Browse Forums Building A New House Re: Profit margin of builders 21Mar 03, 2009 2:19 pm Thanks for the insight folks.
Thlo, Using your rational about the huge profit margin try bargaining with Porter D, Metro.., Nat. Sim, Denis, Dev, etc etc about the price of their homes. A second hand car is not quite the same as a brand new unconstructed house. For a start it’s not subject to inflation or labour costs. As to the bargaining part, Try going into a display home and telling your car story to a sales person or the Managing Director then tell them you know how much they make and ask for a 20% discount. On a $200,000 home its only $40,000. Can someone please explain this? Recession, credit crisis, rising unemployment. Every new estate has at least 5 or 6 some more displays. Few customers and a lot of builders. So, if the profit is so high per home why not a price reduction to remain competitive? Since the profit margin is so high. Why aren’t most people owner builders, simple you could only save the builders margin, say 10 to 20k and for the hassle its not worth it. How many of you know how much a 2.4 m stick MGP10 cost per meter. A sheet of Plaster. How much is 1 brick, whats it cost per 1000 to lay them cash price? I was going to owner build so I know as I had to go round and get all the prices. The reality is not many people really have any idea what it cost to build a house. Just because it’s an expensive project they think the builder is to blame for the cost. “He or She is making too much profit.” It is true, very true. Builders make money from upgrades and from land... some are developers as well like Burbank, DFC & AVJ. Profit in building is tiny - and sometimes, like Wincrest it's not there at all. Ed Ed, Joles you seem to get my point. Up grades & site costs. I’ve read on this site the cost of peoples site costs and guess what, ask them did they ask how much per LM sewer, power, S. water connection was going to be before they fell in love with the Blanko 900mm oven. The "free" spa, I bet none. Joeyghb Loss leader that’s the plasma in Harvey .N. for $200 under cost. The term cost is open to interpretation also. Cost of TV + Import duty+ GST+ Delivery etc. They don’t loss on it they just break even and hope you buy the DVD & surround to go with it. 50 Homes a year that’s 1 per week completed and 2 weeks off for Xmas. $10,000 per home @200,000 = 5% profit before tax. Not exactly a big mark up. But volume, volume, Volume. Franko, While I am not in the home building business, I would question the sanity of anyone who involves them selves in a business that does not drive at least 15% profit. That's just my 2 cents. I’m with you mate I can get 4.2 % on my money in the bank. So why would I run a business on a 5 to 20% profit, with the current economic situation. We may never know exactly what profit is the builder’s margin. That’s why they PC items or put in rock removal sums. But I will tell you this I contacted the M.D. of a major player (builder) told he/she that I was impresses with their homes and was happy to build with them. I said I was looking for a long time and the price when up a few month back. Only $7,000, I said I will start pre. Contracts today if you can sell it to me at the last price. The house was well over $200,000 the answer was no. Then I said the air con up grade is 5,000 you buy them for about 2,500 at cost. If you put one in free I will sign up today. Sorry we can’t do it. My point is for 2,500 they let a 220,000 contract out the door. Why? is the profit that low, are they too busy building 200 houses per year in a recession & don’t need the work. Why are established house prices dropping and building going up? If I was a builder and someone came to me with 220,000 and said I can get this home for 10k cheaper with XYZ builders can you mach it. If my profit was 40 or 50 k and things are slow I would say yes. But it not happened yet for me. So as far as bargaining the price, you can do it with the smaller builders, but they are more than the Volume builders anyway. I personally think given inflation, the recession, credit crisis et al. The profit is not as high as most think. Would still like to hear from any builders or anyone who got a discount on base price from a major volume builder. Cheers Kind regards KW………………………. “It's just as unpleasant to get more than you bargain for as to get less” George Bernard Shaw. Re: Profit margin of builders 22Mar 03, 2009 2:47 pm King willy I’m with you mate I can get 4.2 % on my money in the bank. So why would I run a business on a 5 to 20% profit, with the current economic situation. To get the 4.2% interest from the bank, you need your own money. To get the 5 to 20% profit, it's someone elses money. I don't know about others, but I'd rather get 3% from other people's money than 4.2% using my own money. (Of course, I'll need to push any risk to the Owner (rock, etc).) To answer the question about builders' profit, my understanding is that it's 10% give or take 1%. This is different to markup, which is more like 20%. The difference covers supervision and back office expenses. Finally, for those that mentioned that steel prices have gone up, steel prices have dropped 8% this year. And they will drop even more. Demolition August 2009, Construction Started September 2009, Completed December 2010 Re: Profit margin of builders 23Mar 03, 2009 2:58 pm joeygbh franco I would question the sanity of anyone who involves them selves in a business that does not drive at least 15% profit. That's just my 2 cents. Over the long run yes, I'd do the same. You have to cater for the good and the lean times. Why would you go into business with all that risk for less than what you would earn by putting the same money in the bank? I could tell you... but then I would have to kill you... First, don't mix turnover up with funds employed. 2% sounds like a lousy return on investment. But it's 2% on revenue of say $225,000,000 which is $4,500,000. But it's the money invested to achieve the $225 million revenue that is important. So if that is say $20 million working capital to run the business that turns over $225,000,000, then the return on the money invested becomes $4.5 million in $20 million = 18%. And, whose money is used in building the house? The builder gets progress payments from the buyer, terms from the suppliers (average 45 days for materials)... his only need is to cover the gap. Now 2% sounds pretty good... Ed "ECOECO" At 'EcoEco', we design windows, we design the best windows, we do it for you, so that when you’re happy we are happy. Tel. 1800 326 326 Re: Profit margin of builders 24Mar 03, 2009 3:09 pm King willy Every new estate has at least 5 or 6 some more displays. Few customers and a lot of builders. I'd like to question this (nothing personal, just discussion)... every new estate is in the order of 1000-1500 homes and for the super estates e.g. Caroline Springs ~ 8,000. How many builders is a lot of builders? If there were so many builders why is there such a long build time between start-completion date? Take out council time etc, the turn over rate should be much higher, and we wouldn't have weeks/months where nothing is being done on our houses. Even in this recession time - it seems it still takes ages for a tradie to come out? Re: Profit margin of builders 25Mar 03, 2009 6:25 pm No idea about the project builders but custom builders aim for 20-25%.
Those that make even more profit are those that build their own projects and not for customers. I've seen the profit and loss statement from one of those builders and let me say i was quite impressed. Re: Profit margin of builders 26Mar 03, 2009 7:46 pm joeygbh ozzroo I'd believe the low profits they make on the base plan house. Its the extras that seem to be unbelivable. How can they in some cases charge to you an upgrade that ends up more than RRP on the product. profit on that !! (ricky gervais) People tend to forget installation costs when they see the base price. Sometimes that can add 100% on the base price. Think about when you get an aircon from Harvey Normans, what's the base price and installed price? I think you misunderstood my wording. Example here: We are upgrading all internal doors from flush panel to colonial carved panel. Flush doors are approx $55 each unpainted. Colonial are approx $85 each unpainted. We are being charged over $80 per door to upgrade. And when you are doing 20 odd doors its a difference that is noticeable. This is a case where installation as the doors are same size. That is a good example of where the builders make additional profit. On the additional extras and items that people upgrade. i.e. kitchen fittings, tiling etc. Built 36sq Plantation "Retreat" on 4460m2 at Spring Mountain, Qld In Living and landscaping.. >>> ... http://retreatspring.blogspot.com Re: Profit margin of builders 28Mar 04, 2009 10:38 pm I think they are making about $2k markup on our bricks that we have upgraded to and almost $1.5k markup on our fireplace that we are having put in Built 36sq Plantation "Retreat" on 4460m2 at Spring Mountain, Qld In Living and landscaping.. >>> ... http://retreatspring.blogspot.com Re: Profit margin of builders 29Mar 05, 2009 3:25 am King willy Thlo, Using your rational about the huge profit margin try bargaining with Porter D, Metro.., Nat. Sim, Denis, Dev, etc etc about the price of their homes. A second hand car is not quite the same as a brand new unconstructed house. I can't believe your intentional misquotation. There is nothing about a huge profit margin or second hand cars in my post. Re: Profit margin of builders 30Mar 05, 2009 1:41 pm thlo King willy Thlo, Using your rational about the huge profit margin try bargaining with Porter D, Metro.., Nat. Sim, Denis, Dev, etc etc about the price of their homes. A second hand car is not quite the same as a brand new unconstructed house. I can't believe your intentional misquotation. There is nothing about a huge profit margin or second hand cars in my post. yeah I was a little confused by that post too! Annie A thankful person is a happy person. [/color]My hobby design blog: http://aviewondesign.blogspot.com/ Re: Profit margin of builders 31Mar 05, 2009 6:42 pm Annietom thlo I can't believe your intentional misquotation. There is nothing about a huge profit margin or second hand cars in my post. yeah I was a little confused by that post too! Annie Yes willy has a lot of explaining to do. Re: Profit margin of builders 32Mar 05, 2009 9:08 pm mattwalker OK lets say you earn $10,000 per house and you build 50 homes a year After you have paid everyone, all your expenses your are left with $500,000 in your hand. Not a bad profit when you look at it like that is it? Depends how you look at it. Assume that the builder is a straight project builder, i.e., not a developer so there's no land sales to complicate the issue. Further assume that he sells every one of those 50 houses for, say, $180,000, which is a fairly average construction cost. All going well he's turning over $9 million a year. A $500k EBIT on $9 million represents a return of around 5.5%. Not that bad but there are a lot of businesses showing better nett profits than that. But that's EBIT (earnings before interest and tax). It doesn't take into account the cost of borrowing money (and every builder works on borrowed money) or tax. The true bottom line in your example is likely to be considerably less than $500k. It's still a good business of course, and I've never met a poor builder, but I think it's true that the 'average' profit on a new home is not particularly high unless it's a custom build or there are a lot of variations/extras. It's certainly not 15% or more margin. Maybe 15% gross, definitely not nett. I've dealt with a lot of builders over the years and, while you have to take anything they say with a large pinch of salt, as far as I can work out their nett margins range from around 3% to 8%. That's no better, no worse, than many businesses. The supermarket chains operate on margins as low as 1.5%. Clothing manufacturers can be up around 30%. Re: Profit margin of builders 33Mar 05, 2009 9:16 pm Ancient Mariner mattwalker OK lets say you earn $10,000 per house and you build 50 homes a year After you have paid everyone, all your expenses your are left with $500,000 in your hand. Not a bad profit when you look at it like that is it? Depends how you look at it. Assume that the builder is a straight project builder, i.e., not a developer so there's no land sales to complicate the issue. Further assume that he sells every one of those 50 houses for, say, $180,000, which is a fairly average construction cost. All going well he's turning over $9 million a year. A $500k EBIT on $9 million represents a return of around 5.5%. Not that bad but there are a lot of businesses showing better nett profits than that. But that's EBIT (earnings before interest and tax). It doesn't take into account the cost of borrowing money (and every builder works on borrowed money) or tax. The true bottom line in your example is likely to be considerably less than $500k. It's still a good business of course, and I've never met a poor builder, but I think it's true that the 'average' profit on a new home is not particularly high unless it's a custom build or there are a lot of variations/extras. It's certainly not 15% or more margin. Maybe 15% gross, definitely not nett. I've dealt with a lot of builders over the years and, while you have to take anything they say with a large pinch of salt, as far as I can work out their nett margins range from around 3% to 8%. That's no better, no worse, than many businesses. The supermarket chains operate on margins as low as 1.5%. Clothing manufacturers can be up around 30%. although the point is probably moot because all builders have different costs/profits etc... I just can't see a builder earning around $500 gross income if he's building 50 homes a years. That has to cover all staff wages, head office rent, superannuation, bank fees, lending costs to cover display homes, advertising... and so on and then his wages. I just don't see it. I think your analogy of 15% gross on turnover is closer, but I think even more with most, perhaps some, less - and then of course, there's the management (good or bad) which tips the scales either way. A thankful person is a happy person. [/color]My hobby design blog: http://aviewondesign.blogspot.com/ Re: Profit margin of builders 34Mar 05, 2009 9:33 pm Annietom I just can't see a builder earning around $500 gross income if he's building 50 homes a years. That has to cover all staff wages, head office rent, superannuation, bank fees, lending costs to cover display homes, advertising... and so on and then his wages. I just don't see it. Erm, not quite. In the example Matt used the $500k was nett profit in the builder's hand, after all expenses other than interest & tax. The basic equation is pretty straightforward: Income - cost of goods sold - overhead (expenses) = nett profit before tax. Annietom I think your analogy of 15% gross on turnover is closer, but I think even more with most, perhaps some, less - and then of course, there's the management (good or bad) which tips the scales either way. Perhaps, although I would think it would actually be pretty hard for most businesses to make a profit at a 15% gross margin. Given the costs/overheads a builder faces I suspect they would need to operate at a minimum 25% gross margin in order to turn a profit at all. Re: Profit margin of builders 35Mar 05, 2009 9:41 pm Ancient Mariner Annietom I just can't see a builder earning around $500 gross income if he's building 50 homes a years. That has to cover all staff wages, head office rent, superannuation, bank fees, lending costs to cover display homes, advertising... and so on and then his wages. I just don't see it. Erm, not quite. In the example Matt used the $500k was nett profit in the builder's hand, after all expenses other than interest & tax. The basic equation is pretty straightforward: Income - cost of goods sold - overhead (expenses) = nett profit before tax. Annietom I think your analogy of 15% gross on turnover is closer, but I think even more with most, perhaps some, less - and then of course, there's the management (good or bad) which tips the scales either way. Perhaps, although I would think it would actually be pretty hard for most businesses to make a profit at a 15% gross margin. Given the costs/overheads a builder faces I suspect they would need to operate at a minimum 25% gross margin in order to turn a profit at all. sorry, yes, I think $500 nett after wages paid etc is a good profit for a 50 a year builder, maybe a little on the low side. def agree they need a 25% gross margin, they certainly need it! A thankful person is a happy person. [/color]My hobby design blog: http://aviewondesign.blogspot.com/ Re: Profit margin of builders 36Mar 05, 2009 11:42 pm stressed85 Well the builders mark up on our house is 25%.. So.. I dont know how much their administration expenses or advertising expenses are.. But i'm pretty sure they make more than 10k a house. Thats what id heard too. Between 20-25% Living in Caloundra Thread****** Lovin my house all finished!!! Now tackling the HUGE task of the Garden- viewtopic.php?f=31&t=14782 Re: Profit margin of builders 37Mar 06, 2009 12:54 am Guys, a 25% markup does not represent a 25% gross margin (gross profit).
A 25% markup on cost would only give a business a 20% gross margin. To make a 25% gross margin the builder would have to mark up his costs by 33.33%. It's something of a moot point anyway because a builder is not a manufacturer or a retailer and cannot just mark up the 'goods' he sells by a fixed amount. He has a much more complex equation to deal with, involving differing margins on a wide range of materials and complex labour costs across a series of trades. Re: Profit margin of builders 38Mar 06, 2009 8:42 am I think a builder who can make a 10% profit (after paying for all parts and labour) and can minimise their risk would be doing well.
In good times, this figure is probably a bit higher. Right now, I suspect there is some reduction in this figure. Demolition August 2009, Construction Started September 2009, Completed December 2010 Re: Profit magin of builders 39Mar 24, 2009 3:06 pm As material costs are easing, are builders reducing their prices? If not, what would it take for that to happen? Re: Profit magin of builders 40Mar 24, 2009 5:01 pm thlo As material costs are easing, are builders reducing their prices? If not, what would it take for that to happen? I don't know what the basis is for your comment... I can say that materials I am buying are increasing and anything with a global price like steel, aluminium or any form of energy, is suffering from the exchange rate fluctuations. For prices to reflect cost reductions there needs to be 1) A cost reduction, & 2) Stability at the new level of cost. Ed "ECOECO" At 'EcoEco', we design windows, we design the best windows, we do it for you, so that when you’re happy we are happy. Tel. 1800 326 326 Alternatively, you can sign a contract with pre-defined known amount you pay to the builder for management and warranties and then you just pay the invoices their provide… 2 5239 Hi, This is my first post. We are planning to buy new home via House and Land (H&L) Package around Boxhill/Gables/Marsden Park in Syndey. Googled reviews for most of… 0 10448 Very good points. Thanks so much ponzutwo for your advice. Appreciate it. 2 10326 |