Learning how to price a job in construction can seem daunting when you are just starting out in the industry. Coming up with a consistent pricing strategy is one of the most important skills in running a successful contracting business - price too high and you could discourage prospective clients, price too low and you could lose money on a project. Here, we break down the basics of job costs, detail why it is crucial to winning jobs and making a reasonable profit, and share some common pricing and billing methods used in the construction industry so you can stay competitive in the market.
Click on a link below to jump straight to the section you’re most interested in:
- Understanding the Basics of Job Pricing in Residential Construction
- Why it is Important to Get Construction Pricing Right
- Construction Pricing Methods
- How to Price a Job in Construction
- How to Price a Job in Construction & Factor in Profit Margins
- How to Price Construction Projects Based on Market and Competition
- How to Communicate Residential Construction Pricing to Clients
- How to Manage job Pricing and Budgets in Construction
- Final Tips for How to Price a Construction Project
Understanding the Basics of Job Pricing in Residential Construction
Job pricing determines what you need to charge for all aspects of a project and serves as the basis for your bid. These are the four overall categories and associated costs you need to consider when mastering the art of the job costing system:
Materials - Make a list of all the materials you will need to complete the job and the quantity for each. Doing takeoffs of the project plans will allow you to calculate the material requirements.
Labour - Factor in the type of labour and the number of hours it will take to complete a job. This includes determining your salary, and daily rate as well as the total cost of hiring subcontractors.
Overhead Expenses - Don’t forget the total project cost goes beyond the job site. Overhead costs include office supplies, marketing costs, accountant fees, insurance, utilities, office rent, legal fees and any other related expenses.
Michael Parinchy, Senior Construction Manager at ProBuild360, an award-winning design, construction, and installation company, notes that "materials and labour do not add up to a complete construction project cost plan. You must also include management, administration, and preliminaries such as site welfare, waste management, scaffold access, and acro propping."
Desired Profit Margin - After paying all the bills, you still need to make a healthy profit to grow your construction business over the long run. This is the amount of revenue that goes back into your business after all the costs are covered for a project. It is typically a percentage and an amount beyond what you pay yourself as a salary.
The difference between margin and markup
A margin is the percentage of your final project cost that is your profit. A markup is the percentage that you add to your total costs to get your final project cost. To calculate an accurate price for a construction job, you need to calculate the sum of all the three elements above, (materials, labour and overhead costs) and then apply a markup or a margin to get your final price.
As an example, if your total costs for the project were £10,000 and you apply a 50% markup, your final job cost will be £15,000 and your profit will be £5000, which is 33.3% of your project costs. Alternatively, you could decide to add a 50% margin percentage, making your final project cost £20,000 and your profit would be £10,000, which is 50% of your final project cost.
The markup or margin that you apply depends on the desired profit you'd like to make, as well as the competitive value that you want to offer to your clients. To decide what to charge, research your local market and discover what competitors are charging for similar jobs, as well as what prospective clients are willing to pay. The key is to stay competitive yet earn a good living for yourself and your team.
Why it is Important to Get Construction Pricing Right
There are many benefits to taking the time to learn how to price a construction project like a pro. Here are a few of them:
Assure Profit
As mentioned, no business can survive without consistently making a profit which is the reward for all your hard work. An effective and accurate pricing approach considers the profit for every project.
Build Credibility
Having a tried and true pricing method builds trust with clients because they can see the logic behind the prices being charged. It also signals the professionalism they are seeking in a contractor.
Create Transparency
The value clients are getting for their budget is clearer when they understand the pricing methods of their project.
Make Faster Estimates
As with any business process, those that can be applied project after project save time and effort. That is true when you have a framework in place to estimate a construction project.
Construction Pricing Methods
Estimating costs for a construction job gets easier when you choose a billing process that works for you and your business. Here are five common construction billing methods, but you can learn more with Your Complete Guide to Construction Billing Methods.
Fixed Price /Lump Sum
This involves charging a single price that covers every part of the project. Then, you either bill for the entire project upfront or the client pays only after all the work is completed.
Cost Plus Contract
In this pricing mechanism, the client pays all of the project costs plus an extra fee for the contractor's overheads and profit. This helps ensure you will make a profit, but not all clients are comfortable not knowing all the costs ahead of time. Some contractors include a cap on costs to address those concerns.
Time and Materials
Similar to the cost-plus method, T&M makes the plus part an agreed-upon rate such as an hourly or daily wage. This method provides budget flexibility, but you will still need to account for all the actual costs and hours you bill to the client.
Unit Price
With this method, contractors bill separately for specific parts of a project. This provides the advantage of being paid incrementally through the life of the project, but documentation for each unit is essential.
"When it comes to the supply and installation of products, such as windows and doors, cabinetry, appliances, fixtures and fittings, wall and floor coverings etc, the use of provisional sums or prime cost sums will allow a complete project budget to be available," says Parinchy of ProBuild360. "When used correctly, this method allows for an even distribution of quality across the finishes, which results in a finished project that feels like it was well planned and thought through holistically and comprehensively."
How to Price a Job in Construction
Now let’s get started. Here is a step-by-step guide to how to price construction jobs:
Understand the Project Scope
- Location - The distance you and your team have to travel to a job site matters, so take that into consideration.
- Walk the Site - Measure everything, check for any existing damage or safety hazards, and take photos to document any issues.
- Time Constraints, Special Requests - Is the expected timeline for this project shorter than normal? If so, factor in the costs of that. Ditto for any special requests from clients that may increase the price charged.
Estimate material costs
List all the materials you will need for the project, add the quantity and cost for each, and then add a markup to reach your total. Include the overhead costs here also (see below). You will need to research the pricing of materials that go beyond standard lists. This includes checking with specific vendors and suppliers.
Parinchy suggests that "a new construction company should leave a little meat on the bones to avoid losing money on projects should they miss something, or any unforeseen challenges arise." He continues. "Though, this must not be so much as to be uncompetitive and lose the contracts being quoted for.”
Doing takeoffs of the project plans will allow you to calculate the material requirements for the job.
Establish Your Daily Rate
Before you determine all the labour costs for a specific job including subcontractors, start by establishing your daily rate as a contractor. This will give you a base rate, or the minimum you need to charge for every project.
- Set your salary -This is the annual amount you will pay yourself and it is not the same as the profit margin
- Your crew - Determine the salaries of your team
- Know your Billable Hours This will help you determine how much you need to charge per hour to meet the costs. Reach this figure by estimating the number of days you plan to work in a year excluding bank holidays and days off.
- Add in Overhead Costs - These are the annual costs of running your business that we outlined above.
- Add any other employee-related expenses:
-Health Benefits
-Holiday & Sick Pay
-Pension schemes
-Uniforms, work clothing and tools
-Work vehicles
- Set Your Profit Margin- The industry standard is between 10 percent and 20 percent.
- Calculate your Base Daily Rate - Divide the total expenses listed above, including the profit margin by the number of days you intend to work. This is your daily base rate. To know your hourly rate, do the same but divide the total expenses by the total number of billable hours for the year.
A top tip from Parinchy regarding unforeseen or unexpected costs, is to “write them out' rather than 'price them out' – that is to say limit the scope of responsibility in the written part of the contract, doing this should help keep your prices down, thereby staying as competitive as possible."
Estimate Labour Costs for a Job
Your labour costs are determined by your hourly rate multiplied by the number of labour hours that will be needed to complete the job. Additionally, you will need to determine the number of subcontractors, their salaries and the time they will spend on the job.
- Consider experience and working conditions when calculating base salaries - Highly skilled workers with years of experience will cost you more than newcomers. Also, consider what kind of conditions they will be working in and any of those factors that will increase the cost. Checking the Office for National Statistics for average salaries, as well as other job adverts in the area, can help you make these estimates for the salary of your subcontractors.
- Incorporate Overhead Costs - To factor overhead costs into a job, calculate these total costs for a period of time: monthly or annually. Then, calculate the number of hours worked during that time. Dividing those two numbers will give you an hourly overhead cost. Then, apply that hourly cost to a specific project by figuring the number of labour hours worked on the project and multiplying that by the hourly overhead rate.
Don’t Forget Taxes
Remember to factor in VAT for labour and material costs. These indirect costs can add a significant amount to the project cost. Also, add a prorated amount for annual taxes such as business and income tax into your overhead costs.
How to Price a Job in Construction & Factor in Profit Margins
It is important to make sure that your prices are high enough to cover all your expenses and earn you a profit so that your business will continue to thrive and grow. Your price for the project equals the costs multiplied by your markup, and your profit equals your revenue minus costs and expenses. The industry standard for profit margins is between 10 percent and 20 percent, and here is one method for building in a profit margin:
Cost-based method
Under this method, this is how you reach your price: You determine all the costs: materials, labour, equipment, and more. Then, multiply the costs by your markup factor. The markup factor is 100 percent of your costs plus your percentage markup. For example, if the markup is 20 percent then add 1.0 and 0.2 to reach a markup factor of 1.2.
How to Price Construction Projects Based on Market and Competition
Now that you have determined the base rate you will be charging for jobs and your markup factor, it is a good idea to compare it to your competitors to make sure it is not too high or too low. Pricing jobs significantly higher than your competitors can reduce your chances of winning the contract, and submitting bids that are too low could mean you will be covering some of the expenses out of your own pocket.
Here are some ways to check how your prices fit your market:
- Reach out to a professional organisation or construction trade association. They typically collect data that can help.
- Contact competitors. It can’t hurt to ask, and they may be willing to share and compare if you are.
- Talk to your clients and networks
How to Communicate Construction Pricing to Clients
Professionally delivering a bid or quote and demonstrating transparency makes a good first impression on clients. Here are some tips for effectively communicating your pricing to customers:
- Use a quote template branded with your business logo
- Send your quote digitally
- Work off of a single source of truth to avoid sending outdated information
- Make financial documents accessible to clients via an easy-to-access client portal
- Allow clients to see as many pricing details as possible to create transparency
- Learn more about How to Do a Construction Estimate and How to Do a Construction Quote
How to Manage Job Pricing and Budgets in Construction
Pricing a construction project is a key piece of the budget puzzle but not the only one. Effectively managing budgets and adjusting them along the life of a project is important for assuring that your pricing estimates match up with reality. This also requires having a way to easily track construction time.
Final Tips for How to Price Construction Projects
Most construction pros will make job pricing mistakes early on, and it is important to review and revise your estimates based on those learnings. "As a company becomes more established and wins more jobs, the more the margin can be spread over the jobs, whilst the more jobs that are completed, the more data becomes available to analyse and gain insights into the company’s true costs. Both of these things will enable more confidence in quoting projects and the more competitive they can be," says Parinchy.
Using business software makes job pricing and budget tracking more accurate and faster than doing it manually through spreadsheets and pdf templates. Use the tips and techniques in this article to make the job easier every time you price a new job.
Conclusion
Taking the time to develop a consistent pricing strategy and method is crucial for staying competitive, winning the trust of clients and ensuring that your construction business maintains a healthy profit margin and you remain financially stable.
Start a free trial of Houzz Pro to explore our estimating, takeoffs, cost estimation, and client portal features that can aid in pricing jobs accurately and getting paid fast.
