Pricing Your Services in Construction –

Pricing your services in construction can be tricky. Here are the three basic ways to charge for your construction-related services: 

  1. Fixed Figure (aka Lump Sum Pricing)
  2. Cost Plus
  3. Time & Materials (aka hourly rate). 

There are many variations, but here are the three basic methods.

What is the Difference?

Fixed Figure pricing is when you estimate the cost of a given job, calculate your markup, apply that markup to the job cost, and then present the fixed figure (aka lump sum) price to your potential client. It is the smartest way to work, but it requires more effort.

Cost Plus pricing is a commonly used alternative to a Fixed Figure contract because it is the easiest way to start a job. All you need is an agreement that your client will pay all of your costs, plus overhead and profit. The final price is determined after the job is completed. This allows you to avoid the unpleasant work of estimating jobs and calculating your markup.

Time and Materials contracts are similar to Cost Plus contracts, only they are generally used for smaller jobs and handyman work. The client is expected to pay for labor at a quoted hourly rate, plus all of the materials. There may or may not be a markup on the material cost. Time and Materials contracts can be used successfully for service work up to about $2,500.

Be aware that using any other method than Fixed Figure or Lump Sum pricing for larger jobs has some serious disadvantages. 

Time and Material Pricing

Something important to remember when pricing your services in construction: Keep it simple. Job cost times markup equals the sales price. In some specialties, it is appropriate to charge your time using an hourly rate. As I mentioned above, you are doing service work up to $2,500, so charging an hourly rate can be smart. It will give the guy in the field the ability to price out his work on the spot for smaller jobs and get the job started. 

There can be downsides though. The perception by the client that he will get all non-labor expenses at your cost, similar to Cost Plus contracts. It is important to define exactly what is included in the rate per hour. And how materials, subcontractors, and other costs will be billed to the client, otherwise, this can be problematic. 

Another issue with this method is that it shifts the entire overhead burden of the company onto the labor rate. What if you or one of your employees gets sick? Or if incoming jobs slow down and you do not work the required number of hours, you will quickly find yourself cash poor. 

Using Cost Plus to price out your jobs may seem good, but it can end up costing you money in the long run. 

One of the biggest mistakes is basing your rate on the perceived “going rate” for the same work. If you don’t take the time, or do not know how to calculate actual costs, your company can lose money very quickly.

Cost Plus Contracts

Using Cost Plus to price out your jobs may seem good, but it can end up costing you money in the long run.

Most definitions of Cost Plus say that it is an agreement between you and your client where you charge your client the cost of the job plus an additional markup for your overhead and profit. This agreement is supposed to be clear and determined before the job starts.

Let’s say you have made this kind of agreement with a client. What is your job cost? Does it include your job superintendent’s salary and benefits, or is that included in your overhead? If the client is going to furnish his own materials, will you get paid to pick them up and deliver them to the job? Who waits at the city or county permit office to get permits, and who will pay for that time? All things to consider.

Your client has no idea what your overhead and profit percentages really are or how you arrived at them. He only knows what he believes the “industry standard” is, which is 10% overhead and 10% profit. Do not tell your client that you are going to charge job cost, plus any percent over his perceived industry standard. You and your client will probably never see eye to eye on that problem unless it is a number so low that there is no chance for you to make a decent profit on the job. 

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