Builder profit margins shrank in 2020 for the first time since 2008 due to growing balance sheets, according to the NAHB Builder Cost of Doing Business Study. The national survey of manufacturers attempts to provide benchmarks of profitability allowing companies to compare their financial performance.
On average, builders reported $13.7 million in revenue for fiscal 2020, of which $11.2 million (81.8%) was spent on cost of sales (land costs, construction costs direct and indirect) and an additional $1.5 million (11.2%) in operating expenses. (i.e. finance, S&M, G&A and owner compensation). As a result, builders averaged a gross profit margin of 18.2% and a net margin of 7.0%.
The average gross margin for builders fell dramatically during the housing recession (from 20.8% in 2006 to 14.4% in 2008), but then increased steadily until 2017 (19.0%) before drop slightly in 2020 (18.2%). Similarly, the average net margin of manufacturers fell between 2006 and 2008 (7.7% to -3.0%), gradually increased until 2017 (7.6%), then fell in 2020 (7. 0%).
However, it is important to place the latest results in the context of the circumstances and realities of the time. 2020 has not been a normal year for any person or business in any part of the world as the COVID-19 pandemic has engulfed our lives and our economy. Like most businesses in the United States, many builders have been forced to shut down operations for a while, reinvent processes to ensure safety, provide health training to workers, limit visits to model homes and accommodate office staff working remotely. Builders in 2020 have also had to quickly learn to navigate the uncertainties of supply chain disruptions that have made many building materials significantly more expensive and unavailable in demand. And, as if those problems weren’t difficult enough, the industry’s chronic labor shortages worsened as fear of the virus spread among workers and contractors.