Eye On Housing
Findings from the recently released Remodelers’ Cost of Doing Business Study: 2017 Edition show that the net profit margin for the typical residential remodeler increased to 5.3% in 2015, up from 3.0% in 2011.
Combining all sources, remodelers reported an average $1.8 million in revenue for 2015, of which $1.3 million (71.1%) went to pay for cost of sales items such as labor, material, and subs. Subtracting these costs from revenue left a gross profit of roughly half a million dollars – or 28.9% of revenue.
Remodelers also spent an average of $420,000 in operating expenses (e.g. general and administrative expenses, marketing and finance expenses), thus ending fiscal year 2015 with $95,000 in net profit – a 5.3% net profit margin.
Remodelers’ gross and net profit margins in 2015 were higher than in 2003 and 2011, the last two times similar surveys were conducted.
In 2015, residential remodelers reported total assets averaging $414,000 on their balance sheets. About $279,000 (67.5%) of that was backed up by liabilities and the remaining $135,000 (32.5%) was held as owner’s equity.
The limited history available for this series shows that remodelers’ average assets in 2015 were higher than in both 2003 and 2011. In the meantime, the share of assets backed up by liabilities went from 62.5% in 2003 to 67.5% in 2015.
Similar results are available for single-family builders in a previous post.
Interesting article but it leaves further questions. Is the $95K net profit after taking a salary throughout the year or is that the remodelers’ total earnings for the year? If that’s their total earnings for the year that doesn’t leave much “net profit” for the company after paying themselves a normal salary, benefits, payroll taxes, etc. for the hours worked and the risks of running a business. When I see the words net profit, I consider that as business earnings after everyone has been paid, including the owners of the business.
Yes that’s how I see it. Owner’s salary is paid out of the gross profit. 5% net profit appears to be pretty average.
$95k net profit is, in fact, after accounting for owner’s compensation.
When a similar survey was first populated remodelers had trouble distinguishing net and gross profits and where to put owners compensation. The interpretation was that combining owners compensation + net profits (before taxes) should be closer to 20% in a really well run operation. Look to the compensation studies to get a feel for what owners pay themselves. In order to get good industry data standardization needs to be applied. Since owners do not standardize their draws then adding them to net profits gives a better picture of what an owner can make in the remodeling business.
I think NAHB needs to more clearly account for and identify company profit and owner’s compensation, since 95% of the time they are somewhat one and the same. A small remodeler doing 2 million$ a year, paying him/herself $100k in salary and nets $100k in company profit, just made $200k.
Allan, you are spot on. An owner can pay themselves $50k a year or $150k. That changes the net profit by $100k while still earning the same total income. I was more interested in knowing what remodelers total earnings are, not just the company’s net profits.
A smart business owner will consider their pay as cost of goods sold (if he/she is swinging the hammer) or overhead (if he/she is doing the behind the scenes stuff). Or perhaps a combination depending on how the company operates. For a company to be truly profitable it needs to have money left after paying for absolutely everything that it needs to operate and that includes the owner. If the owner pockets the net there is no profit, only income for the owner.
Matt, I totally agree with your comments. When the article was written it would have been helpful if it stated what the owners take as salary or distributions in addition to the net profit. That would have given a clearer picture of what remodelers actually earn in a year.
A question I have relates to the project management costs. That is, are project managers salaries charged to the job and included in the cost of sales or is their salary part of the operating expenses. Either way is acceptable, but it makes a difference when evaluating this information (the same way owner’s compensation does).