Residential contractors build, renovate and repair homes and apartment dwellings. There is no set salary for residential contractors, and individual results vary widely. Some contractors who deal in large contracts involving the construction of hundreds of homes make millions annually -- though many lose money during lean times. Other contractors just get by but have steady earnings, even when construction is in a down cycle.
The Contracting Process
Contractors typically place "bids" on construction or renovation projects, though many projects are done on a time and material estimate basis: The contractor gathers the specifics of a job and then quotes a price defined as a man-hour rate, plus materials. The estimate is common on smaller jobs or custom projects, while, for contracts that involve a number of similar jobs, the contractor will place a bid based on his cost estimate for the project as a whole. If the contractor's estimates for the cost of labor and materials are accurate, he should expect to make money on the job -- provided he is hired to perform the work. If his estimates are inaccurate, he may well lose money. Bids are frequently binding, especially on larger contracts, though contract managers frequently build in a mechanism to adjust costs due to circumstances that could not have been reasonably foreseen by the contractor or if there is a change in the scope of work. Time and materials estimates are more flexible, but the customer takes on more risk, as the final bill may be more than what was originally anticipated.
Residential contracting is a competitive business, and there are frequently several qualified providers in every market to perform a given service. This puts downward pressure on profit margins. Contractors strive to make a bigger profit margin on smaller jobs -- from 15 to 75 percent. Larger jobs, or those done using "cost plus" accounting, in which the contractor is paid a margin over and above costs, frequently carry a narrower profit margin, sometimes as low as 3 to 4 percent.
Part of the overall income picture for owners of contracting companies involves the structure of compensation. Salary income is taxable as ordinary income and subject to Social Security taxes. Dividend income, however, is not subject to Social Security taxes, which can save as much as 13.3 percent in taxes, as of 2011. Qualified dividend income also receives more favorable tax treatment. So two contractors with identical businesses could bring home very different incomes, after taxes are taken into account, depending on how much of the owner's pay is from a salary and how much is in dividends.
A contractor may be able to increase profits through leverage -- or borrowing money to invest in the business. For example, a roofing contractor with one truck may borrow $100,000 for a second truck and equipment. If he can keep the truck and crew busy, he may be able to double his annual revenue -- and more than double profits, because, while revenue can increase with additional labor capacity, the overhead costs of the business can remain relatively fixed. However, if the demand for the second truck and crew does not materialize as expected, the contractor is still on the hook for debt payments and may go bankrupt as a result, if operating revenues are not enough to cover the debt service. Borrowing money can increase profit margins. But it also increases risk.