Gross Profit Margin Vs. Builder Earnings

Written by daniel r. mueller
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Gross Profit Margin Vs. Builder Earnings
Though house building can be lucrative, overhead is expensive. (Goodshoot/Goodshoot/Getty Images)

The gross profit margin of a building company is the amount of profit left over after the production costs of a project are subtracted from total project revenue. The gross profit margin does not take into account factors such as taxes or investor dividends. Builder earnings reflect the adjusted net income of the construction company after expenses.

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Gross Profit Margin Deductions

The first certain deduction from a gross profit margin are taxes. Many builders opt to have accounting professionals manage tax affairs in the interest of preventing costly bookkeeping errors. Investors may also take a cut of a builder's gross profits as dictated by the terms of the investment contract signed by both parties. Direct investment repayment deductions work more like a loan than a stock investment, where the company merely sells shares which hopefully grow in value rather than paying out cash dividends.

Calculating Builder Earnings

Determining the builder's net earnings is a simple matter of subtracting overhead costs from total project revenue to arrive at the remaining profit margin. Deductions include the cost of maintaining the builder's administration office, paying staff, buying materials and tools, as well as paying taxes and investor dividends. Depending on the demand for housing, it may be necessary to hire a real-estate agent to sell a new home, which incurs additional overhead.

Investor Profit Dividends

Investor profit dividends are a fairly common occurrence in smaller building companies funded by private individuals rather than investment companies or banks. The general agreement could read along the lines of: Mr. X will receive a 20% share of the building company's profit in perpetuity as compensation for his contribution to the initial start up cost of the venture. While it can be tempting to make such an agreement while starting up a building company, be careful about signing away too much of the company's profits lest the cost impede growth.

Company Growth Allowances

Depending on the specifics of the business model profit, surpluses -- particularly in small or medium building companies -- may be divided among the construction team members. Builders from smaller companies can take a page out of the large-scale corporate construction business and allocate a portion of the surplus revenue towards the growth of the company, thereby increasing its ability to juggle multiple projects. Most large-scale or incorporated builders already factor growth into the company's revenue plan, though smaller companies may wish to add a feature to their budget by automatically deducting a portion of gross income for diversion to a company growth account. Diverting funds for later expansion may reduce the apparent net profit of the company; however, it is an investment that can result in greater growth for the long-term.

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