Archive for builder profit

The Challenge of Affordable Housing – Part 1 a

As I noted in my last blog, during the Building Contractors Association of Southwestern Idaho Political Action Committee interviews of candidates for public office, the majority of the candidates cited the lack of affordable housing as one of major the issues facing us. During the discussions, a number of the candidates said they understood that it is a supply and demand issue.

The more I thought about it, the more I felt the need to dispel some possible misconceptions regarding the supply and demand issue.  A commonly held misconception regarding supply and demand and its impact on pricing is that providers increase prices when demand exceeds supply and decrease prices when supply exceeds demand.  While this might be true in some industries, it isn’t true in homebuilding. Builders use the same mark-up percentage on their direct cost (the sticks and bricks) regardless of demand to calculate the sales price. Builders typically use a 15% to 20% markup. Markup is also referred as the expected or planned Gross Profit Margin.  The markup covers the Builders operating expenses which include financing expenses, sales and marketing expenses, general and administrative expenses (overhead), and the owner’s compensation, and the Builder’s Net Profit Before Taxes. It also covers Slippage – the variance between the Builder’s expected or planned gross profit margin and what is actually attained for a given period or particular job.  Slippage can result from a number of factors including but not limited to unanticipated increases in material and labor costs, delays due to lack of skilled trades or inclement weather, or other factors beyond the Builder’s control.  It can also result from increases in financing expenses due to unanticipated delays in selling the home.

The National Association of Home Builders (NAHB) has been conducting a biennial survey of its builder members and compiling the findings into a publication titled The Cost of Doing Business Study since 1970.  As shown in the table below excerpted from the latest study, during that time, the average Gross Profit for Builders has ranged from 14.4% in 2008 to 23.9% in 1978 with the average being 19.29%. The average Net Profit Before Taxes for Builders has ranged from minus 3.0% in 2008 to 10.0% in 1991 with the average being 5.1%. In 2017, the most recent year for which numbers are available, The Cost of Doing Business Study, 2019 Edition, the average Net Profit Before Taxes was 7.6%.

While it is not a factor in how Builders determine their markup, supply and demand is a factor in the direct cost of the home. The biggest impact of supply and demand has been in the finished lot cost. Over the years, NAHB has periodically conducted “construction cost surveys” to collect information from builders on the cost of the various components that go into the sales price of a typical single-family home.  

As shown in the tables below, the cost of the lot as a percentage of the sales price was 20.3% on 2009 and 21.5% in 2017. But those percentages don’t tell the whole story. In 2009, the average lot size was approximately 21,879 square feet – approximately ½ acre.  In 2017, the average lot size was approximately 11,186 square feet – approximately ¼ acre. The average cost per square foot of a finished lot in 2009 was $3.50.  The average cost per square foot of a finished lot in 2017 was approximately $8.22 – an increase of approximately 235%. 

While supply and demand is a factor, it is not the only factor impacting the cost of the lot as we will discuss in The Challenge of Affordable Housing Part 2 – The Cost of Regulation

Posted in: builder profit, building, cost of building, home building, home buyers, homeownership, housing affordability, housing for all, land development, Uncategorized

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The Happiest Careers in America – Where’s Homebuilding?

Forbes published an article today titled “The Happiest Careers In America.” The article highlights the results of a new survey from job site that revealed the top ten happiest professions in America. The survey results measured nine factors of workplace happiness, including the individual’s relationship with their boss and co-workers, their work environment, job resources, compensation, growth opportunities, company culture, company reputation, daily tasks and job control over the work that they do on a daily basis.

Homebuilding was not one of the ten happiest careers. As I read the article and viewed the slideshow of the “10 -Happiest Jobs in America”, I realized that they had obviously made a mistake. Why do I say that? Let me explain.

I teach the National Association of Home Builders “Business Management for Building Professionals” course. One of the slides from that course contains a picture of 14 different hard hats – each one representing a different role or job within a small volume building company. The building professionals in the class are asked “How Many Hats Do You Wear?”

According to the Census Bureau, as of 2007, there were almost 2.6 million nonemployer residential construction and specialty trade contracting firms, including foundation, framing, siding, masonry contractors, stucco, electrical, plumbing, heating, air-conditioning, drywall, painting, flooring, and landscaping contractors. So, naturally, the typical small volume builder wears many hats and fills many roles in his company. As I viewed the slideshow of the “10 -Happiest Jobs in America”, I realized that a career in home building typically encompasses 7 of the 10 careers listed as the happiest.

No. 2 – Customer Service. Customer service professionals enjoy working directly with customers, helping people, managing conflict, and problem solving.

No. 3 – Education. Home builders are educators. We educate our customers about the building process and we educate our trade contractors on how we prefer our homes to be built

No. 4 – Administrative – Clerical.  These professionals simply feel good about their daily tasks. They keep things running smoothly.

No. 5 – Purchasing – Procurement.  These professionals are responsible for purchasing the materials and goods for their companies. Their satisfaction stems from relying on their superior negotiating skills to secure the best deals possible.

No. 6 – Accounting.  The professionals hold the purse strings and ensure that their companies are run efficiently, that records are kept accurately, and that taxes are paid properly and on time.

No. 7 – Finance.  These professional handle transactions and provide guidance to make sound investment decisions.

No. 8 – Non-Profit Employees.  According to the National Association of Home Builders latest “Cost of Doing Business Study,” the average small-volume builder in 2008 had a net loss $53,000 or 1.4%. Non-profit employees derive satisfaction from doing good. Abraham Lincoln said that “The strength of our nation lies in the homes of its people.” Seeing a family move into a new home you built just feels good.

The only careers not encompassed by home building were No. 1 – Biotechnology, No. 9 – Health Care, and No. 10 – Legal. So, if you’re chosen career in home building, you’ve chosen one of the happiest careers in America. Don’t you agree? I do.


President / Builder – Chuck Miller Construction Inc.

(208) 229-2553

Posted in: builder profit, building, home building

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The Business of Building – Part 1

Welcome to the first in my series of blog posts on the Business of Building.  Let’s start with a quiz.

In a normal market, what is the average Net Profit for a Builder?  Is it

  1. 21% to 30%
  2. 17.3% to 20.9%
  3. 3.7% to 8.7%
  4. -5% to 0%


It has been my experience as a home builder that most home buyers have a real misconception regarding what percentage of the price of a new home is the Builder’s profit.  The correct answer is C, 3.7% to 8.7%.  The range reflects the differences between Builders who built exclusively on their customer’s land, Builders who built on land they developed or purchased, and Builders who built on both.

Type of Builder Gross Profit Margin Net Profit
All Builders 17.3% to 19.0% 3.7% to 5.4%
Small-Volume Builders (1) 16.8% to 19.5% 3.2% to 5.5%
Production Builders (2) 18.5% to 20.9% 5.4% to 8.7%
Notes:(1) Builders who build 25 or fewer single-family homes per year
(2) Builders who build 26 or more single-family homes per year
Source: NAHB Cost of Doing Business Study


The difference between the Builder’s Gross Profit Margin and Net Profit is the Builder’s expenses which include his or her General and Administrative Expenses, Financing Expenses, and Sales and Marketing Expenses. General and Administrative Expenses range from 8.3% to 12.9% and include employee salaries; payroll taxes, insurance, and other benefits; office expenses; vehicle expenses; taxes; general liability insurance; accounting and legal service fees and expenses, and depreciation.  Financing expenses range from 0.3% to 0.9% and include interest lines of credit and construction loans; and closing costs. Sales and Marketing expenses range from 0.9% to 3.8% and include commissions, website hosting and maintenance, and other advertising and promotion expenses.

The Net Profit is what enables the Builder to continue to operate when business is slow and revenues are down.  It’s what enables them to perform warranty and maintenance services on their finished homes.

According to, the average sales price for new homes is approximately $190,000 in Ada County and $145,000 in Canyon County.  For a small volume builder in a normal market, the average net profit on that new home in Ada County would be somewhere between $6,080 and $10,450. Considering that new home takes approximately 90 to 150 days to build, that equates to $1,216 to 3,483 a month.

Are you waiting for the price of that new home you’d like to build to drop further?  I wouldn’t.

Chuck Miller GMB   CGP  CGB   MIRM   CMP   MCSP   CSP

President / Builder – Chuck Miller Construction Inc.

(208) 229-2553

Posted in: builder profit, building, home building, real estate

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