Contractor Business--Pricing for Profit

Contractor Business-Pricing for Profit

by Ben Hardy

In a stumbling economy, it is commonplace to be a contractor and see chronic underbidding by competition lead to lost jobs. As the underbid contractor, it is easy to fall victim to the impulse and lower your own prices, just for the sake of landing some jobs. This is the quickest way to see your contractor business fail. Businesses have to make a profit to succeed, and your contractor business is no different.

Pricing for profit comes down to an equation. You add up your material, labor, and overhead costs to the profit that you want to make, and you come out with a number: the price of the job. This is how you determine how much to charge. It's as simple as that.

Here's a better breakdown of the different parts that you are adding up:

• Material costs. This is the cost for each item used to complete the job. You multiply the unit cost per item by the quantity of items/materials used. This is simple enough.
• Labor costs. The labor cost is the cost/hour to do the job. Multiply this by the number of hours required to the complete the job. You must also take into account the number of employees on the job, and who you have working, as different employees may earn different rates.
• Overhead costs. This is often omitted from a contractor's price determination. Overhead costs include the business's utility costs (if you are running out of a brick-and-mortar location), your advertising costs, insurance, etc., etc. A successful business needs to have a grasp on the total overhead costs per month and per year to be able to work this into your price. If you aren't covering overhead costs in your pricing, these costs will come out of your profit.
• Profit. Onto the good stuff. How much do you want your contractor business to rake in with every job? It's probably a good idea to think percentages here. This is a flexible variable. Those other costs are somewhat fixed -you can't not use materials to complete a job, and labor is labor. The job doesn't complete itself. But the profit you make off of each job is fixed by you and your ambitions. Don't sell yourself short, but don't price your way out of job after job.

Accounting for the Competition

Are you constantly looking into what the competition's prices are? This is good and bad. If you get too caught up in the competition, you will end up lowering your own to the extent that you aren't profiting. Do you know what percentage of businesses fail within the first two years? At least one third. (This and other info can be found at the United States Small Business Administration, at http://www.sba.gov/). Do you want to be pricing against a business that may fail? This would put you in their company.

That said, you HAVE to stay apprised of the market, so you can at least be informed when giving a potential customer or client an estimate or a price. This is just basic awareness. It's a balancing act, and there's no question that today's economy MAY compel contractor businesses to adjust their pricing somewhat to land jobs. But don't get carried away, or you'll soon be shuttering your windows just like some banks.