What is a Reasonable Profit in Construction?

Minimum Bottom Line Profit Should Average 9.4%!
For Trades & Subcontractors, at Least 11%
After Income Taxes Are Paid!

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 will follow this schedule:

Minimum Net Profit                             >7%
50th Percentile Bracket                           9%
Upper 10% of All Contractors             12%
           After All Income Taxes Are Paid!

AND this includes 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?

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I have written several articles related to this exact issue:

  • Contractor’s Profitability – a very simple job as an illustration in the mindsets of both the homeowner and the contractor in determining a reasonable profit for the work done.  
  • Profit Standards for Residential Contractors identifies the various groupings and types of residential contractors and their associated net profit margins.
  • Mark-Up Percentage for Re-modelers – this article restricts the formula to re-modelers and additions. The formula works exactly like the formula in this article but adjusts for the issues related to this segment of the residential construction industry.
  • Margins in Construction –  this particular article goes beyond the scope of just residential construction and includes those contractors in the multi million dollar range. In general the margins decrease with volume related to several factors. The formula is modified and expanded upon with this article.

Before we answer these two questions, let’s first define several layers of profits. Once we agree to the terminology, then

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