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The Future of Home Building and Residential Construction

Have you ever wondered how your builders salary compares with others? Are you underpaying yourself?

What about the way you price your jobs? How does it match up with industry benchmarks?

Unfortunately, too many residential home builders are undercharging for jobs, working on razor-thin margins, and subsequently taking far less than the market salary for all the work they do.

It all comes back to the level of financial understanding in the building industry. Despite this improving, according to a recent industry report published by the Association of Professional Builders, one-third (29.5%) of builders still don’t understand the difference between margin and markup!

A better understanding of construction finances will lead to improved margins and a more financially viable business.

Keep reading to find out how to improve your building company finances and your salary as a result…

A Common Mistake Builders Make When Pricing Projects

A large portion of home builders price projects by simply adding a percentage or dollar amount to the cost of labor and materials. It’s known as a cost-plus pricing model.

Unfortunately, this doesn’t guarantee a net profit from the work you complete. When cost overruns happen your profit disappears and the amount you take home becomes less and less.

If you’re operating a building business on the false assumption that a percentage markup will equate to profit, you’ll likely run into trouble at some point. It doesn’t factor in overruns and your fixed expenses.

How Builders Can Improve Their Financial Understanding

Here are some tips for builders who are eager to understand their finances with more clarity:

  • Learn about the difference between markup and margin to correlate your profit with the company’s fixed expenses.
  • Review every project at its completion to learn more about your cost overruns and timelines, and improve the accuracy of budgets.
  • Get comfortable with your fixed expense-to-revenue ratio so that you can price your projects effectively.
  • Consider using a different pricing model for your projects which adds a net margin rather than a gross margin.

Understanding Fixed Expenses and Your Break-even Point

To expand on the bullet points above, let’s take a closer look at the fixed expenses of a building company and how they affect your break-even point for a project.

In an ideal world, you’ll add a net margin to your projects that factors in fixed expenses, rather than a gross margin that only looks at project and material costs. The fixed costs you should attribute to a job directly correlate to your capacity and concurrent jobs.

For example, a building company with fixed annual expenses of $840,000, needs to apply $3,500 of fixed expenses to projects per day to break even. You can quickly calculate this figure by dividing your total yearly fixed expenses by 240, the number of working days in the year.

Say this building company is running four projects concurrently, they should attribute $875 of fixed expenses per day, per job - $3,500 divided by four.

To break even on these jobs, the builder simply needs to multiply the $875 figure by the number of working days the project will run and add it to the other costs associated with that project, such as labor, materials, etc.

Now, any amount you add to this new cost figure that includes both variable and fixed costs for the job will be pure net profit.

Taking Back Control and Paying Yourself a Market Builders Salary

An alarming number of builders are not only underpaying themselves, but pricing jobs without considering their fixed expenses and putting the entire business at risk.

By factoring fixed expenses into your project pricing and adding a net margin, you put yourself in a position to earn the salary you deserve for the hours you put in.

Want to benchmark your salary and building company finances against others in the industry? Download the State of Residential Construction Industry Report here.