It costs a lot more than you realize to build a home or perform residential repairs. This article looks at both the homeowner’s and contractor’s perspective of what one perceives and the other actually incurs.
What is a Reasonable Profit in Construction?
For any company, a reasonable profit is based on the risk reward concept. With construction, what is a reasonable profit? Owners of construction companies should expect a profit of seven to nine percent per year net of taxes throughout the entire economic cycle. This profit is net of a reasonable compensation package to the owner for their management services.
For any company, profit is based on the risk reward concept. With construction, what should be the profit (reward) given the risk? What is a reasonable expectation given the industry and the particular business? There is no single correct answer. The construction industry is divided into several significant branches. This article is focused on the residential contractor.
From the new home builder to the re-modeler, a reasonable profit given the risk should be no less than 9% AND this is net after a reasonable salary to the owner for his management role. This is the take home or actual bottom line profit; the amount after taxes. How do you derive such a figure? How do you determine the markup on the construction project to end up with this profit?