Many companies are embracing the design/build model as a means of better controlling the handoff between design and production. But when it comes to tracking profitability, there are a couple of things to watch out for.
If you fail to differentiate between revenue from construction and design, it will be impossible for you to look at the profitability of each division separately. In other words, if your design and production income are lumped into the same account “bucket” and the costs for design and production are similarly combined, you won’t be able to calculate your gross margin for only one or the other. In Figure 1, the gross margin appears to be 32%. We assume that this includes income and costs for both the design and production divisions, but there’s no real evidence of that.
You also need to be able to capture all costs associated with design. For example, if one of your employees is a full-time designer, you might be tempted to classify their costs as overhead. But if you mingle the income from that designer’s work with income from production, you can end up with an overstated gross margin. In Figure 2, the margin looks better (43%) and design and construction income are separated; however, the margin is overstated because costs for design labor are in overhead while other design costs are in production costs.
The solution is to be sure that you can identify both the income and cost components of each profit center. Depending on your accounting software, this can be done in several ways: by creating departments; by tagging jobs with a designation and using filters on reports to isolate information; or by using separate accounts. You should be able to get the data you need to analyze your margins for construction and design separately, as in Figure 3.
Once a project moves from design to production, consider creating a separate job. If the designer continues to design for that job, make sure that those costs are tracked to production and billed to a client. Often the profit on construction jobs is eroded by additional design work that needs to be done during the project. Be sure to create a contract that includes the ability to bill for the designer’s additional time. And if you pay commissions, be sure those are included in the construction costs. Too many remodelers do not mark up commissions or just show them as overhead, making jobs appear more profitable than they are while eating away at the bottom line.
While the world of design/build is becoming more prevalent and can improve profitability, be sure that you can back up that claim with the facts