Pricing the Job

Real Estate appraisers use 3 methods to arrive at the value of a property:

1. Income Capitalization Approach
2. Cost Approach
3. Sales Comparison Approach

Contractors would do well to apply some approaches to the price they bid on jobs. But first, let us look at the objective we are trying to attain which is the highest price the client will pay and be satisfied they are getting a fair deal. That being said, do you have some built-in rules for pricing that are cutting profits? If so, change!

Cost Estimate

Most contractors first consider their costs first by detailing the quantities of material, labor, equipment, subcontractors. Then, current costs are factored in to arrive at a total cost to finish the job. Let's not confuse your costs with the price you charge. And, let's not forget to add an overhead factor to your costs before adding profit. A lot of people add a margin that includes overhead. We like to do the overhead calculation first (gets us to break-even) and then play with the profit figure.

Market Assessment

If the market is such that lots of your competitors are also bidding, then you need to lower your profit to get the work. In a really poor market you might not factor profit in at all so you get jobs to keep your employees busy. In a "bull" market we believe you should raise the profit figure substantially depending on work load and your limited resources.

Your resources

Your ability to finish your project is limited by your resources in supervision, skilled labor, availability of materials, and availability of subcontractors. Once you have maxed these out you simply cannot do any more work. You will have to make a conscious decision to grow the business to take on more jobs. Please consider that fast growth is many times uncontrolled. Uncontrolled growth can lead to lots of problems that have hidden costs. These costs may very well eat substantially into your profits so that the extra work might not be producing what you thought it would under normal circumstances.

Client Assessment

We know that some clients can be difficult. This difficulty manifests itself in slow or no pay for work, lots of disruption, and a potential for being sued. Not fun to be sure! We suggest doing a series of background checks to root these out before you price the job. If you are doing work for a proven bad actor, this will definitely need to be added to the price. We know of subs who routinely mark up for GC's who are slow pay and difficult.

Example

Let's assume we are bidding on a job where we are confident our hard costs will be $50,000. We then determine that last year our overhead was 8% of hard costs and have every reason to believe that overhead will be about the same this year. So, we add $4,000 for a break-even cost of $54,000. In a poor market this might be our price to the client. In a normal market we might figure a 10% profit and bid $59,400. In a bull market, perhaps we bid $65,000. In a bull market with a difficult client we might bid $75,000. Remember these percentages are for illustration only. There will be differences depending on your trade.