Most Homebuilders Are Small Businesses
Natalia Siniavskaia // NAHB / December 07, 2015
Based on the recently released 2012 Economic Census data, new NAHB research shows that residential construction remains the industry of independent entrepreneurs with 81 percent of homebuilders and specialty trade contractors being self-employed independent contractors. Even among establishments with paid employees, the industry is dominated by small businesses, with two-thirds of homebuilders and three out of four specialty trade contractors generating less than 1 million dollars in total business receipts.
Among homebuilders, multifamily general contractors tend to be largest, with more than 55 percent of companies generating over $1 million and close to 23 percent generating more than $10 million in 2012. Less than 8 percent of for-sale builders (who build on land they own and control) and under 2 percent of single-family contractors (who build on land customers own) crossed the $10 million mark in 2012.
Under the most recent US Small Business Administration (SBA) size standards, the vast majority of residential construction companies qualify as a small business. The most recent small business size limits for all types of builders is $36.5 million, for land subdivision $27.5 million, and $15 million for specialty trade contractors. By these standards, almost all remodelers and at least 96 percent of homebuilders, 94 percent of land developers, and 97 percent of specialty trade contractors easily qualify as a small business.
Home building establishments are highly specialized and subcontract out a significant portion of the construction work to subcontractors who can more efficiently perform specific construction activities. In the case of single–family general contractors and speculative builders, subcontractors account for more than a third (36 percent) of the total construction revenue. For multifamily general contractors, 63 percent of the annual construction receipts are generated by subcontractors. Specialty trade contractors who, by definition, specialize in specific activities (e.g., pouring concrete, site preparation, plumbing, painting, and electrical work) subcontract out only 10 percent of the work. The cost of materials purchased by establishments for subcontractors is not included in the cost of construction work subcontracted out but rather counted in the net (in-house) value of construction work.
Because residential construction establishments are highly specialized and subcontract out a significant portion of construction work to others, they maintain relatively few construction workers on their payrolls. Single-family general contractors on average have four employees on their payroll, with only three directly engaged in homebuilding. Non-construction workers include supervisory employees above the working foreman level, in addition to executive, accounting and other professional employees in routine office functions.
Speculative (or for-sale) builders’ payrolls average under six workers over the course of a year with close to two-thirds being non-construction workers. Multifamily general contractors and specialty trade contractors maintain largest annual payrolls, averaging more than 13 and 9 workers over the course of the year, respectively. Specialty trade contractors also stand out for reporting the highest share of construction workers, with three out of four payroll workers working in construction. Residential remodelers average less than four workers on their payrolls.
The complete NAHB report is available to the public as a courtesy of Housing Economics Online.