For some custom home professionals, the skills needed to design and build their clients’ dream homes comes naturally. For others, it’s knowing how to make a profit that is programmed into their DNA. The key to success is the ability to master both skill sets at once.

It’s possible to be good at making profit while not knowing how to create high-quality homes, but even those who create the highest-quality homes will fail if they do not turn a profit. So how do successful, profitable custom home firms do it? Residential Design & Build talked to managers of a design firm and two custom builder businesses to find out.

Landis Construction

A simple way to ensure profit is building it into a project’s budget, which is much easier said than done. But Chris Landis, owner/partner, Landis Construction in Washington, D.C., knows how to make it work. Landis’ contracts spell it all out for clients so everyone is on the same page.

“Clients understand they’re going to pay for my work,” Landis says. “We have it in the contract that as price goes up so does the design fee. I’m explicit about it. For example, as we go along, if suddenly the clients say they want a fireplace, or some other change or addition, this increases the project budget, the time it takes to design the changes as well as our fee and ultimately, the profit.”

Landis’ clients sign separate contracts for design and construction services. The design process is divided into three parts: schematic design, design development and construction documents. The design budget likewise is broken into three parts accounting for two-fifths, two-fifths and one-fifth respectively. Each portion comes with its own budget of hours which allows Landis to track hours spent against the total design budget and to update the owner(s) on how the budget is doing.

“Ultimately, the design fee is calculated based upon an hourly rate,” Landis says. “This rate is essentially an average loaded labor cost for our design department plus a markup which theoretically would get us to a 10 percent net profit at the end of the process. The loaded labor cost includes overhead as it relates to the budget set forth in the beginning of the year for the design department.

“We know from past projects that this number of hours typically backs into a rate of anywhere from 9 to 12 percent of the final design fee, depending upon a universe of variables during the design process including: how decisive the homeowners are with choices; how much they assist with finish selections; whether the project is large enough to have economies of scale in the design process; the complexity of the project; and again, the general level of personal assistance that a customer requires during the process,” he explains. “Design sometimes continues into construction to clarify details and to make finish selection changes. After construction is complete, we calculate our hours and credit back to the customer any hours or dollars not used in the design process.”

In addition to accounting for man-hours and budget increases, the umbrella expenses of running the corporation fall within Landis’ overhead which is not necessarily job-costed, he says. This number is arrived at as a percentage of Landis’ annual construction goal and is factored into the firm’s markup throughout the job. “These expenses include, but are not limited to, our office, office equipment and office personnel, insurance and workers’ comp insurance, marketing, employee events, training, 401k program, employee health insurance program, licenses and more. At the end of the day, our goal is to achieve a 10 percent net profit. To achieve this, since our overhead as a percentage of our total annual goal is more than this number alone, our markup is also somewhat more.”

None of this works unless the clients agree to the terms at the beginning of the entire process, Landis notes. “What happens is people might say they don’t remember something, so we make them sign off in case they forget. One caveat in design is that both decision makers must be at the table at the same time. The wife one day can’t agree to something then a few days later have the husband come back and say they’re not going to pay for it because he wasn’t with his wife when she agreed to spend the money. These things always happen but you can pre-empt them. We have it in our contracts that both parties must sign off on decisions and designs.”