Why Builders Leave Profit on the Table
Most construction companies are less profitable than their owners think. Some of the biggest builders, the ones doing $50 or $60 million a year, are clearing as little as 5% net. They are leaving millions on the table, and according to Russ Stephens, fixing it takes only a few simple changes.
Russ is the co-founder of the Association of Professional Builders (APB), a coaching company that has worked with thousands of residential home builders since 2014. On this episode of Builders, Budgets and Beers, he sat down with Reece Barnes to break down the financial blind spots that quietly sink good building companies, why work in progress is the most misunderstood number in construction, and how to price jobs so profit is built in from the start.
Here are the key takeaways.
Why do profitable-looking builders still struggle financially?
Revenue hides the truth. Construction is a high-revenue, low-margin business, much like distribution, where Russ spent two decades before construction. When there are big numbers moving through the business, it is easy to feel successful while the bottom line tells a different story.
The number that matters is what is left after you have paid yourself a market salary, covered every expense, and reinvested in growth. Time and again, Russ sees two patterns: owners underpaying themselves, and not enough net profit. And it gets worse with size. He regularly finds operators running tight, systemized companies at $3 to $6 million who are better organized than companies doing ten to twenty times the revenue.
The bigger builders often become complacent. A quick look at their numbers shows them clearing 5% net when a few adjustments could add $2 to $3 million in annual net profit without any additional work.
What is the work in progress (WIP) calculation, and why does it matter?
Knowing your numbers starts with truly understanding work in progress. Russ calls it the most misunderstood calculation in construction, and the one that sends good builders broke every year.
His annual industry survey makes the problem clear. About half of builders say they understand WIP. But when the half who say yes are asked to define it, only about 20% answer accurately. That means roughly 40% of builders think they understand WIP but do not, which puts them in a worse spot than the builders who openly admit they do not know.
The confusion comes from the term itself. In manufacturing, work in progress measures the rising value of raw materials as labor is added, so it is treated as an asset. Generalist, non-construction accountants carry that definition over and place WIP on a builder’s balance sheet as an asset. In new construction, that is backwards. Work in progress is a liability.
How does front-loading distort a builder’s financials?
Almost every builder front-loads a job, either on purpose or not, and creating positive cash flow is a good thing. But it scrambles your reporting if you do not adjust for it.
Consider a $1 million contract at a 33% markup, which works out to a 25% gross margin, or $250,000 over the life of the job. That is the norm for a professional builder. Now say you are a third of the way in. Through deposit, slab, and framing, you may have already billed the client $350,000. Your accounts now show $350,000 in revenue, but your costs have not caught up, so your profit and loss claims you have made far more than the roughly $85,000 you have actually earned in gross profit at that stage.
That gap, the difference between what you have billed and what you have truly earned, is the work in progress accounting adjustment. It is a liability, and it needs to be journaled into your accounts every month. Once it is done correctly, your profit and loss stops swinging wildly from month to month, your margins hold steady, and you can finally trust the figures in front of you.
For a builder doing $6 million a year, the WIP liability is often around half a million dollars. If the balance sheet instead shows a couple hundred thousand as an asset, the owner can be $800,000 worse off than they believed.
How should builders price jobs to guarantee profit?
Stop adding a percentage and hoping. Most of the industry prices by tallying labor and materials, adding a markup someone once recommended, and crossing their fingers for profit at year end.
The APB approach focuses on what is left at the bottom instead. It starts with fixed expenses, including the owner’s salary at a true market rate. If you work 60 hours a week, replacing yourself would take two or even three people, and that cost is real. For many companies, owner salary lands around 5% of revenue, so a $6 million builder should be running a $300,000 salary through the books, even if the cash is not drawn out, as long as it is journaled.
From there, the math is straightforward. Take annual fixed expenses, divide by the number of weeks the business runs, divide by the number of jobs you can run at once, then divide by five days. Now you know what it costs in fixed expenses to run each job per day. When pricing, look at the job schedule, add contingency for weather, and multiply the days by that daily cost. Add that to your cost of sales and you have your true break-even point. Anything above it is net profit.
This is what stops builders from underpricing big jobs. When a $2 or $3 million project comes in, the instinct is to trim margin to win it. The calculator shows the opposite is needed. A larger job runs longer and eats far more supervision time, so you can no longer run as many jobs at once, which raises the fixed-expense load that job has to carry.
Should builders take on bigger projects to grow?
Be careful. Russ’s blunt advice to a builder humming along on $600,000 jobs is to stay in your lane. A streamlined, systemized, repeatable process is where profitability lives, and a single $3 million project is a different business with far more supervision, decision making, and risk.
The same logic applies to mixing new homes and remodeling. Doing a few new builds and plugging the gaps with remodels feels efficient, but they are two different business models with two different marketing motions. Trying to serve both dilutes your systems and weakens your marketing, because the strongest client wants a specialist, not a generalist.
When a builder is ready to move from remodeling into new homes, the cleaner path is to commit. Refocus all marketing on new homes. Remodeling work will still trickle in through reputation and referrals, but the focus belongs in one lane. Trying to run both at full tilt hampers each side.
How does business valuation connect to building a better company?
A valuation is not just for builders who want to sell. Russ argues it matters for every owner, because building toward a saleable company is the same work as building a healthier one.
Too many builders feel trapped in companies that are effectively worthless, locked in by contracts they cannot leave, which takes a real toll on mental health. A company that buyers would line up for gives the owner freedom, and by definition it is one that can run without them.
Buyers pay for transferability of cash flow and certainty. They want confidence that the net profit continues without the current owner. More certainty earns a higher multiple. Low certainty earns very little, which is why so many building companies are worth almost nothing.
Russ shared a client who grew from $1.5 million to $15 million but whose business achieved only 40% of what a company that size should be worth. The gaps were a missing key leadership position and weak profitability from underpaying himself and, in turn, underpricing jobs.
A free business valuation for listeners
APB has built a valuation tool that analyzes every aspect of a building company to estimate what it is worth and what it could be worth with a few changes. Business brokers charge $5,000 or more for this level of reporting. Because the tool has not launched publicly yet, Russ is offering the report free to Builders, Budgets and Beers listeners, including a free consult to walk through the results. The link is in the show notes.
As Russ put it, the best time to plant a tree was ten years ago. The second best time is now. The same goes for understanding the value of your business.
Listen to the full episode
This conversation covered work in progress, pricing for profit, managing growth, culture, and valuation. Listen to the full episode of Builders, Budgets and Beers with Russ Stephens of the Association of Professional Builders for the complete discussion, and check the show notes for the free valuation report.