My colleague and friend Tim Faller recently asked me, “Do you happen to know the percentage of field labor in a typical remodeling company?” I did the research and now can answer that question. But I also want to pose another, equally important question: Once you know the number, what should you do about it?

To get an answer, I reviewed year-end financial statements from between 2010 and 2015 from 127 remodeling companies, with revenues ranging from $575,155 to nearly $12.1 million and average job size ranging from $6,209 to $909,155. Here's the result:

Labor cost chart developed from research by Judith Miller

On average, these companies had $2.3 million in volume, of which $1.64 million went to cost of goods sold (COGS) and $663,000 was kept as gross profit, a GP percentage of 29%. Again on average, direct labor costs plus the related burdens of employment averaged $328,000, or 20% of COGS. The cost of using tradespeople averaged $892,000, or 54.4% of COGS.

Given that wide variation, I focused on remodelers with revenues around the $2.3 million average:

AVERAGE Companies Annualized Volume COGS / Job Costs Field Gross Wages + Burden Labor % COGS  Trade Expenses Trades % COGS Gross Profit Margin
Company 1
  $2,011,032
 $    1,340,554
 $    382,096
29%  $        563,089
42% 33%
Company 2
  $2,307,969
 $    1,746,440
 $    530,833
30%  $        761,630
44% 24%
Company 3
  $2,294,532
 $    1,757,153
 $    390,070
22%  $        894,867
51% 23%
Company 4
  $2,545,524
 $    1,661,718
 $    432,739
26%  $        738,202
44% 35%
Company 5
  $2,204,020
 $    1,559,124
 $    308,563
20%  $        837,528
54% 29%
Company 6
  $2,561,862
 $    1,773,833
 $    717,321
40%  $        512,372
29% 31%
Company 7
  $2,598,244
 $    1,622,084
 $    363,754
22%  $        935,368
58% 38%
Company 8
  $2,300,242
 $    1,784,528
 $      92,010
5%  $    1,173,123
66% 22%
Company 9
  $2,179,989
 $    1,444,025
 $    305,198
21%  $        784,796
54% 34%
Company10
  $2,452,483
 $    1,737,829
 $    416,922
24%  $        980,993
56% 29%
Company11
  $2,230,978
 $    1,565,254
 $    468,505
30%  $        602,364
38% 30%
Company12
  $2,246,789
 $    1,434,350
 $    584,165
41%  $        224,679
16% 36%
Company13
  $2,014,198
 $    1,481,241
 $    543,833
37%  $        604,259
41% 26%
Company14
  $2,011,459
 $    1,428,538
 $    301,719
21%  $        563,209
39% 29%
Company15
  $2,211,151
 $    1,434,816
 $    442,230
31%  $        464,342
32% 35%
Company16
  $2,410,474
 $    1,586,574
 $    361,571
23%  $        843,666
53% 34%
Company17
  $2,309,989
 $    1,737,805
 $    461,998
27%  $    1,085,695
62% 25%
Company18
  $2,466,928
 $    1,849,949
 $                -  
0%  $    1,134,787
61% 25%
AVERAGES
  $2,297,659
 $    1,608,101
 $    394,640
25%  $       761,387
47% 30%

Here again, big differences appear in labor and trades costs. Of the 127 firms whose numbers I reviewed, 18 had revenues between $2 million and $2.6 million. Their labor costs as a percentage of COGS ranged from zero to 41%, and their trades costs ranged from 16% of COGS to 66%. As one might expect, there’s often an inverse relationship here: The remodeler with trades costs equaling 66% of COGS had labor costs of just 5%, while the business with labor costs at 41% of COGS had trade costs of 16%.

After stripping out all companies that were more than plus or minus 10 points from the overall average of $2.3 million, the average field labor rate was 25% of COGS, while trade contract expenses were 47% of COGs.

That answers Tim’s question. But knowing where your company stands relative to others has limited value, because it benchmarks you only against your current practices. How should your expectations evolve as your business grows?

Ten of the 127 businesses provided multiple years’ worth of financial data. Let's look at those firms over four years:

TIME FRAME Annualized Volume COGS / Job Costs Field Gross Wages + Burden Labor % COGS  Trade Expenses Trades % COGS Gross Profit Margin
Spring 2011
        26,591,807
      16,671,305
           5,143,600
31%            7,216,627
43% 37%
Spring 2012
        52,384,386
      34,446,929
           7,836,301
23%          16,898,931
49% 34%
Spring 2014
        55,273,250
      39,536,739
           7,456,738
19%          23,014,078
58% 28%
Spring 2015
        69,291,726
      49,016,353
           9,788,314
20%          27,941,903
57% 29%
Change over 4 years $
  $42,699,919
 $32,345,049
 $    4,644,714
-11%  $  20,725,276
14% -8%
Change over 4 years %
 161% 194% 90% -35% 287% 32% -22%

Together, they had annualized volume totaling $26.6 million in spring 2011. By spring 2015, their revenue had risen 161% to $69.3 million, and their COGS soared 194%, to $49 million from $16.7 million. On the other hand, the cost of field labor for these 10 companies rose only 90%, and field labor costs as a percent of COGS fell to 20% from 31%. Meanwhile, trade expenses soared 287%, to $27.9 million from $7.2 million. Trade expenses as a share of COGS rose to 57% from 43%.

Put it all together and gross margin percentage slipped to 29% from 37%. I’ve found that as a company moves toward $5 million in revenue, average gross profit percentage tends to decline while average gross profit dollars go up.

Effective field management is essential to every remodeling company. The key follow-up questions to Tim’s query that you should ask are: How can you control profitability by controlling the inherent risk tied to in-house labor? How can you find and train trades to meet your level of quality as well as customer satisfaction? And do the demands of scheduling require more in-house labor due to a shortage of excellent trades? Knowing those answers will help you get the kinds of profits you seek so you can enjoy the work-life style you desire.