Pricing, Estimating, and Success

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Pricing, Estimating, and Success

Post  Admin on Thu Jan 01, 2009 11:53 pm

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%.

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