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Discussion Starter · #1 ·
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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Discussion Starter · #3 ·
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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Discussion Starter · #7 ·
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.

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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Discussion Starter · #12 ·
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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Discussion Starter · #20 ·
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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Discussion Starter · #22 ·
Why not figure all that up and break it down to how much you need to make for the month, then the week, then the day, then you'll have the hour thus your hourly wage.
That is what I am saying. If you work 2,000 hours a year and have an expense that costs you $2,000 a year, then you need to add $1 to your labor cost for each hour you work to recover that cost. Apply that to all of your costs, your wage, and your profit, and you have your hourly rate.

Brian Phillips
 
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