Below is the detail from a white paper that was just prepared regarding margins in the disaster restoration industry.
Understanding Margins by Work Type
This paper examines margins by types of work while acknowledging the inherent deviations. While there are many ways to calculate job costs, the key is to remain consistent in your approach. For the purpose of this discussion, job costs will include:
- Direct labor plus direct labor burden
- Direct materials
- Subcontracted labor
- Equipment rental
You can opt for more detailed job costing methods, but the most critical aspect is consistency. The more granular your approach to costs, the more informed your decision-making will be. However, it’s essential to measure only what you can effectively manage.
1. Construction
Construction gross margins typically range from 35-50%, meaning direct costs fall between 50-65%. Margins can be achieved through direct labor or subcontractors, but each comes with challenges:
- Staff Labor: While in-house teams can increase margins, managing labor, materials, and non-reimbursed time effectively can be complex.
- Subcontracted Labor: Subcontractors offer flexibility, but companies must account for indirect costs like shop materials, dumpsters, and other supplies.
For best practices, apply job manager costs either directly or through an allocated percentage to ensure profitability.
2. Water Damage
Water damage margins are often the most challenging to measure. Companies must maintain 24/7 readiness, investing in equipment, training, and staffing. Margins typically range between 15-25%, with direct costs spanning 75-85% or higher.
Factors affecting water damage margins:
- Equipment costs generally represent about 10% of the rental rate.
- Claims management programs have tightened margin controls in recent years.
Despite these challenges, water damage margins remain strong due to the specialized resources required to deliver these services.
3. Restoration Cleaning
This category includes contents and structural cleaning, with gross profit margins ranging from 45-60% (direct costs: 40-55%). Restoration cleaning involves specialty techniques, materials, and labor:
- Contents Cleaning: Conducted either on-site or in a dedicated facility, this work often incurs significant facility and equipment costs.
- Cost Drivers: Labor, cleaning supplies, packing materials, and moving-related expenses.
Properly accounting for all associated costs is essential to evaluate job profitability accurately.
4. Mold Remediation
Mold remediation, which involves removing mold-contaminated materials and remedial demolition, achieves gross margins between 40-55% (direct costs: 45-60%). Key considerations include:
- Capital Commitment: Mold remediation requires significant investment in training, equipment, and certifications.
- Subcontracting Limitations: When subcontracted, profitability may be restricted to industry-standard overhead and profit percentages, resulting in lower gross margins (~17%).
Mold remediation profitability varies widely depending on whether services are performed in-house or outsourced.
Key Considerations
The restoration industry has undergone significant changes over the past decade. Historically, contractors could determine costs and set pricing to achieve target margins. Today, contractors often must work backward—assembling a price first and then aligning costs to meet margin expectations.
Achieving profitability requires coordinated efforts from everyone involved in managing and executing the job. Key steps to optimize margins include:
- Consistently applying costing methods
- Proactively managing direct and indirect costs
- Training teams to align operations with profitability goals
This information serves as a guideline, providing insight into the factors that impact profitability in various types of restoration work. While individual results may vary, consistent application of these principles will help restoration businesses better understand and manage their margins for long-term success.
For more insights on improving your margins and scaling your restoration business, contact Business Mentors today.
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