Profitability for contractors: calculate your real profit

You billed well this month, but in the end the bank account doesn't reflect that work. If you own a roofing, concrete, landscaping, or remodeling company, this has probably happened to you.

This article is for contractors who want to know how much they really keep after paying for everything. You will learn to separate cash flow from profit and to calculate a reference margin for your jobs.

This is informational and educational content. It is not tax, legal, or financial advice.

In short

• Cash flow is the money coming in and going out. Profitability is what is left after paying all costs.
• Before giving a price, add up direct costs, indirect costs, and fair pay for yourself.
• A net profit margin of 10% to 15% is a reference goal, not an official rule. It depends on your trade and size.
• With up-to-date books you can see which jobs make money and which don't.

Cash flow and profitability: they are not the same

Cash flow is the money that comes into and goes out of your accounts. Profitability is what is left of your sales after subtracting all the costs of the business.

You can have a lot of money in the bank on a Friday and still be losing. For example, if a customer paid you a deposit that you already owe for materials and payroll.

According to the SBA, planning your numbers ahead of time is a basic part of running a business. Without that plan, it is hard to know whether you are making money or just moving it around.

How to calculate the profit on a job, step by step

Before signing a contract, do this exercise:

1. Direct costs: materials and labor you use on that job.
2. Overhead costs: insurance, gas, office rent, tools, and other expenses that keep the company running.
3. Your pay as the owner: if you work in the field, your wage counts as a job cost. It should not come out of the company's profit.
4. What is left over: that is your net profit.

Illustrative remodeling example: the customer pays $20,000. Materials $7,000, labor $6,000, a share of overhead $2,500 and your pay $2,000. Total: $17,500. That leaves $2,500, which is 12.5% of the contract.

Note: for taxes, the rules on paying the owner depend on how your business is set up. Check with a tax preparer, CPA, or enrolled agent. The IRS guide Publication 334 explains how a small business reports income and expenses.

How big should your margin be? The 10% to 15% benchmark

At ODC, we use a benchmark goal: after paying everything, 10% to 15% should be left as net profit. That money is for reinvesting, building a reserve, and growing.

Note: this is not an official rule or a guarantee. Every trade and every company is different.

For comparison, a CFMA association survey with 2015 data, reported by BD+C, found an average of about 4.4% net profit before taxes among the participating construction companies. The top performers averaged about 8.4%. The data is old and covers companies of different sizes, so use it only as context.

If your margin comes out below your goal, it doesn't mean you're doing badly. It is a signal to review your prices, your costs, or the type of jobs you accept.

How to get your numbers ready to make decisions

To calculate your real margin you need organized records. The IRS recommends keeping business records in an orderly way to support income and expenses.

• Record every income and every expense, with its receipt.
• Assign expenses to each job to know which one earns the most.
• Use separate bank accounts for the business and for yourself.
• Review your numbers once a month, not just in April.

If you pay part of the work in cash, record it anyway. Also see the myth of paying "cash".

Listen to or watch the content

If you prefer to learn while driving to your next job, here are the video masterclass and the podcast episode.

Watch the video on YouTube

Listen to the episode on Spotify

What to do now

• Take your last 3 jobs and calculate how much you kept from each.
• Set your own pay as an owner and include it in your prices.
• Pick your margin goal and write it down.
• Separate your business and personal accounts if you haven't already.
• Learn how business profits are transferred to the owner.

When to talk to a professional

Talk to a tax preparer, CPA, or enrolled agent if you have questions about how your profits or your salary are taxed. Talk to an attorney if you have questions about your company's structure. The rules depend on your case.

How ODC helps you

At Oficina del Contratista, we keep your books up to date so you can see your business's real profit. Learn about our bookkeeping for contractors service or schedule a business consultation. Taxes and payroll are handled by independent partners.

References

1. SBA: Plan your business — supports the importance of planning your business numbers.
2. IRS: Publication 334, Tax Guide for Small Business — explains income, costs, and expenses of a small business.
3. IRS: Recordkeeping — supports keeping organized records of income and expenses.
4. BD+C: Contractors’ financial performance improved in 2015 — summary of the CFMA survey used as context for margins.

This article is for information and education only. It is not legal, tax or bookkeeping advice. We are a bookkeeping service: for tax matters, consult a tax preparer, CPA or enrolled agent.