APPLES TO ORANGES.
Written by Mike Frost
Every homeowner gets lured by the guy whose price is so much lower than everyone else. They can’t believe their good fortune in finding someone who is willing to give them top-shelf work at bargain-basement prices. The pitch sounds really great, the references check out, and he can start tomorrow. All the other guys who gave a proposal are just trying to rip you off, take long vacations at your expense, and besides, you think every contractor does the same quality work and has the same costs so it is your duty to find the lowest priced one out there. Right?
Why do you think that contractor pricing for a given project is all over the board? Do you honestly think that every contractor has the same project costs, overhead, and profit margins as every other contractor? Do you think that every contractor provides the same quality of service, has the same skills and experience, and uses the same quality materials? If you answer yes to the last two questions, Â…ok, so let’s talk about that about land in Florida I have to sell.
Let’s say you want to remodel your kitchen and you call three contractors for proposals. After going over some details and specs with them, you receive the three bids. The first comes in the next day, one in a week, and one in ten days. Prices are $32K, $38K, and $40K. All seem to include all the features and promises discussed at the first meeting. $32K can start tomorrow, $38K can start in 4 weeks, and $40K can start in 3 weeks. So why such a disparity? The two at $38K and $40K must be looking to make more money at your expense so it seems that your best choice is the guy at $32K. Besides, the other two must be bigger companies since they have more work, will probably just squeeze you in, and therefore they charge more.
To price a job properly, a contractor has to factor in three things:
1.What all the costs are for the your job alone are
2.What the overhead costs are for the company
3.What the desired profit is for the company
The following is not a comprehensive explanation of pricing, it is not inclusive of every aspect of pricing and business operations, and it is only an example of one way of pricing a job. Some companies use a cost plus method, some, time and materials, and some use fixed cost. This is only meant to help a prospective homeowner understand why pricing is not the same for every contractor.
WHAT ALL THE COSTS ARE FOR YOUR JOB ALONE ARE. This includes costs for all the materials needed for the job including materials being installed on the job and consumables such as nails, caulks, putty, etc. All the labor costs for the job including total employee man hours on the jobsite, hours needed to procure materials and do set up and clean up, and sometimes hours traveling to and from the jobsite. Rental costs for job-specific tools and equipment such as heavy equipment, specialty tools, and disposal service. All subcontractor costs for work such as electrical, plumbing, gas, tile work, lead, mold, or asbestos removal and/or mitigation. All these are costs that are only incurred for a specific job and cease when the job is completed.
CONSIDER: Not every contractor will buy the exact same materials for the same job as the other two. Some purchase the least costly and sometimes the most inferior grades of materials. Some may not have any rental costs; some may have lower labor costs. One has in-house tradesmen, the others subcontract out those trades. Knowing this, you can see that each contractor will have a different cost total for this work.
WHAT THE OVERHEAD COSTS ARE FOR THE COMPANY. Every company has ongoing expenses that must be paid whether or not there are jobs going on. Rent or mortgage costs, utilities, insurance both liability and worker’s comp, medical, leasing costs for equipment and vehicles, management and staff salaries, advertising, taxes, and on and on and on. Even if a company does no work for a year, these costs must still be paid.
CONSIDER: No two, or three, companies have the same overhead costs. Some work out of their homes, some rent or own commercial space. Some advertise, some don’t. Some drive beat up pickup trucks, some lease vehicles, some own them and make payments. SOME CONTRACTORS WORK WITHOUT LICENSES, INSURANCE, AND TRADE CERTIFICATIONS BUT MOST DON’T! Combined, the total annual cost for these expenses is usually reflected in your proposal as a percentage of annual revenues and added to your proposal as a percentage of your job costs. Knowing this, you can see that each contractor will have a different percentage for these expenses.
WHAT THE DESIRED PROFIT IS FOR THE COMPANY. No business wants to operate in a break-even mode. Profit is needed to cover future cost increases, expansion, improved salaries and bonuses for employees, and as an incentive by management to provide a quality service so that a decent return is realized. Profit is also needed to replace tools and equipment, increase advertising, donate to charities and participate in community activities as a sponsor, mentor, or volunteer. The profit expenditures this year may become part of the overhead for next year.
CONSIDER: PROFIT IS NOT A 4-LETTER WORD! It is a necessary and relevant component to every proposal and is usually expressed as a percentage of both job cost and overhead costs combined. So a 1% profit on a $40K job is $400. A 10% profit on a $40K job is $4000. Is a 1% profit acceptable to some companies? Yes, but for others, 10%, 15%, or even more is needed or desired. Knowing this, you can see that each contractor will have a different percentage of profit in their proposal.
How do these three elements affect the price that our three contractors gave you for your kitchen remodel? How can you tell which contractor has the higher overhead and why? Which one is being greedy and looking for a higher profit and which one is actually losing money on the job? Which one buys the materials at the big box stores and which one has better pricing from a wholesaler because they buy in volume? Well, you can’t. Asking a contractor how much profit he is going to make, how much his overhead is, or how much the total job costs are likely to alienate you and the contractor.
So what do you do? How do you decide? Start with checking out the contractors. (Read the article here about how to check out a contractor.) Compare all three contracts for content and clarity, inclusions and exclusions. Look for the Scope of Work, Description of Work, or Job Specifications and compare them. See if it is apples to apples or apples to oranges. How much you learn about your contractor makes the decision making process a lot easier. Knowing what you now know, if each of your three contracts are different, then how can you expect the prices to be the same? If each of your three contracts are the same, then how can you expect the prices to be the same? It is easy to see that the lowest price doesn’t always mean the best value and the highest price isn’t always a bad value.
Connect with me on http://www.linkedin.com/in/michealfrost
9655 Richmond Street
Manassas, VA 20110