Key Takeaways from the 2024 Cost of Doing Business Report for Restorers

The 2024 Cost of Doing Business Report is a must-read for anyone in the restoration business. Put together by the Restoration Industry Association (RIA) and KnowHow, it’s based on a thorough survey that digs into the financial realities of running a restoration business. From profitability to cost accounting and industry benchmarks, this report is packed with the info you need to make smart calls. Let’s break down the key takeaways that can help you succeed in today’s market.

1. The True Cost of Doing Business in Restoration

When we talk about the “cost of doing business” in the restoration world, it’s more than just numbers on a balance sheet. Yes, we measure gross profit, net profit, overhead, and variable costs to see how we’re stacking up, but there’s a lot more to it. Restoration work is about people—families waiting to get back into their homes, communities needing to recover, and our crews putting in long hours, sacrificing their time to help others. So, understanding the cost of doing business isn’t just about profit margins; it’s also about recognizing the personal and financial toll of the work.

2. Industry Benchmarks and Performance Analysis

The report draws on a wide range of restoration companies. A majority (84%) of respondents are U.S.-based businesses, covering 32 states, and nearly three-quarters operate out of two locations or less. This shows the industry is largely built on small to medium-sized businesses. While the big names often get the spotlight, this report reminds us that many in the industry are small operators.

The annual gross revenue data shows a balanced market. Companies earning under $1 million and those in the $30-$100 million range each represent about 10% of the industry. But the mid-range ($1-$5.99 million) makes up a large chunk of the market. The takeaway? There’s considerable growth potential for smaller businesses, especially if they’re looking to scale and grab a bigger market share.

3. Revenue Distribution and the Importance of Diversification

When it comes to revenue, the report emphasizes diversification. While commercial services make up less than 30% of revenue for three-quarters of respondents, residential services dominate, with nearly half of the companies earning over 70% of their revenue from residential work.

The data suggests that companies looking to boost revenue need to balance their mix between residential and commercial work. For example, businesses that lean too heavily on residential revenue tend to fall into the lower 25% in total annual gross revenue. However, smaller companies face barriers to expanding into commercial work, such as cash flow management and the need to build long-term relationships with commercial clients. The key insight here is that higher revenue often comes from having a more balanced approach to both residential and commercial projects.

4. Breaking Down Profitability Metrics

Now, let’s talk about profitability. One of the biggest takeaways is that the traditional “10 & 10” model (10% for overhead and 10% for profit) isn’t cutting it anymore. The report shows that the average overhead across companies is around 36%, which is a far cry from the 10% that many insurers and software tools still push.

For instance, companies’ gross profit margin averages out at about 50%, and the average net profit margin is around 14%. This means overhead is eating up a lot more of the profit than many might realize. The reasons are clear: restoration projects today are more complex, requiring specialized labor and high administrative costs. On top of the physical restoration work, there’s detailed documentation, compliance with regulations, and meticulous project management.

5. Independently Created Price Lists

Half of the companies surveyed (49.5%) use independently created price lists rather than relying on the standardized lists provided by software providers. Interestingly, those using their own price lists see about a 5% increase in net profit margins. This effect is even more pronounced for smaller companies (those with less than $3 million in revenue), which report 8.5 times higher net income when using custom pricing. However, the benefit diminishes as companies grow larger. This suggests that while custom pricing can enhance financial performance for smaller companies, larger ones might not see the same advantages.

6. Job Size and Profitability

Most reconstruction jobs fall in the $10,000 to $50,000 range, and mitigation jobs are typically smaller, with 65% coming in under $10,000. The size of these jobs has a big impact on profitability.

For reconstruction, smaller jobs (under $5,000) bring in an average net profit of 21%, while larger reconstruction jobs (over $50,000) drop to about 7%. Mid-sized jobs ($10,000 - $20,000) offer a more moderate profit of around 11%. So, while bigger reconstruction projects might boost revenue, they often come with higher costs and longer completion times. Focusing on smaller, more profitable projects and larger mitigation jobs might help improve overall company profitability.

7. The Role of Third-Party Administrators (TPAs)

Many restoration companies have mixed feelings about working with TPAs. According to the report, 45% of companies don’t rely on TPAs at all for their revenue. Only 10% of companies heavily rely on TPAs, with 41%-100% of their revenue coming from these partnerships.

One thing to note is that companies with higher TPA involvement tend to have higher labor overhead costs (28% compared to 23% for those with lower TPA involvement). While TPA work can provide a steady stream of revenue, it often comes with administrative burdens that don’t always translate into higher profitability. For companies wanting to maintain more control and keep overhead manageable, limiting reliance on TPAs might be a strategic move.

8. Financial Health and Liabilities

The report also provides a snapshot of financial health in terms of assets and liabilities. On average, companies in the restoration industry hold total assets equivalent to 45% of their annual revenue. Larger companies tend to have more assets relative to revenue (55%), while smaller companies are around 43%.

When it comes to liabilities, most companies rely more on short-term financing. Current liabilities account for about 15% of annual revenue, while long-term liabilities sit at 3%. Smaller companies typically have higher owner’s equity (21%) compared to larger companies (7%), possibly indicating different strategies for capitalization and reinvestment.

9. Investing in Leadership and Workforce Development

A company’s workforce is its backbone, and investing in training and development is crucial for growth. The report shows that more than three-fourths of companies spend less than 2% of their budget on external learning and training, with 32% spending less than 1%. Interestingly, 22% of companies that saw revenue growth invested between 2% and 10% in external training, whereas 24% of companies that saw a decrease in revenue invested less than 1% in these initiatives.

Most of these investments go toward developing internal managers or leaders. About 71% of financially healthy companies (those with a net income of 25% or more) allocate all or most of their training budget to internal development. This shows that companies committed to building up their internal talent often see more stable growth and profitability.

Conclusion

The 2024 Cost of Doing Business Report offers a lot of valuable insights for restoration professionals. The key takeaways are clear: understand your profitability drivers, diversify your revenue streams, and manage your overhead strategically. Use this data to evaluate your business practices, adapt your strategies, and set a course for sustainable growth in a challenging market.

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