Welcome to the second in my series of blog posts on the Business of Building. We started Part 1 with a quiz. I asked what the average Net Profit for a Builder is in a normal market. The correct answer was C. 3.7% to 8.7%. That was based on the National Association of Home Builders 2004 Cost of Doing Business Study. Here is today’s quiz.
In 2008, what was the average Net Profit for a Builder? Was it
A. 11.0% to 20.0%
B. 14.4% to 15.1%
C. 0.0% to 4.4%
D. -3.7% to -1.4%
The correct answer is D. -3.7% to -1.4%. It should be no surprise that the results for 2008 vary considerably from the results for 2004 especially if you are a Builder. As with the 2004 Cost of Doing Business Study, the range reflects the differences between Builders who built on land they developed or purchased and Builders who built exclusively on their customer’s land. Builders who built exclusively on their customer’s land were the only Builders who made a profit.
As noted in Part 1, the difference between the Builder’s Gross Profit Margin and Net Profit is the Builder’s expenses which included his or her General and Administrative Expenses, Financing Expenses, and Sales and Marketing Expenses. General and Administrative Expenses ranged from 5.8% to 13.1% and include employee salaries; payroll taxes, insurance, and other benefits; office expenses; vehicle expenses; taxes; general liability insurance; accounting and legal service fees and expenses, and depreciation. Financing expenses ranged from 0.4% to 3.4% and include interest lines of credit and construction loans; and closing costs. Sales and Marketing expenses ranged from 0.5% to 8.1% and include commissions, website hosting and maintenance, and other advertising and promotion expenses.
One thing that didn’t vary considerably between the 2004 study and the 2008 study was the Cost of Sales, which includes the land cost, the direct costs (the sticks and bricks and labor), and the indirect costs (permit fees, temporary utilities, etc.) In 2004, the Cost of Sales ranged between 79.1% and 83.2%.
In 2008, the Cost of Sales ranged between 80.1% and 90.6%.
As I cautioned in my last post, if you are waiting for the price of that new home you’d like to build to drop further? I wouldn’t.
Chuck Miller GMB CGP CGB MIRM CMP MCSP CSP
President / Builder – Chuck Miller Construction Inc.