HOW MUCH SHOULD A CONSTRUCTION OWNER PAY THEMSELVES — SALARY, DRAWS, AND THE OVERHEAD RATE.
The most common answer to this question is whatever the business can afford after everything else is paid. That is the wrong framework. Owner compensation should be treated as a defined cost of running the business — a fixed salary in the overhead rate that every bid recovers, plus draws from net profit that represent return on equity. When owner compensation is not in the overhead rate, every bid is underpriced by the cost of the owner's labor. The business appears more profitable than it is. And the owner’s personal financial situation is determined by whatever is left over rather than by a deliberate compensation structure.
SPM normalizes owner compensation at engagement start as the first step in calculating the correct overhead rate.
NOT JUST A PERSONAL QUESTION — A COST STRUCTURE QUESTION.
Owner Salary Not in the Overhead Rate Understates Real Cost
When the owner takes draws instead of a defined salary, the overhead rate is missing the largest single overhead line item in the business. A $3M subcontractor whose owner is doing project management, estimating, business development, and financial management at market rate for those functions is worth $150,000–$200,000 in compensation. If the overhead rate does not include that number, every bid is understating overhead by 5–7% of revenue. On $3M annual revenue, that is $150,000–$210,000 per year in overhead that is being subsidized from project margin without anyone tracking it.
What the Business Really Earns After Paying the Owner at Market Rate
Net profit before owner compensation is not a meaningful measure of business profitability. It is a measure of how much the business earns before the most important employee is paid. Net profit after owner compensation at market rate — what would it cost to hire someone to do what the owner does — is the actual measure of whether the business is generating surplus value beyond paying for all inputs including the owner's labor. A business that generates $400,000 after paying a $40,000 draw is not generating $400,000 in surplus. It is generating $200,000 if the owner's market rate is $200,000.
What the Owner Should Be Paid at Each Revenue Level
A $1M–$2M subcontractor owner-operator: $80,000–$120,000 base salary equivalent (all-in compensation including benefits that would otherwise be included in employment). A $2M–$5M owner-operator managing 5–15 crew: $120,000–$160,000. A $5M–$10M owner managing a PM team: $150,000–$200,000. These are the SPM reference targets for owner compensation normalization. At $12M in SPM’s target financial model: $180,000 fixed salary plus draws. The salary is in the overhead rate. The draws come from net profit after all overhead including the salary.
THREE STEPS THAT SOLVE THE OVERHEAD RATE AND THE PERSONAL FINANCE QUESTION SIMULTANEOUSLY.
The CFOS $12M target: $180,000 salary in overhead plus draws from net profit. At 12% net margin on $12M revenue, that is $1,440,000 in net profit before draws. The owner earns $180,000 from a salary that is in every bid, plus a draw from the profit the business generates. That is the financial structure of a well-run subcontracting business at the SPM target revenue level.
FREQUENTLY ASKED.
