How much should you be paid to own and run your own construction company? What’s the correct construction company owner salary?
Sadly, too many contractors don’t pay themselves a regular salary. They don’t think they should be paid a salary, or there isn’t enough money in the business to pay the company bills and pay themselves.
How much should you get paid? A general rule of thumb is if you’ve been in business for less than four or five years, you should be paid about 8% of your total sales as salary. For example, if you sell, build and collect an annual volume of $350,000, your salary should be $28,000. Frankly, that’s hardly enough to live on today, but with sales that low you are probably also building jobs, and you should also be paid wages for the hours you spend on the job. If you sell $740,000, then your salary should be $59,200.
After you have been in business five or more years, you’ve gained experience and have survived at least one downturn that’s proven your ability to run your business and make it through tough times. You’re worth more, and can raise your salary to 10% of sales. For example, with an annual volume sold, built and collected of $350,000, you can now raise your salary to $35,000.
I’ve given these general guidelines to contractors and had them tell me that it’s too much and their company can’t afford that. My friends, that’s a big red warning sign. You can ignore that red flag, but you won’t be around for long. Why are you working if you aren’t getting paid? If your construction business can’t pay you a reasonable salary of 8% – 10%, something’s wrong. You aren’t charging enough for your work or service. If you don’t know how to set your prices, read the book.
Not having the money to pay your bills, both household and business bills, is a distraction. Distractions takes your mind off the process of selling your product or service. As you probably know, making sales is the toughest part of this business; getting jobs built is the easy part. Your focus needs to be on sales, and if you own a construction company and aren’t getting paid at all, or aren’t getting enough salary to pay your bills at home, you’ll be distracted from what’s important.
If your spouse is working in the company, they should be paid a fair wage as well. They should be paid the same or more than your best competitor would pay them for the same work. If you’re a spouse and you’re not being paid for your work, turn in your resignation today. Why should you work for free?
Too many business owners confuse profit with salary. Their CPA or bookkeeper told them that they should just draw funds from time to time during the year as the company can afford it. Gang, that’s bad advice, and any CPA or bookkeeper that recommends that approach needs to be replaced. Drawing funds on occasion, when the company can afford it, puts you in the position of hoping something good will happen so you can get paid. Paying yourself shouldn’t be an option.
Pay yourself a regular salary just like any other employee, and I guarantee it will keep you focused on making sales and getting jobs built and collected so you have enough green stuff to pay ALL the company bills. Profit isn’t salary, and should never be treated that way. Your salary is an overhead expense and should be considered a company bill that needs to be paid just like your fuel bills, utility bills and every other bill that comes along every month.
A question for my married friends: Are you dependent on your spouse’s income to pay your household bills? If your spouse wants to support you and your hobby, that’s great. I call it a hobby because if it doesn’t provide an adequate income, it’s a hobby not a business.
But I’ve talked to many spouses who don’t want to be the breadwinner for the family. I’ve talked to wives who wish they could be at home with their kids, but have to work because their spouse has a nice hobby and doesn’t think they can charge the correct price for their work. If you’re that spouse, it’s time to take a very hard look at how you’re running your business. It’s time to either start charging enough for your work, or to find a job that will provide an income. Why should your clients keep getting a great deal on your services while your spouse earns the income to make that happen?