So you want to ask a pricing question?
We’ve all seen it; new guy joins a forum and says this is the best place he has ever seen. Glad to be here and by the way, what do YOU guys charge to (insert routine contractor activity here). Once the popcorn is gone, the dust settles, and the blood has been cleaned up, we never here from the wonder kid again. We can say good riddance, but we have helped to create another potential hack.
OK, so you are going to ask a pricing question and since we can’t stop you, we might as well help you out. This article is written to help you understand some of the things that go into setting a price for your work so that you hopefully will become better educated about running your business. We do want you to succeed, be profitable, and to help enhance the image of contractors in the public’s eyes.
“How much do you guys charge to hang drywall?”
“Tree fiddy, but only on Sundays”. “As much as I can get”. “I don’t charge for that, I pay them”. Funny, but not very helpful to you, is it? That is the typical response you will get when you ask a question like that. Right, we all want to know what the other guy charges for a couple of reasons. One is from a competitive standpoint, to see how we stack up to others, the other is because we don’t know how to price our own work and want to jump right in now. If you could, you would take our price and reduce it by 10% and become rich and famous. Sure. That is the crux of the issue and the one we will talk about here. All cost numbers are hypothetical so don’t get your knickers in a knot thinking the numbers don’t look right.
Let’s say you want to know how much everyone charges to hang rock. (Drywall, GWB). You, on a good day, get the following responses: $30 for a 4 —8 board and you supply everything, $45 for a 4 —12 board and I supply everything, and $25 a 4 —8 board and you supply the boards, I supply everything else. Now you have answers, but what price are you going to use? Point is, none of the answers will help you because you know absolutely nothing about why those guys set their prices at the level they did. So let’s look at what goes into setting prices, from YOUR business perspective.
Size doesn’t really matter, so forget the board size and who supplies what for now. You have a residential single family job to bid that you estimate (from your vast years of experience) will require 1500 boards. You think it will take two 2-man crews one week to hang, tape, apply two skim coats and sand to primer ready condition. No primer, no point up. To start figuring what you will charge for the job, you will need to know two things; what the costs of doing this job are and what the costs of everything else is.
Job costs are things that are directly needed for a particular job and include all your materials, tool rental for that job, labor for your guys or subs, delivery fees, disposal, consumables such as masks, gloves, etc, and anything else that is for that job only. The other costs, called indirect costs or overhead, are for things like your truck payments, gas, insurance premiums, profit, shop rent, office staff salaries, marketing, profit, new equipment, profit, profit, and so on.
Wearing out your new carpenter’s pencil, you figure that your job costs, called direct costs, will be $22,500 for this job. That is about $15 per board. At this price, you will break even from a direct cost basis. What you don’t know is, and many guys just shoot from the hip here, is how much your indirect costs are. $5 a board, 10%, whatever, you just don’t know. A simple way to figure it out is this: take all of last years indirect costs, costs not associated with a particular job, and divide that by the total amount you billed for last year and you will get a percentage. Say you did 200K and of that, 60K went to things other than direct job costs. Your overhead is 30%of the total, so add 30% to every job cost. Simple right, and the light goes off in your head; take my job costs for a given job, add 30%, and BINGO! My new rate of $29250, or $19.5 per board. Off you go having made no profit and nothing for mistakes.
So now you have to figure in profit, and that is where many contractors have a problem. Maybe industry standard is 8%, but that is not enough. You can put whatever percentage of profit on a job you want. If it doesn’t sell, either your profit percentage is too high, your overhead needs trimming, or you overestimated your direct costs. Shoot for 20% and see what happens. You now have job costs of $22,500, overhead of $6750, and you are going for a profit of 20% over the direct costs AND your overhead, or $5850. That comes out to $23.40 per board. You charge that per board and you will cover all your costs for the job, cover the percentage of overhead associated with that job, and have $5850 in profit, free and clear.
This is an extremely simplified method of figuring out what to charge. It is only a starting point. Keep in mind that there are a lot of other factors that go into pricing a job and there are several other ways to calculate your rate. I have tried to put out a simple method that will at least get you started with understanding pricing. It is now your responsibility to further educate yourself as time permits by reading up on the subject, learning what you can about different methods, and figuring out which way works best for you, AND THEN DOING IT!
Doing it this way will enable you to price your jobs for what YOU need to operate your business profitably and it doesn’t matter what others are charging does it? Doing it this way you can see that asking a pricing question really gets you nothing and you begin to understand why you got beat up and kicked down. Better question to ask is this: I need to charge $25 per board but too many GC’s only want to pay $20. How do you guys deal with this since I don’t want to lose money. Well, that may open up another can of worms, but that is fodder for another article.
So what was your question again?
Some good references to get you going:
(Spend some profit, (that’s what it is for), to learn)
- Mark Up and Profit, A Contractor’s Guide, Michael Stone, about $35, http://www.markupandprofit.com/books_mark.html
- How Much Should I Charge?, Ellen Rohr, ebook format, about $20, http://www.barebonesbiz.com/detail_hmsic.html
- Profit 101, George Hedley, about $20, http://hardhatpresentations.com/products/detail-eckamap.php
- Running a Successful Construction Company, David Gerstel, about $20, http://astore.amazon.com/paradigm360-20/detail/1561585300/002-1007200-3928019
- Defensive Estimating, William Asdal, about $30, http://store.builderbooks.com/cgi-bin/builderbooks/806
Article by Mike Frost www.homesteadrenovations.net.