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New Census Data Shows How Construction Businesses Operate

Special Studies, August 3, 2017
By Ben Whetzel
Report available to the public as a courtesy of HousingEconomics.com

Additional Resources
ASE Business Characteristics Statistics
ASE Business Owner Statistics
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ASE US Company Statistics
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This study examines the US Census Bureau’s new Annual Survey of Entrepreneurs (ASE) The survey’s data allows NAHB to compare construction to other industries, presenting new insights into the general business characteristics and finances of firms in the industry.

Key results include finding that, compared to other industries, construction businesses in the U.S.

  • Cater to customers in a single region
  • Are somewhat more likely to operate on a seasonal basis
  • More often operate out the business owner’s home
  • Tend to make heavy use of subcontractors
  • Are less likely to have company websites

A particularly useful aspect of the ASE is the financial data it collects, much of which is not available in a consistent and comprehensive way from any other source. The ASE financial data show that construction businesses in the U.S.

  • Require less start-up capital than other businesses
  • Often use personal or family savings as the primary source of start-up capital
  • Tend to rely on banks and credit cards if they need additional funding
  • Are marginally more effective than other business in raising additional funding
  • Earn positive profits about three-fifths of the time
  • Are especially susceptible to negative impacts from labor shortages and late or non-payment by their customers

ASE Background

The ASE is the U.S. Census Bureau's first effort to produce yearly estimates on businesses and business owners. Some of these data were available previously in the census’ Survey of Business Owners (SBO). However, the SBO is conducted only once every 5 years, with the most recent version occurring in 2012. Data from the ASE, in contrast, should be available every year. Data from the first installment of the ASE (2014) were recently released by the Census Bureau and are the basis of this study.

The ASE covers 20 distinct North American Industry Classification System (NAICS) industries. From the standpoint of the home building industry, the ASE’s principle drawback is this limited industry detail. While the ASE provides information for the construction sector as a whole, it does not permit separating residential from non-residential construction. Nonetheless, the ASE offers certain advantages. In addition to more timely data, the ASE collects data not available in the SBO or other federal data sources. Some of these new data are potentially quite interesting, especially the data on businesses’ finances, such as source and amount of capital used to start the business.

General Characteristics of Construction Businesses

Construction firms tend to serve customers within a single region. As seen in Exhibit 1, 94 percent of construction companies report that three fourths or more of their customers live within the same region as their firms.

Exhibit 1: Customer Location

Construction is often characterized as a seasonal business, under the assumption that more construction activity takes place during the warmer weather months. Exhibit 2 confirms this to a certain degree. Compared to an average across all industries, construction companies are almost twice as likely to operate less than 12 months of the year. Additionally, ASE data reveals construction firms are 40 percent more likely to operate on a seasonal basis versus all American firms. Although construction companies report above-average rates of seasonal operation, ultimately the vast majority of construction firms still remain in operation during all twelve months of the year.

Exhibit 2: Seasonal Businesses

Nearly half of all construction companies are home-based businesses, over double the average for all industries. Just over 23 percent of all American firms are home-based, while more than 48 percent of construction firms are home-based (Exhibit 3). A previous NAHB study based on the Census Bureau’s 2012 Economic Census was able to break down the construction industry into subsectors in a way that helps explain this phenomenon. As that article shows, over two thirds of all construction establishments are Specialty Trade Contractors, yet of that figure 81 percent are non-employers (one-person businesses with no paid employees). The fact that these small-scale specialty contractors represent over half of all construction firms explains the high proportion of home-based businesses in the construction industry.

Exhibit 3: Home Based Business

The ASE confirms that the construction industry employs subcontractors at significantly higher rates than other industries (Exhibit 4). A wide variety of workers with different areas of expertise are often brought together to finish a construction project. A single project may require carpenters, masons, drywall installers, plumbers, electricians, roofers, etc. In residential construction, as reported in the September 2015 Special Study, 70 percent of single-family home builders use somewhere between 11 and 30 subcontractors to build the average single-family home, with an average of 22 different subcontractors per home. Moreover, NAHB’s 2016 Member Census shows that the typical builder has only 6 housing starts per year. This relatively low number helps explain why a substantial share of construction firms may not have enough work to support full-time payroll positions in 22 different construction specialties.

Exhibit 4: Types of Workers Employed

The construction industry lags behind other U.S. industries in website usage. Evident in Exhibit 5, the share of construction businesses with their own websites is over 10 percentage points lower than the average across all industries. A 2013 NAHB Special Study reported that over 85 percent of both remodelers and single-family builders have web sites, with over two thirds having had one for at least five years. The lower figure for the construction industry as a whole is likely due to specialty trade contractors, who represent a significant portion of the industry. Not only are many of these trade contractors relatively small businesses, as discussed above they are often engaged as subcontractors by other construction firms, and are likely to maintain working relationships with the larger firms, which may reduce the need to maintain websites to market their products and services. It is still possible, however, that smaller construction firms may be overlooking an opportunity to attract additional business via a website.

Exhibit 5: Company Website

Construction Business Finances

As mentioned previously, a particularly interesting facet of the ASE is the new information it collects about business finances. One of the noteworthy things the 2014 ASE shows is that, compared to businesses in other industries, construction companies require lower amounts of start-up capital. The median amount of capital used to start a construction business is only $33,529, and for many construction businesses it’s $25,000 or less. As seen in Exhibit 6, the median amount of start-up capital for all industries is over $40,000 higher than that of the construction industry. As the ranges of start-up capital increase, the percent of construction firms reporting steadily decreases while industry averages are more evenly distributed.

Exhibit 6: Amount of Start-up Capital

The figure above suggests that the financial barriers to entry into the construction industry are relatively small. However, in the survey for the October 2016 NAHB NAHB/Well Fargo Housing Market Index, two-thirds of single-family builders said that, even if they have access to start-up capital, a shortage of available land was preventing younger people from entering the market and becoming home builders.

Personal and family savings of the owner(s) are the primary source of start-up capital for construction companies. As seen in Exhibit 7, these savings represent almost two thirds of the sources of start-up capital for both construction firms and other industries. Credit cards and home equity lines are the next most popular within the construction industry. Relative to other industries, construction companies less often acquire bank loans for start-up capital. This represents a possible barrier to entry within the industry. However, the lower levels of start-up capital found in the construction industry could prevent the need for firms to pursue bank loans. Other options, such as family or personal savings, may suffice.

Exhibit 7: Sources of Start-Up Capital

As shown in Exhibit 8, construction companies and other industries occasionally attempt to raise additional funding through a variety of means. Among construction companies, the most popular sources of additional funding are banks and financial institutions, credit cards, and trade credit. Trade credit refers to credit extended by suppliers to a firm, allowing the purchaser to buy now and pay later. Without paying immediately, a consumer is using trade credit when accepting materials, equipment, or other valuables. For homebuilders, these funding sources are often used for buying building materials.

Exhibit 8: Sources of Additional Funding Attempted

The construction industry’s success rates for acquiring additional funding are marginally higher than the average for all industries in the U.S. This positive difference is reflected in every source of supplemental funding measured by the ASE. The three most popular sources shown in Exhibit 8, trade credit, credit cards, and banks and financial institutions experience the highest success rates in both the construction industry and all others. The round numbered success rates in Exhibit 9 are a result of the Census Bureau’s measurement methodology.[1]

Exhibit 9: Additional Funding Success Rate

The breakdown of profitability in the construction industry matches the all-industry average fairly closely (Exhibit 10), although construction businesses are slightly more likely to report breaking even (19.0 percent vs. 17.8 percent for all industries) and slightly less likely to report positive profits (61.3 vs. 62.4 percent).

Exhibit 10: Business Profitability

The ASE does not report an actual profit rate for the businesses. According to NAHB’s Cost of Doing Business Study, the average net profit before taxes for single-family home builders in 2014 was 6.4 percent of total revenue. According to NAHB’s Remodelers Cost of Doing Business Study, the average net profit before taxes for residential remodelers in 2015 was 5.3 percent of total revenue. For both single-family builders and residential remodelers, measuring profit is often difficult due to the prevalence of small businesses in the industry—the distinction between the owner’s compensation and the business’ profit can be blurry.

As shown in Exhibit 11, the construction industry is experiencing shortages of qualified labor and customer nonpayment at significantly higher rates than industry averages. The ASE data is consistent with other NAHB surveys showing the severity of the labor problem. In January 2017, an Eye on Housing blog post reported that the cost and availability of labor was the most significant problem builder members faced in 2016 and a growing issue since 2011. Notably, changes in technology affect construction firms markedly less than the industry average. These data indicate that, compared to other industries, new technology either plays a lesser role in construction firms’ profitability, or perhaps sometimes has a positive impact.

Exhibit 11: Items with Negative Impact on Profit

This article describes only some of the data contained in the 2014 Annual Survey of Entrepreneurs. All of the data described in the text along with additional information are available in tables in the Additional Resources box that appears at the top of the webpage version of this article.

[1]The Census Bureau does not provide success rates; they are calculated by NAHB. The calculations are made by comparing the proportion of successes relative to total attempts. These numbers are very small values, often with only a single decimal point or significant digit. The ASE values represent rounded figures; thus, some round numbers result during calculation.

For more information about this item, please contact Paul Emrath at 800-368-5242 x8449 or via email at pemrath@nahb.org.

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