Residential Roofing Contractors – Financial Performance Standards


The national average sales for the upper 20% of residential roofing contractors are slightly greater than $3 Million per year. A typical small roofing contractor will have a couple of crews working various projects and frequently sub out jobs. In addition, the owner acts as a project manager and there are one to two estimators depending on the volume of work.

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.
Income Statement
Year Ending 12/31/19
Roofing Contracts (347 Jobs)                        $4,618,900
Inspections/Certificates (587 Units)                   279,300
Service                                                                  48,500
Total Sales                                                                         $4,946,700  
Costs of Construction:
   Materials                                                        1,849,800
   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
   Equipment                                                          43,700
   Other                                                                   67,600
   Sub-Total Indirect Costs of Field Production                   572,800
Gross Profit                                                                        $1,640,000
Overhead:

  Officers/Staff                                                     467,700
  Facilities                                                            151,200
  Office Operations                                                93,600
  Taxes & Compliance                                         211,100
  Capital                                                                 59,800
  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.

Financial Results

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
Labor                                                                                                   1,206
Other                                                                                                       885
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
Labor                                                                                                   4,600
Other                                                                                                       915
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.

Value Investing

Do you want to learn how to get returns like this?

Then learn about Value Investing. Value investing in the simplest of terms means to buy low and sell high. Value investing is defined as a systematic process of buying high quality stock at an undervalued market price quantified by intrinsic value and justified via financial analysis; then selling the stock in a timely manner upon market price recovery.

There are four key principles used with value investing. Each is required. They are:

  1. Risk Reduction – Buy only high quality stocks;
  2. Intrinsic Value – The underlying assets and operations are of good quality and performance;
  3. Financial Analysis – Use core financial information, business ratios and key performance indicators to create a high level of confidence that recovery is just a matter of time;
  4. Patience – Allow time to work for the investor.

If you are interested in learning more, go to the Membership Program page under Value Investing section in the header above. 

Join the value investing club and learn about value investing and how you can easily acquire similar results with your investment fund. Upon joining, you’ll receive the book Value Investing with Business Ratios, a reference guide used with all the decision models you build. Each member goes through three distinct phases:

  1. Education – Introduction to value investing along with terminology used are explained. Key principles of value investing are covered via a series of lessons and tutorials.
  2. Development – Members are taught how pools of investments are developed by first learning about financial metrics and how to read financial statements. The member then uses existing models to grasp the core understanding of developing buy/sell triggers for high quality stocks.
  3. Sophistication – Most members reach this phase of understanding after about six months. Many members create their own pools of investments and share with others their knowledge. Members are introduced to more sophisticated types of investments and how to use them to reduce risk and improve, via leverage, overall returns for their value investment pools.

Each week, you receive an e-mail with a full update on the pools. Follow along as the Investment Fund grows. Start investing with confidence from what you learn. Create your own fund and over time, accumulate wealth. Joining entitles you to the following:

  • Lessons about value investing and the principles involved;
  • Free webinars from the author following up the lessons;
  • Charts, graphs, tutorials, templates and resources to use when you create your own pool;
  • Access to existing pools and their respective data models along with buy/sell triggers;
  • Follow along with the investment fund and its weekly updates;
  • White papers addressing financial principles and proper interpretation methods; AND
  • Some simple good advice.

Value Investment Club

Please Signup
*
Username
Username can not be left blank.
Please enter valid data.
This username is already registered, please choose another one.
This username is invalid. Please enter a valid username.
*
First Name
First Name can not be left blank.
Please enter valid data.
This first name is invalid. Please enter a valid first name.
*
Last Name
Last Name can not be left blank.
Please enter valid data.
This last name is invalid. Please enter a valid last name.
Website (URL)
Website (URL) can not be left blank.
Invalid URL
Invalid URL
*
Email Address
Email Address can not be left blank.
Please enter valid email address.
Please enter valid email address.
This email is already registered, please choose another one.
*
Password
Password can not be left blank.
Please enter valid data.
Please enter at least 6 characters.
    Strength: Very Weak
    Select Your Payment Gateway
    How you want to pay?
    Payment Summary

    Your currently selected plan : , Plan Amount :
    , Final Payable Amount:
    Submit
    Please follow and like us: