For a business to be profitable in the real sense of the concept, it must take in more money than it lays out. It must recapture in its charges more than it disburses for production of the goods it sells (construction in our case) and for SGA (sales, general, and administrative), including pay for the work SGA requires, whether it is done by owners or employees.
Experienced, savvy builders understand the need for profit viscerally. They want to be paid well for the skilled work they put in at their jobsites and for managing their companies. They also know that just as they must receive pay for their work, their companies must accrue earnings, a profit beyond what they pay out to cover production and SGA. In short, the savvy builders know they need to get paid and that their companies also need to get paid.
In all the various educational channels now available to builders, we hear a great deal about methods of making a profit. Relentlessly, we are advised to do such things as making sure that prospective clients have in mind a budget adequate to allow your company to make a profit before you spend too much time with them; applying markups that help you realize your intended profit; and building protections against profit erosion, such as a clear change order procedure, into your construction contracts and management systems. But for all the information given us about the how-to of capturing profit, little is said about the why of profit, about why we must make a profit.
I have come to think that the prime reason that a construction company must earn a profit is to cover specific profit costs that are more than likely to hit you. Yes, just as you must recapture your direct costs of production out at the jobsite and the off-site SGA costs of running your company, you must capture profit to cover a whole other range of costs.
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