How Builders can Make an Additional $100k in Net Profits with Accounting

My Name Is Paramita Bhattacharya,I work with custom home builders & luxury remodelers as an outsourced controller and part time CFO. I know the unique challenges construction business owners face. I see builders losing thousands of dollars and they are not even sure where their money is going despite of having high sales volume. I help custom home builders and remodelers make a minimum of $100-$150 K without having to sell more, using financial strategies and scorecards.

Overview of the “Builder’s Financial Scorecard” 

I meet custom home builders’ who have annual sales ranging between 2-10 million but have difficulty achieving a high net profitability. 

Does this relate to you 

Less than 8% in net profit 

  • Paying huge tax bills 
  • Predicting cashflow 
  • Tracking jobs in progress 
  • Monitoring margin as the job progresses 
  • Worried about not charging enough to earn the correct profit on your employees 
  • Struggling to keep up with all the costs and expenses associated with your employees? 
  • How much money is left to earn on the job. 
  • Whether your jobs are underbilled and will cause cash flow tightness. 
  • How many months of overhead you can cover with your current job mix. 

We built an exclusive program for Custom Home Builders where we use financial strategies to achieve higher profitability. Builder’s Financial Scorecard allows Custom Home Builders to make more money without selling more

The four main financial strategies we use to achieve higher profitability are:

  1. Net Margin Pricing- how to price your contracts to hit 8% net profit margin 
  2. Percentage of Completion- accurate entries will help you reduce tax liability 
  3. Labor Burden Calculator- know how much your labor is costing 
  4. Tracking KPI’s- 9 numbers custom home builders must know to always make a profit 

Step 1: Using Pricing4Profit

The first thing we do is put together a clean set of financials in place so that we can clearly distinguish between the Sales, Production Costs and Overhead Costs. After having accurate profit and loss and balance sheet, we go over to a three-step pricing strategy here we start with the Current Net Margin and then come up with Target Net Margin and the third step is how to price individual contracts based on the Target Net Margin.

Step #1 Last 12 Months Actuals:

Check out the breakdown of the actuals, then compare the process.

Step 2: Percentage of Completion

Custom Home Builders work on projects which runs for a minimum 4 months and beyond.Percentage of completion often referred to as WIP schedule should be a mandatory part ofmonth end closing procedure. Percentage of completion schedule gives an overview of all jobs, gross profit margin, backlog, job overview by customers and project managers. Without having monthly percentage of completion adjustment entry custom home builders end up overpayingtheir taxes by thousands of dollars. Percentage of completion gives accurate financials and evens out the roller coaster ride of gross and net profit margin.

Not Calculating Percentage of Completion:

Jim's Reality with Implementing Percentage of Completion:

Step 3: Labor Burden and Profits

Are your labor costs killing your profits?

  • Worried you're not charging enough to earn the correct profit on your employees?
  • Unsure about how to estimate and track fully loaded labor burden costs in QuickBooks?
  • Concerned that the cost-basis for your products or service might be wrong?
  • Struggling to keep up with all the costs and expenses associated with your employees?
  • Frustrated by the cost of lost and wasted time or errors and rework?

Having known what your labor burden is costing will enable you to get an accurate perspective
of job profitability. Using our labor burden calculator, you can calculate what your labor cost if
individual labors are even though they are all working the same hours every week.

Before Labor Burden Allocation:

Before Labor Burden Allocation

After Labor Burden Allocation

Without Fully-Burdened Labor Cost Info, You May Be Surprised…

If you’re not using fully-burdened labor costs on jobs, you may find that your estimates aren’t as accurate as they should be. But, when you know how much each employee actually costs per production hour, you can use the information to more accurately stimate each job’s labor costs.

Here’s How the Estimated Labor Costs Could Be Very Different

Computed results for our Example are shown below:

In the first section, you’ll see fully-burdened burdened rates for different positions. Please note that there can be a significant difference between employees’ average hourly rates and fully-burdened labor costs Labor cost totals for the first job (Job A) are shown n blue in the second grid (below). Labor cost totals for the second job (Job B) is shown in green in the third segment (below). The difference in labor costs is shown at the bottom, in yellow

Even though each job requires the same number of hours, look at the wide variance in estimated labor costs… $517. Amazingly, that means the labor costs for Job B are 34% higher than for Job A!

Why? It’s due to: The different fully-burdened labor costs for each type of employee – as well as The different way that time is assigned to the specific people working on the job. In this example, without these detailed numbers at hand, you wouldn’t have known how dramatically different your costs could be!

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