Industry benchmarks on profit margins, asset levels, and equity positions are important because they allow businesses to compare their performance to their peers, and that can be extremely helpful in identifying areas for improvement and increasing efficiencies. This is the reason why NAHB periodically conducts a survey asking single-family builders nationwide to (confidentially) provide us their income statements and balance sheets.  Complete results can be found in the recently released Cost of Doing Business Study: 2016 Edition, showing that profit margins continue to increase, but have yet to reach 2006-levels.

Builders reported an average of $16.2 million in revenue for fiscal year 2014, of which $13.2 million (or 81.1% of revenue) was spent on cost of sales (i.e. land costs, direct and indirect construction costs), thus leaving them with a gross profit margin of 18.9% ($3.1 million). Operating expenses (i.e. finance, sales and marketing, general and administrative, and owner’s compensation) consumed another $2.0 million (12.5% of revenue), and as a result, builders posted an average net profit (before taxes) of $1 million – a 6.4% net profit margin.

Profitability levels in 2014 are the highest reported in the Cost of Doing Business series since 2006. That year, the average gross profit margin for single-family builders was 20.8%; it then fell dramatically to 14.4% in 2008; and has been rising slowly but steadily since, up to 15.3% in 2010, 17.4% in 2012, and 18.9% in 2014.  The net profit margin, meanwhile, went from 7.7% in 2006 to -3.0% in 2008, barely turned positive in 2010 (0.5%), and made significant gains in 2012 (4.9%) and 2014 (6.4%).

Balance sheets for fiscal year 2014 showed that, on average, builders had total assets worth $9.2 million in their books that year. Of that amount, $6.2 million was backed up by liabilities (67.4% of all assets) and $3.0 million was held as equity (32.6%).

Looking at the balance sheet over the last few years shows that average total assets were not significantly higher in 2014 than in 2012 ($9.2 million vs. $8.9 million, respectively), but both of these years were good improvements over 2010, when assets only averaged $6.2 million. That number was about half the assets builders had reported in 2006 – $13.0 million.

The figure below also shows that builders were highly leveraged in 2006: they owed the equivalent of 74% of their assets to someone else.  As their balance sheets shrank over the next few years though, their reliance on debt declined as well, bottoming out at 64% in 2012.  Relying less on debt to finance their assets meant builders were using more of their own capital to do the job.  In 2006, equity accounted for 26% of builders’ assets, but by 2012, it had jumped ten points to 36%.

Further results from the study will be announced at a free webinar being held on Tuesday, March 22, from 2:00 – 3:00 p.m. E.T. Here is the link to register:  Cost of Doing Business Study Webinar.

Finally, the NAHB Economics team is currently conducting a similar survey among residential remodelers. If that is the primary activity of your firm, we need your help.  Without your data we can’t produce industry benchmarks.  Please email the author at rquint@nahb.org to participate.

Tags: construction, homebuilding profits, housing economics, profit margin