Operating Expenses: Fool's Gold for Improving Profit

A builder's operating expenses are those costs not directly related to building houses. They include indirect construction costs (field overhead), financing, marketing and sales, and general administrative costs.

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.