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Old 08-11-2008, 09:17 AM   #1
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Default Pricing, Estimating, and Success

One of the most challenging aspects of running a contracting business is estimating jobs. For someone with little experience, estimating can be a rather scary endeavor (it can also be scary for someone with tons of experience). After all, the accuracy of the estimate will have a huge impact on the contractor’s success.

This, I believe, is the primary reason we see so many questions asking what to charge for a job. But such questions are misdirected, because what I (or anyone else) would charge is completely irrelevant and doesn’t address the real issues.


The price of a job is comprised of 4 basic components: labor costs, material costs, overhead, and profit. Estimating is the process of identifying the labor and material costs. We add our overhead and profit to those costs to obtain our price.

Overhead—advertising, rent, insurance, utilities, phone, owner’s salary, etc.— is completely unique to each company. Without knowing these numbers, it is impossible to properly price a job.

Profit goals are also unique to each company. Again, without knowing the specific profit goals for a company, it is impossible to properly price a job.

Consequently, any attempt to answer a pricing question in the absence of these two key numbers is essentially meaningless. More to the point, pricing questions ignore the fact that a large percentage (often more than 50%) of the job’s price should be comprised of overhead and profit. (My suspicion is that those who pose such questions don’t know their overhead, and mistake gross profit for net profit. But that’s a different issue.)

As I said, estimating is the process of identifying the labor and material costs for the job. Labor costs are determined by the type of work being performed, the production rates of the company’s workers (the time required to perform each task), and pay rates. As with overhead and profit, these numbers will be unique to each company. Material costs are determined by the type of materials required, the quantity required, and their purchase price.

For example, let us say that a painting contractor knows that his painters can prepare and paint a certain style of door in 30 minutes. He looks at a job that has 10 of these doors. He knows that his painters can prep and paint these doors in 5 hours. He can also calculate the materials required by the spread rate of the product he will use. The contractor can now determine what his costs will be for the job. By adding his overhead and profit to these costs he will have his price for this job.

While the above example is simple and uses a painting project, the same principle applies to every contracting job—large or small, simple or complex—regardless of trade.

What should I charge for X? really means: what is the total of my labor costs, material costs, overhead, and profit? And the answer to that question requires a substantial amount of additional information. Providing an answer without that information is simply a guess.

Accurately pricing a job is not rocket science, but it shouldn’t be based on conjecture, blind guesses, or another company’s numbers either. Certainly accurate estimating takes effort, but owning a successful business isn’t easy. Asking what to charge for a job is asking for a short cut, but there are no short cuts to success.

Such questions about prices for a job are inappropriate, because they ignore the many factors that determine the price. Providing a price in response to such questions is also inappropriate, for the same reasons.

It is a documented fact that 90% of small businesses fail within 5 years. Of those that make it 5 years, another 90% will fail within the next five years. Which means, 99% of small businesses fail within 10 years. One of the primary reasons for failure is not charging enough. Contractors are as guilty of this as anyone.

There seems to be no shortage of hacks willing to work for dirt cheap prices. Nor does there seem to be a shortage of replacements when they inevitably fail. One of the most effective means for avoiding failure is to know your numbers. Asking what to charge for a job is simply an admission that you don’t know your numbers.

I hasten to add that there is nothing wrong or inappropriate with asking how to price a job. But how to price is different from what price to give. Learning the process is a good thing. Looking for an easy way out isn’t.

Putting paint on the wall is a trade skill. Pricing a job is a business skill. A skilled craftsman does not necessarily make a good businessman, because different skills are required. The owner of a contracting company does not necessarily need to have trade skills, but it is imperative that he have business skills if he is to succeed. The longer you wait to obtain those skills, the closer you move to joining those 99%.

Brian Phillips
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Old 08-11-2008, 04:34 PM   #2
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Good post Brian but ........ What about the market value of a job. The market should have a direct influence on what a companies overhead should be. If you are simply over pricing jobs based on a high profit margin or because your overhead numbers are too high then you have to adjust to stay in business. I think that most that ask for "the going rate" are usually trying to find the market price for the type of work they are looking to price.
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Old 08-11-2008, 05:14 PM   #3
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Good post Brian but ........ What about the market value of a job. The market should have a direct influence on what a companies overhead should be. If you are simply over pricing jobs based on a high profit margin or because your overhead numbers are too high then you have to adjust to stay in business. I think that most that ask for "the going rate" are usually trying to find the market price for the type of work they are looking to price.
NEPS,

This was orginally written for another forum and I was asked to post it here.

I am not sure what you mean by market value. Nor am I sure that I understand how the market has a "direct influence on what a companies overhead should be."

I can understand how certain aspects of a market will have an influence on overhead. For example, if certain costs of doing business are abnormally high in one market, that would certainly drive up overhead. But even those costs will vary from company to company.

But the real issue is: in general there is no "market price" for the work we do. There may be something approaching that in certain segments, but certainly not in the residential repaint segment. New construction seems to have a narrow range-- which one might call a market price-- but even this isn't a rigid number. I may be wrong, but I think Scott to attest to this.

I know guys in Houston who swear that nobody will pay more than $25 an hour for a painter. To them, $25 an hour is the going rate or market price. At the same time, I can cite many contractors in Houston getting $40 to $55 an hour in Houston. How can this be, if the going rate is $25? Clearly, the going rate is not $25. More to the point, there is no going rate.

Each company's pricing is unique to that company. My overhead is unique to my company. My profit and income goals are unique to my company. My production rates are unique to my company. The same is true of everyone's company. If our price is labor + materials + overhead + profit, and 3 of these items are completely unique to each company (and unknown to me), how could I or anyone else who doesn't know these numbers possibly give an answer? The truth is, they can't. All you can say is what you would charge. That might make for interesting regional comparisons, but it is useless as far as pricing a particular job.

What one's competitors charge is irrelevant to what one needs to charge to make a decent living. If someone can't sell at the price they need to sell at, they have a sales issue (assuming they know what that price is). But they won't improve their income or profit by basing their price on what others charge while remaining oblivious to their own costs and income goals.

Brian Phillips
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Old 08-11-2008, 05:40 PM   #4
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NEPS,

But the real issue is: in general there is no "market price" for the work we do. There may be something approaching that in certain segments, but certainly not in the residential repaint segment. New construction seems to have a narrow range-- which one might call a market price-- but even this isn't a rigid number. I may be wrong, but I think Scott to attest to this.
Brian Phillips
Alot of our experience as a company is in ultra custom new construction. I dont know that I would describe it as a narrow range, but it definitely is a niche market and every one of them is unique. Sometimes in my job costing after a project, just for poops and giggles I will figure out the s.f. cost (which is irrelevant to any estimating). It is astonishing and varies greatly from one to the next. Far beyond what most would think could be sold. When guys post about s.f. rates of $1-2 it makes me sick to my stomach to think of trying to run a business that way.

As to market value and pricing, I have only seen cases where it would apply in large cookie cutter developments where every house is exactly the same. In those cases, there is a range usually dictated by the developer and they are presented to painters as volume opportunities. Inexperienced guys will look at it and say: "there's 300 houses and I can make $600k in the next 18 months..." Never figuring out that it will cost them $800k and put them out of business. Developers are smart that way. A good paint company has to be smarter.

If NEPS is suggesting that in a tight market we should be re-evaluating our overhead costs and profit goals, then I would agree with that. If we are running 40% profit in a "fat" market, it may be tough in some areas to fly that right now. It does seem to be important to anticipate and adapt to whats going on. That doesnt always mean lowering our goals, it could also mean expanding our services and markets.



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Old 08-11-2008, 05:44 PM   #5
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NEPS,

This was orginally written for another forum and I was asked to post it here.

I am not sure what you mean by market value. Nor am I sure that I understand how the market has a "direct influence on what a companies overhead should be."

I can understand how certain aspects of a market will have an influence on overhead. For example, if certain costs of doing business are abnormally high in one market, that would certainly drive up overhead. But even those costs will vary from company to company.

But the real issue is: in general there is no "market price" for the work we do. There may be something approaching that in certain segments, but certainly not in the residential repaint segment. New construction seems to have a narrow range-- which one might call a market price-- but even this isn't a rigid number. I may be wrong, but I think Scott to attest to this.

I know guys in Houston who swear that nobody will pay more than $25 an hour for a painter. To them, $25 an hour is the going rate or market price. At the same time, I can cite many contractors in Houston getting $40 to $55 an hour in Houston. How can this be, if the going rate is $25? Clearly, the going rate is not $25. More to the point, there is no going rate.

Each company's pricing is unique to that company. My overhead is unique to my company. My profit and income goals are unique to my company. My production rates are unique to my company. The same is true of everyone's company. If our price is labor + materials + overhead + profit, and 3 of these items are completely unique to each company (and unknown to me), how could I or anyone else who doesn't know these numbers possibly give an answer? The truth is, they can't. All you can say is what you would charge. That might make for interesting regional comparisons, but it is useless as far as pricing a particular job.

What one's competitors charge is irrelevant to what one needs to charge to make a decent living. If someone can't sell at the price they need to sell at, they have a sales issue (assuming they know what that price is). But they won't improve their income or profit by basing their price on what others charge while remaining oblivious to their own costs and income goals.

Brian Phillips
There is a difference when competing for commercial or new construction work. There are so many variables that can have a direct effect on winning or losing a bid. The market (what the average price of competing bids are coming in at) is crucial to have a pulse on. It also works to increase your margins.

If there is less work available and more companies competing for the desired job the price will be driven down. The money needs to be absorbed somewhere and that would mean shinking the overhead. It is simple supply and demand.
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Old 08-11-2008, 05:57 PM   #6
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That all.
It can be very simple. A basic example is, in my case, I learned alot about pressure washing here on painttalk over the winter and came out in the spring and really ramped up our offerings in that department. That brought revenues that I wasnt going after previously. I want to build on that. In the past I would have declined calls for deck washing and refinishing, now I see the potential of that service. String together a few little things like that and you can compensate for a sluggish commercial or new construction market right now. Do a bang up job on the deck and next month you may be back doing the whole interior. Etc. etc...This may be old hat to alot of guys here, but it was news to me and this sort of thinking has impacted my business this year.



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Old 08-11-2008, 06:05 PM   #7
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There is a difference when competing for commercial or new construction work. There are so many variables that can have a direct effect on winning or losing a bid. The market (what the average price of competing bids are coming in at) is crucial to have a pulse on. It also works to increase your margins.
That may be more true in new construction and commercial (versus residential repaints), but more true is not always true. Scott has verified that.

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If there is less work available and more companies competing for the desired job the price will be driven down. The money needs to be absorbed somewhere and that would mean shinking the overhead. It is simple supply and demand.
I wouldn't say that it is simple. What is being supplied and what is being demanded? If you are supplying a commodity, then yes the price would be driven down. However, if you supply something that is not a commodity (such as Scott) then you can command a higher price. But that's really a different issue.

If you are saying that we should monitor our overhead and cut the fat, then I agree. But we shouldn't need our customers or competitors to be telling us that.

Brian Phillips
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Old 08-11-2008, 07:00 PM   #8
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[quote=Brian;35327] However, if you supply something that is not a commodity (such as Scott) then you can command a higher price. But that's really a different issue.

Thats what has been interesting as we have dabbled more in scrape and prime exteriors or pressure washing - markets we had mostly ingnored in the past. Finding price points and figuring out how to deliver superior service and value in new to us areas is really interesting. I do find that its possible to win jobs with high prices in other areas. The more I explore, I realize that presentation and how we sell is key.

If you are saying that we should monitor our overhead and cut the fat, then I agree. But we shouldn't need our customers or competitors to be telling us that.

Knee jerk reactions and desperation moves only prolong the agony. It has to be methodical and driven by our goals. Gmack and I are in the same exact market and we were just discussing today how things are more competetive and closing is more difficult. We both vow to not be put in a position of buying jobs. Thats the choice.



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Old 08-11-2008, 09:00 PM   #9
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[quote=vermontpainter;35338]
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We both vow to not be put in a position of buying jobs. Thats the choice.
May we all stay away from buying jobs to keep our loyal employees busy this winter. I've been planning for December all year. Ive never sat my crews for more than 4 days in the winter. Hopefully I'll be as successful this year.
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Old 08-11-2008, 09:17 PM   #10
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[quote=NEPS.US;35373]
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May we all stay away from buying jobs to keep our loyal employees busy this winter. I've been planning for December all year. Ive never sat my crews for more than 4 days in the winter. Hopefully I'll be as successful this year.
Agreed . . . I've taken steps and will continue to take steps toward having a very succesful winter in 08/09. Whether it plays out the way I want it to or not, I can say that I've been much more proactive recently than I ever have been in the past and will continue to be. A big thanks to most all of you regular posters here on Painttalk
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Old 01-13-2009, 12:26 AM   #11
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Good post Brian but ........ What about the market value of a job. The market should have a direct influence on what a companies overhead should be. If you are simply over pricing jobs based on a high profit margin or because your overhead numbers are too high then you have to adjust to stay in business. I think that most that ask for "the going rate" are usually trying to find the market price for the type of work they are looking to price.
NEPS; i agree; in my market, there are four tiers of builders and they can be separated based on quality, which then in turn correlates directly to price.
for my market (milwaukee, wi metro area and outlying suburbs), tier 1 would be the 125,000 to 175,000 range ranch, cape, and small two story. this tier expects the drywallers to spray sand texture one coat over bare drywall and expects $.75 per sf of wall space.
then there's tier two which builds 175,000 to 275,000 type homes for a larger ranch, larger cape and 2500sft two-story. they expect one coat primer and 1 topcoat over sand or orange peel or knockdown at about $2 per sf of wall space.
then there's tier three which builds 275,000 to 400,000 type homes for a 2500-4000 sft home. they expect one coat primer and 2 topcoats over sand or orange peel or knockdown at about $3.75 per sf of wall space.
then there's tier four which builds 400,000 to 1,000,000 type homes for a larger ranch, larger cape and 5000 sft homes. they expect one coat primer and 2 topcoat over sand or orange peel or knockdown at $4-8$ per sf of wall space. adn they expect multiple custom colors throughout.

North of my area (green Bay--Go Packers!) prices are slightly less as the cost of living is less.

You must adjust your prices for your area so that you both make money to keep you happy and to make sure you still get business. it's a da*n fine line that every contractor is conflicted with at some point, but once peace is made with that line, you are better for it.

for instance, i see some of the prices that some in this forum get for their work, and the natural reaction is to get jealous. you then have to look at some of the other prices that people get, adn think "my God, how do they survive." there is a pecking order to all of this; it's the free market at work. cetain markets are more high end. one should not to expect to receive the same amount of money working in milwaukee (like me) that those recieve in Hollywood or Martha's Vineyard. they are, get ready, DIFFERENT MARKETS. don't be envious. be smart about your area, put systems into place so that you are efficient, and move on from there.

whooft!!! i need a nap after this one.
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Old 01-13-2009, 07:04 AM   #12
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NEPS; i agree; in my market, there are four tiers of builders and they can be separated based on quality, which then in turn correlates directly to price.

North of my area (green Bay--Go Packers!) prices are slightly less as the cost of living is less.

You must adjust your prices for your area so that you both make money to keep you happy and to make sure you still get business.
These are valid points, but I think they are addressing a different issue than the OP. Questions about the "going rate" are often an attempt to find some magic number. But such a number doesn't exist. There are far too many factors involved.

Yes, the area where we live and the market we service will impact our prices. If our cost of living and cost of doing business is lower, then that will be reflected in our pricing. Our overhead is usually about 50% of our costs, and if these costs are lower because of where we live, this will ultimately impact our prices. Regardless, we must know our numbers and calculate our price based on those numbers.

But even then there is a lot that we can do to get a price higher than our competitors.

Brian Phillips
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Old 03-11-2009, 11:17 AM   #13
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Default Estimated.

How hard is do reasonable quote, because some unlicence and insurance painter do the jobs cheap, ?how many troubles get the home owners with this can of jobs or contractor, they take just the down payment, don't appear again, still value or damage furnithure etc.
Use some software program powerestimated, to have one idea some city rates, also good look with your prices, have in mine you charge reasanoble price and do good job, remenber you need the client, the client don't need you.
Bye visit our link...
http://magictouchcontracting.com
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Old 08-02-2009, 03:19 PM   #14
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Scott had another great article in APC this month where he talked about pricing and estimating.
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Old 09-30-2009, 11:09 AM   #15
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Mornin' Fellas,

I would like to start off by saying that this is a great forum. On top of that this particular thread is very infomative. My question for you guys is, where do you find out the particular price range for your area. It has been discussed in the thread that different areas have different markets, and I believe that to be true, but how does one go about finding out what the playing field looks like for their area? I am curious because I am currently laid off from the construction industry and I am seriously contemplating starting my own painting business. I have over three years painting experience, but I have always been on the other end of the equation so to speak. I have never actually dealt with bidding jobs or closing sales. Any information would be greatly appreciated.

Thank you,

Steve
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Old 09-30-2009, 01:30 PM   #16
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To find out, you START bidding. If you get jobs and make enough money, whatever enough is for you, and the customers speak well of you, then you are bidding at the correct amount.

If you do not get any jobs when you bid, then either you are bidding too high, or you have a poor reputation, or you present yourself poorly, or all of the above.

In short, YOU need to go out there and try bidding by yourself in your particular market. AFTER that, you can start adjusting your bids based on past bidding experience.
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Old 09-30-2009, 09:45 PM   #17
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Quote:
Originally Posted by Nakinaw View Post
I have over three years painting experience, but I have always been on the other end of the equation so to speak. I have never actually dealt with bidding jobs or closing sales. Any information would be greatly appreciated.

Thank you,

Steve
Did you work for a painting contractor? What kind of experience do you have painting?
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Old 10-04-2009, 02:07 PM   #18
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I have worked for several painting contractors. I started my painting career in June of 2005 working for Swanson & Youngdale, a fairly large painting contractor in Minnesota, as a member of the IUPAT. Most of the work that I have done has been commercial work, but I also have a bit of experience doing residential side jobs. I have never acutally bid anything though. Thats the most scary part. I am comfortable handling the actuall painting and prep, or physical aspect of this, its the closing and bidding aspect and marketing that is a little worrysome. The side work that I have done was to help out friends and family with projects that they took on, so I never had to worry about any bidding or paperwork.

I have two kids at home and I have been on the bench for about 4 months now and I feel like its time to do something myself. The commercial aspect of construction has basically shut down in my area and with the kids and wife, I cant travel too far away. Thats why I am here, I hope to learn and gain enough knowledge to be able to sustain a fair income for my family or possibly more. Any insight is greatly appreciated. Even if you can point me to threads that have already been posted. I am looking through the site, but there is so much information out there that its hard to weed through it all.

Thanks,

Steve
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Old 10-07-2009, 05:00 PM   #19
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Why do people say that you have to figure labor, material, overhead, and profit. I have figured out what I need to make per hour to cover everything and just use that as my hourly rate as labor and add material.
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Old 10-07-2009, 06:46 PM   #20
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Quote:
Originally Posted by capitalcity painting View Post
Why do people say that you have to figure labor, material, overhead, and profit. I have figured out what I need to make per hour to cover everything and just use that as my hourly rate as labor and add material.
How do you figure your hourly rate if you don't include labor costs and overhead? And how will you have anything left over--profit--if you don't include that?

These are rhetorical questions, because nobody can accurately and properly figure their hourly rate if they don't include labor, overhead, and profit. And by accurate and proper, I mean an hourly rate that allows you to make a decent wage and have money left to grow your business.

Brian Phillips
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