of sales, which equates to both direct and indirect construction costs.
Direct construction costs include:
Building machinery and equipment can quickly eat into a chunk of a builder’s budget, and it is beneficial if the builder already owns the equipment they will need.
Direct costs are often easier to consider when initially working out a builder’s profit, but it is also vital to consider indirect costs. Successfully running a construction business is not an easy feat and requires capital to ensure it runs smoothly.
Indirect costs are expenses that are not related to a specific project but rather ensure that the construction business can continue running. For example, these must be considered indirect costs:
- maintenance costs of machinery and equipment
- office equipment
- legal costs
- business insurance
- administration staff
#2: Labor Costs for Builders
A builder will need a reliable team to assist them, which will require labor costs. In addition, for full-time laborers, the builder will be required to cover additional costs such as medical aid and contribute towards a 401K.
Additional indirect costs will also eat into a builder’s profit but will ensure the business’s longevity, such as:
- professional accounting services
- office equipment
The builder’s profit is often not their salary, and their personal salary will be included in the business’s overhead expenses. However, the overall profit legally belongs to the business entity, and a good builder will reinvest this into their business to increase its growth.
For example, builders should reinvest their profit by purchasing needed machinery or hiring more laborers to complete additional projects.
Average wage pay affects how much profit a builder can make, primarily if they outsource services and take a percentage of the wage paid to the subcontractors. Depending on the profession, the wage per hour will vary from around $26 – $35.
Builders can charge an additional markup on these wages to increase their profit and as payment for taking the time to source quality subcontractors and the administration that occurs behind the scenes to book these professionals.
#3: Building Materials And Equipment
Another expense to consider is equipment and building materials, which can be quite pricey. Building equipment is often highly specialized, depending on what requirements the clients have laid out for their projects.
Additionally, due to the Covid-19 pandemic and the rising consequences of the Ukrainian attacks, building materials are on backorder in many parts of the world or have increased in price. A builder will need to account for these delays and communicate clearly with their clients to avoid potential backlash.
This does mean that if the cost of materials goes down, the clients will still pay the same amount, and this will increase the builder’s profit. On the flip side, if the cost of raw materials increases, then the builder’s profit decreases.
The builder’s ability to source good quality materials with access to reliable suppliers will increase their profit margin on raw materials. Building a good network of suppliers will work in the builder’s favor and ensure that a project can be completed with fewer delays.
Builders often add a markup to their material costs, and this is where they make additional income. On average, builders add approximately a 5-7% profit margin onto their building materials. This markup is partly due to constantly fluctuating raw materials and guarantees a profit for the builder.
#4: Transportation Costs for Builders
Transportation costs play a role when determining expenses, especially with the rise in fuel costs. These costs can vary immensely depending on how far the construction site is from the builder’s main offices and whether they provide transport to their laborers.
NOTE: This expense relates to the business as an indirect cost and is often not considered.
#5: Builder’s Insurance And Permits
Furthermore, builders will have to consider expenses such as insurance and building permits which are necessities when running a construction company. A builder cannot operate without having the necessary permits, and insurance is vital due to the high-risk nature of construction sites and the volatile economic climate.
General operating expenses can involve:
- salaries for administration workers
- costs of skilled subcontractors
- professionals such as architects if the clients have not sourced this service
Operating expenses are vital as these workers keep your business running.
Tips To Maximize Your Income As A Builder
Builders will likely make a higher profit by quoting per construction project as opposed to per hour. Doing so will allow the builder to ensure their overhead and profit margin are guaranteed, barring unforeseen expenses.
Despite the necessary expenses, builders are able to bring home a pretty penny if they do their research right and are well-known for their work. Builders with stellar reputations are able to charge more for their services as people are willing to pay higher rates for work they can trust.
Good builders will maximize their profit and not have to delay starting a project by having a reliable network of:
It is beneficial for a builder to understand basic accounting and labor law. Doing so will immensely reduce their business risk as they will be able to ensure their business is effectively run.
There are several expenses that are unavoidable for a builder; however, there are ways builders can reduce their fees and overhead costs to maximize their profit without sacrificing the quality of their work.
How Builders Can Reduce Their Expenses And Overhead Costs
Careful planning will significantly benefit a builder as this will ensure that they do not incur avoidable and unnecessary expenses. While there are circumstances that you cannot prevent or foresee happening, planning for potential risk will reduce the likelihood that unforeseen circumstances will eat into your profit.
#1: Having Strong Administration Skills
For example, It is advisable to forecast what building materials will cost in the near future. If there is a product that has had a backlog, it’s best to consider a suitable alternative or add a markup to the materials to cover the potential increase in price.
It is further vital that all due diligence has been done and that measurements have been carefully recorded. Ordering an unnecessary excess of material can lead to wasted costs, or ordering an insufficient amount of material can also lead to wasted costs if matching materials cannot be sourced.
Finding the most effective insurance for the lowest price is further highly recommended. Always do your homework before signing up with an insurance company and check that they have good reviews.
The last thing you will want is to argue with your insurance company when the worst-case scenario occurs, only to find out you are not adequately covered. Going the extra mile to find the right insurance company will save you:
Having a reliable team to work with will additionally result in a higher income in the long run. If you have people you can trust to get the job done correctly the first time, you won’t have to spend more time and costs fixing others’ mistakes.
As mentioned, it is beneficial to builders to have a database of excellent subcontractors and construction workers to avoid losing out on a job that comes with a time crunch. This database of subcontractors will further give you peace of mind knowing you can trust the people you work with.
#2: Having A Trusted Network Of Suppliers
Builders have to be able to guarantee their work, and if they have made a mistake in their work, it must be fixed using their own costs. Furthermore, having trusted suppliers who you have worked with will maximize your profit as you will not have to replace defective materials.
It is crucial for builders to have a network of suppliers who they can rely on to source and deliver their building materials with ease. Once a builder has established a good working relationship with a supplier, they can potentially negotiate lower prices with the guarantee of a steady stream of orders.
This is a win-win for builders and suppliers.
#3: Comply With Labor, Building, And Tax Laws
Another way to reduce unnecessary costs as a builder is to ensure that your business and construction team are all compliant with tax and work laws. You don’t want to be slapped with a hefty fine or, even worse, have to shut down your business because you have not followed the fundamental laws of the country you work in.
Paying an accountant or lawyer to ensure you are compliant may feel counter-productive at first, as it will eat into your costs. In the long term, it can save thousands of wasted costs if your business is compliant from the start.
Smaller or newer businesses make the mistake of believing they are exempt from strict accounting and legal compliances. It is best to be prepared for your business to be booming and have good systems in place, even if you only have small projects at the moment.
#4: Purchase Your Own Equipment
It can become more expensive if a builder is required to continuously rent equipment for each project, as this increases the builder’s risk as well. On the alternative side, renting equipment means that the builder is not liable for maintenance.
While equipment is expensive, it is worthwhile for a construction business to purchase its own equipment. This will also enable them to rent out their equipment to competitors and, in turn, maximize their profit in slower business months.
#5: Additional Tips To Save On Expenses
Furthermore, a builder can save on indirect costs if they are willing to do the administration work and bookkeeping themselves, with a few things bought on Amazon like this. This can be risky, but entrepreneurs often wear many hats. There are several courses available to learn administration skills if this is a route you choose to take for your business.
Keeping track of your expenses and business costs will ensure that you do not waste any unnecessary costs, which is wasted profit at the end of the day. Maximizing your profit as a builder is simple if you have the right connections and understand business basics.
Becoming a builder is rewarding; if you run a successful company, you could bring home more money than expected. Good business people think of their clients first and ensure that they have a reliable team to work with.
While maximizing profits is essential for a thriving business to survive in the long term, cutting corners and raising your prices to exorbitant levels will ultimately cause you to lose business.
Be wise in the areas where you choose to cut unnecessary costs, but remember to respect your:
A builder’s profit margin will vary from project to project, but on average, builders can expect to make a profit of between 15% – 23%. Builders can use various highly effective methods to increase their earnings, and proper administration will be incredibly beneficial when determining the best business practices to ensure a higher income.
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