When it comes to home repair, renovation, and construction, most homeowners run to expert home builders to get the job done quickly and properly. Homebuilders specialize in various home improvement projects such as trimming, concrete, framing, glass installation, plumbing, electrical, etc. When you need to get the home interior painted, leaking pipes repaired, or old roofing replaced, there are specific contractors that you need to call.
However, some general contractors manage major home improvement or construction projects that require more than one contractor or provider. Projects like home renovations, porch installation, and construction of additional spaces require the expertise of a general contractor. These contractors have their team of laborers, skilled workers, and professionals to complete the job. They also have networks of suppliers and sub-contractors who can handle specialty construction needs.
Like any other contracted service, home improvement contracting come for a fee. Usually, builders stipulate their profit margin in their cost estimate. But how much profit do builders earn on a house? And how much profit is fair?
Before the project starts, the general contractor provides a cost estimate or contract price. Once the homeowner agrees to the job order, the project can then start. Typically, the total project cost is broken down equally into three groups: materials and supplies, labor, and gross profit.
Let’s check out the breakdown of expenses of a home improvement job.
Materials and supplies cost (33%)
Materials account for a third of the project cost. These include construction supplies, finishing materials, job equipment, and special tools. Builders also include costs related to the delivery or mobilization of equipment or supplies to the site, as well as the protection of existing structures. The cost of materials is dependent on the quality of materials and the complexity of the project. In some projects, materials can account for more than 33%.
Labor cost (33%)
Another 33% goes to labor. This includes the salary of the professionals, work crew, and other employees. In projects with sub-contractors, payment for these providers is also included here. Some factors that can affect the labor cost include size, location, and complexity of the home improvement job.
Gross profit (33%)
This portion of the project cost covers the overhead expenses associated with the project which is typically around 23 to 25 percent. At around 33 percent of the project cost on profit, some homeowners mistakenly think that builders are making so much (and unfairly) in a home improvement job but this is not the case. The gross profit does NOT go directly to the builder.
According to tenant build-out contractors from AFS General, Florida, running a general contracting company entails overhead expenses, such as insurance, legal fees, sales commission, employee expenses, office expenses, equipment upkeep and storage, and construction management. Add to that, builders also assume wastages in materials or unforeseen changes in material price.
Assuming 25 percent of gross profit goes to overhead expenses; home builders will take only around 7 to 8 percent of the total project cost. Exceptional financial management, proper planning, and supervision are vital to improving the profit margin. Contractors who manage their projects properly, avoid losses, and optimize manpower may increase their profit by up to 10 percent – although this is unusual.
Generally, the profitability of a home builder depends on two things: an efficient business model and running it well. A profit of around 5-10% is a fair income that a builder earns from making a house. Having said that, you should be cautious about builders that promise a substantial markdown in their profit.
If a contractor offers an unusually deep discount, it can be very risky. The builder may cut corners in materials and labor to lowball the bid and win the contract. Worse, the contractor might run out of budget midway and be unable to complete the project. Likewise, if you only have a sole contractor, it might be possible that the contractor has jacked up the project price so they can make it appear that they have reduced the profit (when in reality they didn’t). As a homeowner, consider your home as your most priced property and should hire only the best builders.
Finally, it is really difficult to estimate how much profit builders make on a home improvement project. And since most builders are sole proprietorships or private corporations, they are not legally obliged to reveal their exact profit margins.