Control the Process. Following are some additional ways to manage the sales line on your income statement:
- Sales from custom homes can be reported on your income statement in a variety of ways. In order to best manage your company I recommend reporting sales from custom homes and remodeling projects using the percentage-of-completion method of accounting. Under this method revenue is matched with the costs being incurred as construction of the new home progresses.
- When it comes to time and materials make sure to include all items in your cost and don’t be afraid to sell the markup that you are entitled to. Make sure that in addition to your direct construction costs you include things such as general liability insurance, superintendent vehicle and communications expenses, and other overhead items that you can attribute to the job. When selling a markup show your profit and overhead as separate line items: First multiply the cost by your overhead percentage and then mark up that total by your profit percentage.
- It is important to sell your superintendent, project managers, carpenters, and field labor at a fair hourly billing rate. Check how much your plumber, electrician, and other trades are charging you for their labor. If a plumber is being charged out at $75 per hour, why should you only be getting $50 per hour for billing your finish carpenter?
- When selling design/build work make sure that you are in control of the process. Direct clients toward decisions that fit within their budget and maintain the profit margins that you need and deserve.
- When bidding an architect’s set of plans and specifications sell alternative ways that you can value-engineer the plans to be more cost effective to build.
- Sell the margin you are entitled to; my suggested benchmark for gross profit is 21 percent, which equates to a markup of 26.5 percent. Remember, you are better off building three houses at a margin of 21 percent than four at a margin of 15 percent.
In my next article I will examine the direct construction cost line of the income statement and provide tips on how custom builders who improve their control over job costs can thrive during tough economic times.
—Steve Maltzman, CPA, is president of SMA Consulting in Redlands, Calif. He can be reached at smaltzman@smaconsulting.net.
In my “Small Volume Sales Survival Guide” I identify five phases of new home sales: welcoming, discovery, matching, closing, and service. In the welcoming phase it is important to make a good impression and build rapport with your customers. Establish trust by letting prospects talk about what they want instead of telling them what you have to offer.
During discovery, take the time to listen to what the customers want and why it is important. Whether you work through a design/build relationship or are preparing a bid on architect-prepared plans and specifications, it is important to excel in the discovery process.
Discuss how you can best satisfy the clients’ desires during the matching part of the sales process. It is in this phase that you describe why you are different (click here) and how your differences best match the customers’ wants and needs.
The goal in closing is to reach agreement with the customers on the appropriate next steps. Every time you have a conversation with the clients you need to be closing them on the next step in the process until you get them to sign on the dotted line. Only then can you move into the service phase.
Download a free copy of SMA Consulting’s ”Small Volume Sales Survival Guide“ at www.buildersurvival.com.
