Creating a Successful Pricing Structure

Choosing the best price for your contracting business can be tricky. Higher pricing can deter potential clients from using you as a contractor. Lower pricing can prevent you from reaching your optimal profit margin.

Unlike average salary workers, there is no set structure for a general contractor salary. Instead, there is a general contractor pay rate dependent on a variety of factors. These numerous factors are why you need to think strategically about your pricing structure.

This blog will provide the factors pay rates depend on and discuss different pricing structures to maximize profit margins.

Before a contractor can choose their pricing strategy, they need to consider many variables. By having a better understanding of these variables, they can set an appropriate price for the projects.

Understand the Project

Having a full understanding of the project at hand is a crucial step to setting the price. Many contractors start a project without fully understanding what the client wants. Rushing into a project is an issue because clients can add items or materials to the project. This can lead to unexpected costs, and the client will expect you to cover those costs.

To prevent these common issues from happening, it is best to have a full understanding of the task at hand. Before pricing, meet with the client and potential workers to go over project planning. Working to have a better understanding of the job site includes visiting the job site and seeing the client's vision.

Prepare an estimate for the job based on the amount of labor, material costs, and time to complete. Estimates reduce guesswork. They provide you and the client a clear view of current material and labor costs.

Once you have a full understanding of the project, you can prepare for the costs ahead.

Material Costs

Predicting the costs of materials is imperative to help you stay on track for the project. By knowing the range of the material costs, you will not have to correct any project estimates.

To start the material cost predictions, list the materials that you will use for the project. Then, contact potential suppliers about the current cost of the specific materials. After receiving current cost of materials, increase your client cost to cover shipping and handling charges.

Labor Costs

Labor costs are also very important to calculate. Labor costs typically include the wages of technicians and office workers. While the cost of labor does impact the overall total cost, it does not change as much as material costs.

There are two ways to calculate labor costs. One way to calculate is the unit rate method. Use this method by dividing jobs into measurable units.

An example of calculating the labor cost using the unit rate method is below. For the example, there is a 200 square foot wall that needs paint.

• First, calculate the number of hours it will take to paint one square foot. For the example, we can say it takes about half an hour (30 minutes) to paint one square foot. This means it would take a painter about 100 hours (200*.5 Hours) to complete the project.
• Then, multiply the hourly rate by the number of work hours to complete the project. For this example, the labor rate is $20, so the labor cost would be $2,000 (20*100).
• Lastly, add a markup for potential employee benefits and taxes. For the purposes of the example, we will add a markup of $350, making the total labor cost come out to $2,350.

The other method that can be used is the detailed estimating method. This method divides a project into smaller tasks, finding the labor costs, and adding them to get the total labor cost.

Overhead Expenses

Construction overhead is the cost of running the business. This consists of ongoing and indirect costs of a specific job. Overhead costs include:

• Accounting Expenses
• Rent and Utilities
• Company Car
• Insurance
• Equipment
• Marketing

Calculate the overhead rate by dividing the total overhead for the entire year by costs from construction projects. Other ways to calculate the overhead are by project-based allocation and labor-based allocation methods.

Profit margin and markup

The last variables to consider are the profit margin and the markup. Profit margins are the difference between sales and direct costs, material costs, and labor costs. Markup is the difference between the price and the direct and indirect costs.

While both are important, markups are better for pricing jobs because you can add them as estimates.

Once you calculate all the variables of the project, you can choose a pricing model that works best for you. Many pricing models exist to choose from, and each has a unique way it works. The following are some of the most common pricing models.

Cost-Plus pricing

Cost-Plus pricing is one of the more popular methods in construction. To use this pricing method, find the total cost and add the desired profit margin in dollar terms. This number will be the amount you charge the client.

Competition-based pricing

This pricing model requires the contractor to research competitors in the industry and choose a competitive price. This is quite a common model used in the contracting business. Using this model allows you to match or go slightly below the competitor’s prices.

Premium Pricing

This pricing model allows you to charge clients a premium price if you offer unique services. Using this pricing model attracts new customers and helps you separate from competitors.

Bundle Pricing

Bundle pricing is an example of providing quality customer service to your clients. This pricing model allows you to do multiple tasks together and charge one price. Using bundle pricing helps to increase customer loyalty and profits.

Penetration Pricing

Penetration pricing is where you start with lower initial prices. Depending on the demands of the market, prices can increase. This is helpful if you are a newer contractor looking to gain market share from competitors.

Value-based pricing

Value-based pricing is where contractors set a price based on perceived value from the customer. Contractors that provide luxurious renovations benefit the most from this pricing model. Customers that want higher quality projects are more likely to pay a higher price.

While this pricing model is typically for experienced contractors, newer contractors can also use this pricing model. However, new contractors should be careful using this method to avoid running off potential clients.

After choosing a pricing method for the project, it will be best to choose the pricing terms between you and the customer.

Lump Sum

A lump sum pricing structure is where you find the total fixed price of the project based on accurate estimates. Then, the client pays you a lump sum price. Be cautious in using the lump sum method because you may have additional costs you will have to pay for later on.

Fixed Price Contract

A fixed price contract is where the contractor sets a fixed price for the construction project. Fixed price contract lock in the price, assuming there are no dramatic market shifts. Changes in market costs, material availability, and environmental conditions can increase costs for you. Include a clause in your agreement allowing for a renegotiated price due to market price increases and availability.

Firm-Fixed-Price Contract

A firm-fixed price contract puts most of the risk on the contractor. Firm-fixed contracts prohibit price changes, even if there are additional expenses down the line. It is important to know market trends when using this contract structure. Uncontrollable factors can increase costs for you which could leading to losses overall.

Cost-Plus-Fixed-Fee

The cost-plus-fixed fee is a pricing structure where the contractor gets payment for the standard project while also any extra fees. The fee will either be a fixed dollar amount or a percentage of the total job costs. This pricing structure puts more risk on the customer because the contractor has complete control over the project costs.

Guaranteed Maximum price

This pricing structure agreement states that the contractor cannot go above a set maximum price upon project completion. This cost increases within the construction timeline. While this is a good agreement for customers, contractors must cover additional costs.

Target Cost contracting allows the client and contractor to form an agreement about the target cost. If the costs are below the target, the client and contractor will split the savings. If the cost is over the target, then the client and the contractor will split the cost.

There are a variety of pricing structures that you can choose as a contractor. It is important to first calculate the pricing variables and then choose the best pricing model for the project. From there, decide on the best pricing agreement for your business.

Create a clear and understandable pricing model to present to your clients. This will then lead to an increase in customers and profit margins.