These costs normally range from 18% to 20% of sales. We target 18% - 3.5% for field overhead, 4% for financing, 6% for marketing and sales, and 4.5% for general administrative.
If builders can keep cost of sales within 70% of sales and operating expenses at 18%, net profit before taxes should be 12%.
Typically, as builders attempt to improve profits, they try to grow volume or reduce operating expenses. Both can have negative impacts and often do not yield the desired bottom-line results.
As a builder becomes volume-oriented, the company begins to buy growth by discounting prices or including extras. Those discounts come right off the bottom line. Growth also can tax system and process efficiency to a point at which operating expenses must increase disproportionately to the increase in sales volume.
I recommend that you improve profitability by looking at direct construction costs before you tackle operating expenses. Direct costs are typically more out of line with our targets, and you get a bigger bang for your efforts.
