Home Builders and Remodelers: Where the Money Goes

Same trade, two different businesses

A builder earns a thin margin on every dollar and makes it up in volume: large contracts, a lean office, and most of the money passing straight through to land, subcontractors and materials. A remodeler earns a fatter margin on each job, then spends much more of every dollar selling, designing, estimating and managing a stream of smaller jobs. Each one keeps a modest share of revenue at the end. They just get there by opposite roads, so the line that matters most is different for each.

Where builders' money goes

For a builder, most of every dollar goes straight into the house: land, subcontractors, materials. That makes direct costs the whole game. One point of direct cost on $5 million of closings is $50,000, a large share of what the business keeps.

The leaks I look for first: subcontractor prices that drift up from one house to the next without a fresh bid, upgrades and changes sold to the buyer below what they cost to build, and finished homes or lots carried longer than planned while the interest and taxes keep running.

Where remodelers' money goes

Remodeling jobs are smaller and every one has to be sold, designed, estimated and managed. That is why a remodeler's overhead takes a far larger share of revenue than a builder's. It is also where the money leaks: a project manager or estimator hired before the volume is there to carry the cost, small jobs that take as much office time as large ones, and change orders done in the field and never written up or billed.

The other remodeling leak is the estimate itself. When the margin on a job comes in below what was bid, the cause is usually labor hours or materials that were not in the estimate, and it repeats on the next job until someone compares estimate to actual line by line.

Margins move with the market

Neither business holds its margin still. When housing turned down in 2008, builders' margins collapsed and the average builder lost money. In 2021, remodelers' margins fell to a record low as material prices jumped faster than contracts could be repriced. The businesses that came through those years were the ones that knew their numbers early enough to act.