For readers, their primary concern is the profitability of a residential roofing contractor. A simple answer is 14%. But it is never that simple. Each contractor is different in how they exist as a legal entity; how much is paid to the owner as compensation; and how is the company organized or structured? All of these questions greatly impact the ability of a residential roofing contractor to generate a net profit of more than 14% annually. For those readers that are homeowners and wondering how much your local roofer is earning off your roof, you may believe that 14% is excessive. The simple truth is that it is NOT. Earning 14% versus the risk the contractor assumes for call backs, leak damage and injuries on the job site is acceptable. Given the nature of what is involved and the risks, 14% is actually low.
Take a look at a simple profit and loss statement for a residential roofing contractor:
XYZ Roofing Inc.
Year Ending 12/31/19
Roofing Contracts (347 Jobs) $4,618,900
Inspections/Certificates (587 Units) 279,300
Total Sales $4,946,700
Costs of Construction:
In-House Labor 581,600
Out-Source Labor 97,300
Other (Debris Removal/Safety/Tooling) 205,200
Sub-Total Costs of Construction 2,733,900
Field Production Profit $2,212,800
Indirect Costs of Field Operations:
Estimators/Inspectors/Project Management 249,500
Transportation (8 Vehicles) 92,300
Insurance (WC, GL, E&O, Bonds) 119,700
Sub-Total Indirect Costs of Field Production 572,800
Gross Profit $1,640,000
Office Operations 93,600
Taxes & Compliance 211,100
Sub-Total Overhead $983,400
Net Profit (After Taxes) $656,600
XYZ’s net profit after taxes as a percentage of sales equals 13.2%; just shy of the 14% minimum. However, in XYZ’s case, the owner of the company pays himself $175,000 per year as his salary. This is about $40,000 more than average. In addition, the company rents space that is owned by another legal entity that is also owned by XYZ’s owner. In effect, XYZ pays a premium for facilities.
Overall, the owner of XYZ is able to pay himself more than a reasonable salary plus earn more than 14% net profit after taxes when the financials are adjusted for these excessive costs.
Before evaluating XYZ’s performance, take a look at the overall picture.
During 2019, XYZ performed 347 jobs for a total of 9,480 squares of work. XYZ ran two crews and outsourced high-end non-traditional roofs (slate, ceramic, metal, cedar shakes) to a third-party sub-contractor. In addition, XYZ performs roof inspections and issues LeakFREE® certificates under the guidelines of the National Roof Certification and Inspection Association (NRCIA.org). Approximately 30% of the repair contracts are a result of the inspection process.
XYZ utilizes two crews to perform the respective jobs. The first crew is used to train new employees and limits the work to simple roofs with reasonable or low pitches, i.e. less than ½ pitches. To keep the roofs simple, this particular crew rarely has to address multiple valleys, complex flashing issues and dormers. The key for this crew is volume. A typical home has between 24 and 31 squares of shingles; thus, with a six-man crew they are able to do this project in one day. During 2019, this crew completed 231 projects.
The second crew does the more complex work; roofs with higher pitches, multiple stories, dormers, valleys, hips, and flashing requirements. In general, this crew’s more complex roofs utilizes safety equipment; and the square footage is often much greater than the first crew’s roof size. The members of this crew all started out as members of the first crew (they acquired their training under the guidance of the first crew’s foreman). No member has less than one year of experience on the second crew. All the second crew members are paid higher wages than the first crew and experience better benefits from the company. A typical project takes about 3 days to complete. During 2019, this crew performed 92 projects.
The out-sourced work was done by several different sub-contractors, each with different skill sets. Out-sourced work performed 24 projects in 2019.
To manage the crews, XYZ utilized one project manager. This project manager’s sole responsibility was to organize the materials; ensure all tools and services were at each job prior to either crew’s attendance. He had to address weather issues, communicate with the homeowners; get the debris removed; and facilitate the schedules of work and crews. Any minor call back issues were his responsibility.
XYZ employed two estimators and both are qualified as inspectors. Each estimator/inspector could perform 2 inspections per day and submit 3 estimates per day. Overall, during 2019, the estimators prepared 1,201 estimates. The closing rate was almost 29%. Thus, XYZ would estimate 3.1 jobs and contract 1 job. In comparison to other roofing contractors, XYZ had a lower closing rate on average; however, the entire organization’s culture accepts this lower rate because of their pricing model. In effect, XYZ demands greater margins than other residential roofing contractors and understands when a potential job is denied by the customer. The customer is price conscious.
XYZ utilizes work order software that follows a lead creation all the way through final presentation of a warranty certificate upon completion. This software has a communication portal for the customer; all documents are electronically created, signed and stored on a server. The software includes customer selections, various meetings with notes and work schedule. Field crews load their respective times and indicate start/completed dates. The entire field production is managed with this software.
A typical job performed by the first crew follows this pattern:
27 Squares with one Valley and Debris Removal $12,940
Cost of Materials 5,053
Job Profit $5,796
Job profit margin is 44.8% with a markup on costs of 81%.
A typical job performed by the second crew follows this pattern:
34 Squares with eight Valleys/Flashing/ Debris Removal $22,750
Cost of Materials 9,043
Job Profit $7,802
Job profit margin is 34.3% with a markup on costs of 54%.
In general, the second crew jobs are less lucrative to XYZ; however, over time the company has learned that this particular market is more price sensitive than the lower end market. The offset is that since each job is significantly greater in value than a first crew one, the absolute dollars earned on each project is much greater.
Total contributions toward field production profit are as follows:
First Crew (231 jobs @$5,800/each) $1,339,800
Second Crew (92 jobs @$7,800/each) 717,600
Total Field Production Profit Contribution $2,057,400
The 24 projects completed by the out-sourced labor and the respective inspections/certifications contributed the difference ($155,100) with field production profits.
Overall, this financial standards performance model reflects the residential roofing industry. XYZ relies on a strong organizational structure to enforce and comply with a set of high standards of performance and financial outcomes.
If your residential roofing business does not mimic this model adjusted for the number of jobs and staff; consider learning more about how to achieve these standards. Join as a member of the NRCIA and gain access to the various resources needed to achieve success. Act on Knowledge.