The income of a general contractor can vary widely depending on several factors, including the size and location of their construction company, the types of projects they undertake, and their hourly rate. In this article, we'll dive into the factors that influence a general contractor's earnings, shedding light on the potential revenue a construction business can generate.
Factors that can influence your revenue as a general contractor
1. Type of Projects
The type of construction projects you take on can greatly impact your income. Residential construction projects might have different profit margins compared to commercial or industrial projects. Specialized construction niches, like luxury home building or green construction, can also influence your earnings. Moreover if you’re working on home additions, basement renovation, kitchen or bathroom renovations you will have a different revenue and profit profile.
For example, smaller projects like kitchens and bathrooms (~20-25% profit margin) have a higher profit margin than larger projects like home additions (~10-15% profit margin). However in terms of dollar value it’s not the same game.
2. Location
Your geographical location is a crucial factor. Construction markets vary by region, and the demand for construction services and the local economy can significantly affect your revenue potential.
3. Market Conditions
Economic conditions and construction industry trends can impact your revenue. During economic downturns, construction projects may decrease, affecting your income. Conversely, during periods of growth, opportunities to increase revenue may arise.
4. Efficiency and Project Management
Efficient project management, streamlined operations, and effective cost control can enhance your profitability. Utilizing construction management software and optimizing processes can contribute to higher earnings.
5. Effective marketing for a consistent client base
A robust client base built on trust and repeat business can lead to a stable income stream. Satisfied clients are more likely to hire you for future projects and recommend your services to others. Consistently delivering high-quality work can lead to positive client referrals and repeat business, ultimately boosting your earnings. Investing in marketing and branding efforts can help attract more clients and increase your revenue. A well-defined marketing strategy can expand your reach and generate more leads.
Choosing small projects or large projects, what’s better to make more money?
Usually when you start a residential construction company, you will start with 2 employees to help form a first crew of workers. You should also already have a relationship with at least a plumber or electrician which will allow you to cover most types of interior renovations.
Type 1: general contractor that focuses on small to medium remodeling projects
Assumption 1: Average Project Size
Let's assume that the average project size for your residential general contracting company is around $30,000. This could represent small residential construction or renovation projects, such as bathroom renovation or kitchen renovation.
Assumption 2: Number of Projects per Year
With three employees, including yourself, let's assume that your team can comfortably handle approximately 12 to 16 projects per year. A bathroom or kitchen renovation usually takes 3 weeks.
Assumption 3: Profit margin
You want to aim for a profit margin of 20-25% for small remodeling projects. The profit you generate will help you reinvest in machinery, or provide you with more financial cushion to increase the number of crews.
Now let’s calculate the revenue for your construction company:
Estimated revenue = Average project size x Number of projects per year
Estimated revenue = $30,000 x 15 = $450,000
Estimated profit = Estimated revenue x Profit Margin
Estimated profit = $450,000 x 20% = $90,000
Type 2: general contractor that focuses on major remodeling projects
Assumption 1: Average Project Size
Let's assume that the average project size for your residential general contracting company is around $200,000. This could represent mid-sized residential construction or renovation projects, such as home additions or major remodeling.
Assumption 2: Number of Projects per Year
With three employees, including yourself, let's assume that your team can comfortably handle approximately 3 to 4 projects per year. Each major remodeling project will probably last a quarter.
Assumption 3: Profit margin
You want to aim for a profit margin of 10-15% for major remodeling projects. The profit you generate will help you reinvest in machinery, or provide you with more financial cushion to increase the number of crews.
Now let’s calculate the revenue for your construction company:
Estimated revenue = Average project size x Number of projects per year
Estimated revenue = $200,000 x 4 = $800,000
Estimated profit = Estimated revenue x Profit Margin
Estimated profit = $800,000 x 15% = $120,000
Small renovation projects or large renovation projects, what’s better?
The first type of general contractor can generates about 50% of the revenue of the second type of general contractor but profits would be just 30% lower. There are pros and cons with both types of general contractors. Choosing which route to take depends on your preference.
Type 1: small renovation projects
Growing your company from one crew to 2 crews
If you want to generate over $100k per year in profit, you’ll likely have to consider building 2 crews of construction workers.
In order to go from one crew to 2 crews, you will need to have built a solid customer base where your number of monthly referrals starts to be good enough to support another crew so that you limit your financial risk.
As you increase the number of crews, you will inevitably increase the number of quotes you send on a monthly basis. Moreover, the number of invoices, change orders, and the volume of communications with customers will increase dramatically.
We advise you to equip your construction company with a construction management software like Billdr Pro that will allow you to save a dozen hours per week running your business. In 2023, you’re at a disadvantage if you do not use software that consolidates all your information into one screen.
Growing your company from 2 crews to 3 crews
If you want to generate over $150k in annual profit with your residential construction company, you will likely need to grow the number of employees to 3 crews or 6-7 employees.
At that point the difficulty will be to hire excellent project managers to supervise crews and help you handle all of the stress that comes with executing multiple projects at the same time.
Managing 3 crews, processing timesheets, following on project advancement across 3-4 different construction sites at the same time will turn into a heavy administrative burden. You will likely spend 20h or more per week simply communicating with your crews and customers. Many general contractors start to hire a secretary because the administrative load is too much to handle on top of the construction work itself.
With 3 construction crews under your responsibility, using a construction management software becomes inevitable so that you can keep track of all your operations and have tighter control over your profitability.
Approximate earnings of a general contractor
This is an estimate of what an average residential general contractor company makes.
