Contractor Pricing, The Mystery Solved

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Anyone of us that has had multiple contractors over to our homes to work up a quote for a project must have had similar experiences. Similar with respects to receiving such a wide range of pricing for the same job….how can this be? The simple answer is, and this ties into my previous blog post, most contractors really are not skilled or proficient in business finance. I don’t profess to be at the upper end of this spectrum but definitely above 50%, or at least that’s what I’m rolling with.

Ok, let’s break this down a bit. It’s really not all that cryptic. A contractor comes in, measures up, investigates material and labor costs and then puts a price together. That’s not hard, right…..I agree. The next part is where the breakdown, or separation comes in to play. The mark up, the additional charge that EVERY contractor must add on to the estimate in order to pay the bills. That markup, which is a percentage cost or amount of each job that needs to put to the side to pay for all the overhead of the business which includes: general liability, workers compensation & disability insurance, vehicle ...
... cost/insurance/maintenance, tool purchases & maintenance, advertising & on and on and on. Hopefully said contractor(s) have spent some time adding all of their expenses up, added up their gross sales from the year before and then determined what % of gross sales their overhead is. This sounds rudimentary right? Sadly, I believe the percentage of contractors out there that don’t have a clue as to these facts & figures for their respective businesses is quite high.

In addition to poor financial diligence in determining a proper mark up, contractors will also fail to price in or compensate themselves for all the functions that a business must provide. Every function that requires time and effort should be compensated. I haven’t met too many people that work for free, have you? Other than a volunteer who does work for free sporadically, that’s not a fair comparison, they don’t volunteer 5 days a week, 52 weeks a year. A typical contractor will not only do the hands on work on the job, they will also do the estimating, the field supervision of the job, the accounting and all the administrative parts of the business. Each one of these functions requires time & effort….i.e. expense or cost. Most contractors don’t charge for some if not all of these functions. Who cares…..right? You will take the cheap price and that’s his problem, sounds good, who wouldn’t? Consider a few things the next time you hire “the cheap guy”. When the cheap guy who didn’t price the job right realizes he is crashing and burning on your job, get ready for some additional items to pop up (extras). When the cheap contractor who doesn’t have money in the project to have a project manager on the site and you have questions and there is nobody around was it worth it? When the cheap contractor realizes that not only is your job crashing and burning but his entire business is going down because he got audited by Workers Comp and he would have to work for free for the next 6 months to pay his bills, how’s that cheap price looking now? On and on, all the horror stories told by homeowners are birthed the moment “the cheap guy” is hired. He is the bane of the industry but he lives on in perpetuity.

If you are looking for a good contractor that understands all sides of the business, the work, the financial side, the customer relationship side, the contract / legal side he will likely not be “the cheap guy”. I remember one contractor telling me a sales line that really spoke to me in reference to all of this and it was “You will get the exact job that you pay for, if you want more you will have to pay more”.

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