Profit Margins in Building

There are many variables which need to be taken into account to comment on profit margins such as the size and type of project, the type of contract, the overheads/administrative structure of the builder, number of sales and other staff employed, the economic state of the industry, whether renovations or new housing and so on.

Below are a few “ball park” estimates that vary from time to time. Note that small builders may put much larger margins on to cover their own personal supervision because they do not use employed supervisors.

For cost-plus contracts (where the client agrees to pay all costs, plus a specific percentage margin to the builder), a common practice is “costs plus 15 to 20 per cent margin”, although there are some contracts which include a margin as small as 5 per cent. The builder’s margin may also be a fixed amount. It is hard to generalise because projects differ in their size and complexity. Moreover, supply and demand factors will influence margin levels. Remember too that these are gross profit margins, out of which all business expenses must be paid, including salaries, advertising, telephone, leasing vehicles, taxation etc.

For the more usual fixed price contract offered by major builders, there are sometimes gross profit margins that fall somewhere between 16 and 22 per cent, although the figures would often be higher for high value homes. These apparently high gross margins are however greatly eroded by the large infrastructure, advertising and staff expenses carried by volume builders.

For example, display home leases and maintenance, multi-million dollar annual television and media advertising, salaries and sales commissions and unexpected cost increases (which cannot be passed on and must be borne by the builder) can eat into gross profits. Typical overhead costs may absorb around 18 per cent of sales revenue meaning that net profit margins before tax can typically range from 3 to 7 per cent.