Profit margins are a critical metric for any business, and it is crucial that homebuilders and remodelers understand it fully. Profit margins are the percentage of revenue that remains after all expenses have been deducted from the sales.
In other words, it is the profit earned by the company on each dollar of revenue generated.
According to our recent study, the average annual revenue of residential remodelers was around $1,200,000.
- How to make $1,000,000 as a residential remodeler
Knowing your profit margin is essential because it helps you determine if your business is profitable or not. A high profit margin indicates that your business is earning well, while a low profit margin could mean your company is struggling financially.
It’s essential to know your profit margin to make decisions about pricing, expenses, and investments in your business.
The average gross profit margin for the remodeling industry is 17.62%, and the industry average for home builders is 19%-20%, according to Chron.com.1 However, this profit margin can vary based on several factors, such as material costs, labor costs, marketing, and competition.
Material costs can significantly affect profit margins. Home builders and remodelers should look for ways to reduce the cost of materials without sacrificing quality. They can also explore alternative, cost-effective materials that offer the same level of durability and appeal.
Labor costs are another significant factor in determining profit margins. Efficient project management, regular training, and professional development for employees can help improve productivity and reduce labor costs. Additionally, outsourcing some work, such as accounting or marketing, to contractors can help reduce overhead expenses. Read our article on Employees vs. Subcontractors to learn how you can determine which is best for your business.
Competition is also a factor in determining profit margins. To stay competitive, home builders and remodelers should differentiate themselves from their competitors by offering unique services or providing exceptional customer service.
Protip: Check out our free Construction Labor Cost Calculator to calculate the total labor cost of your projects.
To improve profit margins, home builders and remodelers can consider cost management techniques such as optimizing inventory, negotiating with suppliers, and reducing waste.
Implementing a job costing system and managing your overall business finances is crucial to maximizing profits and minimizing overhead expenses. Keeping track of cash flow, maintaining inaccurate financial records, and regularly reviewing your project costs can help identify areas where costs can be reduced.
Calculating gross profit margins can help remodelers determine how much profit they are making on each project. The formula for calculating gross margin is:
Gross Profit = Revenue - COGS
To calculate the cost of goods sold (COGS), remodelers should include all the costs directly associated with the project, such as material costs, labor costs, equipment rentals, subcontractor fees, and any other expenses directly related to the project.
Here’s a step-by-step guide on how to calculate gross profit margins:
For example, if a home remodeling company generated $100,000 in revenue and has $70,000 in costs associated with the project, the gross profit would be $30,000. To calculate the gross margin, you would divide the gross profit by the total revenue ($30,000/$100,000) and get a gross profit margin of 30%.
Want to see how much revenue you need to generate as a home remodeler to achieve a desired net profit? Use the calculator below to adjust the numbers and see the results.
Once you’ve calculated your costs, you can determine your markup by adding a percentage to the total. A common markup range for remodeling projects is 10-20%, while specialty work may require a higher markup to account for the specialized skills and materials required.2
When communicating the reason for the markup to clients, be transparent about the costs involved in the project and the value you bring to the table. By emphasizing the quality of your work and your team's expertise, you can help justify the markup to your clients.
If negotiating is necessary, try to find a compromise that benefits both parties. Be willing to adjust your markup if necessary, but don’t compromise your profits to the point where it affects the quality of the project or your business’s bottom line.
To help demonstrate how the markup is applied in different scenarios, here are a few practical examples:
Total cost of materials and labor: $30,000
Markup total: $4,500
Total project cost: $34,500
Total cost of materials and labor: $10,000
Markup total: $2,500
Total project cost: $12,500
Total cost of materials and labor: $15,000
Markup total: $1,800
Total project cost: $16,800
Use the calculator below to quickly determine your markup based on your desired profit margin.
To maximize profits, remodelers can focus on controlling costs, strategic pricing, and identifying areas of inefficiency in their operations.
For example, they can negotiate better prices with suppliers, implement efficient project management systems to reduce labor costs, and use technology to organize costs and monitor budgets.
Strategic pricing can also help improve profit margins. Remodelers can conduct market research to determine the prices charged by competitors and price their services accordingly. Additionally, understanding profit margins can help businesses make informed decisions based on their profitability. By tracking profit margins over time, businesses can identify trends and make adjustments to their operations to improve profitability.
The remodeling industry is a highly competitive market where contractors are always looking for ways to improve their profit margins. A remodeling contractor’s profit margin is determined by the difference between revenue generated and the cost of goods sold (COGS).3 Let’s analyze the various factors that affect a remodeling contractor’s profit margin and suggest strategies for maximizing profit margins.
Labor costs make up a significant portion of the COGS for remodeling contractors. To improve profit margins, it is essential to manage labor costs effectively. One way to do this is by investing in training and development programs to increase productivity and reduce labor costs.
Material costs can significantly affect a remodeling contractor’s profit margin. Remodeling contractors should look for cost-effective materials without compromising on quality. Additionally, investing in equipment that increases productivity and efficiency can help reduce overall costs.
Permits can add extra cost to a remodeling project, and the amount can vary significantly depending on the location and size of the project. It is essential to factor in permit costs when estimating the total cost of the project to avoid any surprises that could negatively impact profit margins.
Overhead expenses such as rent, insurance, and utilities can add up quickly and significantly impact profit margins. To reduce overhead expenses, remodeling contractors should evaluate each expense and consider less expensive alternatives and/or re-negotiating contractors with vendors.
Marketing is an essential aspect of the remodeling industry. However, it can be expensive. To maximize profit margins, remodeling contractors should focus on cost-effective marketing strategies such as word-of-mouth referrals and social media marketing.
Trade partner costs refer to the costs associated with hiring specialized contractors to complete specific parts of the remodeling project. When trade partner costs are high, it can make it challenging to stay profitable.
On the other hand, if you’re able to negotiate lower trade partner costs or find reliable partners who offer competitive pricing, you can increase your profit margin. This can give you the flexibility to offer more competitive pricing to your clients while still maintaining a healthy bottom line.
Working with trade partners who provide quality products and services can also impact your reputation as a contractor. If you consistently work with reliable trade partners, your clients will notice and be more likely to recommend you to others. This can lead to more business and increased profits in the long run.
Here are some key ways you can maximize your profits on your remodeling projects:
There are many software options available that can help streamline the remodeling process and increase efficiency. With options like BuildBook, you can use estimating, project management, and communication tools to help you stay organized and on top of your projects.
BuildBook is the ultimate solution for remodelers who want to streamline their workflow, improve communication, and increase efficiency. With features like task management, drag-and-drop scheduling, budget tracking, and much more, BuldBook makes it easy to manage all aspects of your construction projects in one place — resulting in cost savings and increased profitability.
By using BuildBook’s financial tools, you can stay on top of your expenses and avoid costly surprises that can eat into your profit margins. With real-time cost tracking, you’ll know exactly where you stand throughout your projects, allowing you to make informed decisions that positively impact your bottom line.
While big box stores may be convenient, they often charge higher prices for materials. Consider researching alternative supplies or negotiating with local suppliers to get better pricing.
You can also consider using online marketplaces or auction sites to find high-quality, budget-friendly materials. By finding lower-cost suppliers, you’ll be able to reduce your material costs, resulting in increased profit margins.
Upselling is an effective strategy for increasing revenues without increasing workload. Consider offering your clients add-ons like smart home features, luxury finishes, or green materials.
By recommending these products and services, you can provide additional value to your clients and increase the overall price of the project. Additionally, you can consider offering financing or payment plans, which can make it easier for clients to invest in additional services.
Incorporating these strategies into your remodeling business can help you increase your profit margins while providing excellent service to your clients. By using remodeling software like BuildBook, sourcing materials from lower-cost suppliers, and selling additional services, you’ll be able to run a more profitable business.
Understanding the key factors that affect profit margins is essential for staying on top of your business. By closely evaluating the project costs, factoring in markup percentages, employing cost savings techniques, and researching potential projects thoroughly, remodelers can go a long way towards maximizing profits.
Taking into account all of these components will help keep your profits healthy while helping you to remain competitive in the marketplace. While it can be challenging to manage such a complex undertaking, taking the time to invest in making sure your profit margins remain strong will be beneficial in the long run.