NAHB analysis of the latest Economic Census data shows that, on average, residential construction establishments were able to cover their hard and soft construction costs and generate positive profits in 2012.

The 2012 data show that the direct costs of construction – consisting of construction payroll, costs of construction work subcontracted out to others, and costs for materials/supplies – vary from 65 percent of total revenue of specialty trade contractors to 87 percent of the business receipts of multifamily general contractors without land costs. For single-family general contractors (who build on land customers own), the direct costs of construction consume on average 81 percent of the total revenue.

For single-family general contractors, 7 percent of total business receipts go to pay wages of construction workers. Specialty trade contractors, who maintain larger construction payrolls and subcontract out a minimum amount of work, spend on average 19 percent of total revenue on construction payroll. In sharp contrast, multifamily general contractors who subcontract out most of the work, spend only 3 percent on the construction payroll. Their biggest expenditure is the cost of construction work subcontracted out to others, 63 percent of the total revenue. This by far exceeds the typical spending on subcontractors by single-family general contractors – 36 percent, residential remodelers – 28 percent, and specialty trade contractors – 10 percent.

Because multifamily general contractors outsource most of their construction work, they spend relatively less on materials, components, supplies, and selected power and fuels – 21 percent of total business receipts, compared to 37 percent by single-family general contractors, 31 percent by residential remodelers, and 36 percent by specialty trade contractors.

When it comes to company overhead, the Economic Census collects data on wages of non-construction workers (including supervisors above the working foreman level) and various operating expenses separately. For operating expenses, the data are collected individually on rental payments for buildings and machinery, capital expenditure, retirements, expensed equipment, software, data processing, communication services, repairs and maintenance to building and/or equipment, utility payments, marketing, professional services, government taxes/fees and other expenses.

As of 2012, non-construction payroll accounts for 8 percent of business receipts of remodelers and specialty trade contractors. Single-family and multifamily general contractors spend 5 and 6 percent, respectively, on wages of non-construction workers.

Residential remodelers and specialty trade contractors report the highest non-labor overhead expenses, 16 and 13 percent of their annual receipts, respectively. For single-family general contractors, the non-labor operating expenses consume 10 percent of the revenue. Multifamily general contractors, who subcontract out most of their construction work, report the lowest non-labor overhead – 6 percent of annual receipts.

The reported residual profit is the leftover revenue after deducting the direct costs of construction and overhead expenses reported in the Economic Census. The Economic Census does not directly collect data on owners’ compensation. Consequently, in unincorporated companies, proprietors’ income is captured in the residual profit. However, in corporations, owners’ salaries would appear in the non-construction payroll.

As of 2012, the highest residual profit is reported by specialty trade contractors, averaging around 11 percent of the total business receipts; the lowest is reported by multifamily general contractors – 2 percent of the total revenue. Single-family general contractors and residential remodelers average around 5 and 9 percent of the annual business receipts in residual profits, respectively.

Considering that different builders calculate overhead and profit differently, the Economic Census data might not be directly comparable to a particular company’s financial definitions. However, the Economic Census data provide a general operational benchmark for home building companies.

Since land costs are not collected by the Economic Census, operational benchmarks for land developers and speculative builders (who build on land they own and control) are not considered in the NAHB study.

Tags: construction, construction materials cost, construction payroll, economics, home building, homebuilder overhead costs, homebuilding profits, labor cost, operating expenses