Are you a contractor looking to strike the perfect balance between profitability and competitiveness? It all begins with your pricing strategy.
Your pricing doesn’t have to be a shot in the dark — think of it as a calculated process that sets you apart from your competition.
Whether you’re a seasoned professional seeking to improve your pricing or a newcomer navigating the contracting world, this article is your comprehensive guide for determining the right prices for your services.
After reading, you’ll know multiple job pricing strategies for contractors and have the knowledge you need to make informed pricing decisions.
Let’s dive in to discover how to price a job as a contractor.
Who is a contractor?
Before covering how to price a job as a contractor, it’s essential to understand what being a contractor means.
A contractor is an individual or business that provides services or labor for another party under a contract or agreement. Typically, a company or individual hires a contractor to complete a specific task or project.
Contractors can either operate independently as self-employed freelancers or own businesses that employ several people.
It’s important to note that contractors are not considered legal employees of the hiring party. They work independently and are responsible for managing their own business operations.
Contractors operate in a variety of industries, such as:
- Construction.
- Electrical work.
- Plumbing.
- Landscaping.
- Information technology.
- And many others.
In their respective industries, contractors offer specialized skills and services to clients who require assistance.
Why is pricing a job as a contractor important?
While it comes with its freedom and flexibility, being an independent contractor is competitive. In a study by Forbes, 14% of the participants identified independent contracting as their primary income source.
Suffice it to say, pricing your jobs right as a contractor is one of the most important elements in maintaining your livelihood. Contractor pricing and profitability go hand in hand. But, it’s a dangerous game. If your prices are too low, you can’t cover your costs — too high, and your prospects will choose your competitors.
Beyond that, pricing your jobs fairly and profitably results in:
- Better communication around the value of your services.
- Adaptability to market conditions.
- Sustainable business growth.
Important pricing considerations for contractors
While there are contractor pricing formulas out there, they have too many variables to consider for them to be useful. When it comes to learning how to price a job as a contractor, here are some things you need to consider:
- Cost analysis: Conduct a thorough analysis of the costs of each project. This includes business expenses such as labor and equipment, and indirect costs like overhead, insurance, and licenses.
- Project scope and complexity: Assess the scope and complexity of the project. Larger, more complex projects typically require more time and resources. You should consider what you really need to deliver the desired results and adjust your pricing accordingly.
- Market research: Research current market conditions and your trade’s industry standards. Evaluate what similar contractors are charging for their services. Don’t forget to ensure that your pricing complies with any regulations in your area.
- Profit margin: Determine an appropriate markup for your services. Consider the level of risk and the value and skills you bring to the project. Your profit margin should support sustainable growth and cover unexpected expenses.
Constructing an accurate estimate: A step-by-step guide
Once you know how to price a job as a contractor, you can create accurate estimates (and invoices) quickly. Here’s a step-by-step guide with everything you need to know.
Assessing the hourly rate
The foundation of any accurate estimate or quote begins with determining an appropriate hourly rate. To figure out an appropriate hourly rate, you need to:
- Evaluate your costs.
- Factor in your desired profit margins.
- Match industry standards.
If you know your desired annual income, you can divide it by your total number of working hours in a year to calculate an hourly rate.
Including overhead costs
Contractors often overlook their overhead costs, but they can really impact the profitability of projects. When creating an estimate, it’s crucial to account for indirect expenses, such as:
- Rent for your office space.
- Insurance.
- Taxes.
- Licenses.
- Utilities.
- Equipment maintenance.
Accounting for labor cost
Depending on the nature of your work, labor costs can make up much of the money you spend on a project. For accurate estimates, you need to account for your labor costs, considering factors like:
- Amount of subcontractors.
- Skill level and experience.
- Scope of the project.
Estimating material costs
As a contractor, a big part of your work involves sourcing and using materials. Naturally, you need to account for the costs of those materials in your estimates to ensure accuracy and transparency with your customers.
To estimate your material costs, you should:
- Analyze the specifications of the project.
- Determine what materials you will need and the amount.
- Choose a supplier and calculate your total price.
Tip: Make sure to account for potential waste and consistently check for any variations in pricing.
Considering additional costs
Even after following the steps above, additional costs can easily slip through the cracks when determining how to price a job as a contractor.
For example, local regulations might force you to adjust your desired prices. Or maybe you’ve provided subcontractors with costly training sessions.
By accounting for these additional costs, you’ll avoid surprises and ensure your estimates are comprehensive and accurate.
Setting a fair price: Markup percentages explored
Of course, the more revenue you make from a job, the better. But if you’re not charging a fair price to your customers, you’ll notice a lot fewer of them as time goes on.
It’s crucial to charge more than just what covers your costs, but it’s not always clear just how much.
Your markup is a percentage of your costs that you charge as a fee for your services.
On average, contractor pricing strategies for competitive advantage impose a markup percentage of around 10% – 20%. But, depending on the value you provide, your percentage could be as high as 40%. If you want, you can negotiate your price with your customers and adjust your markup accordingly.
When you establish a fair price, customers are more willing to pay for your services and return to you.
Evaluating potential customers and projects: A strategic approach
A strategic approach to evaluating potential customers and projects involves thoroughly assessing your contracting business.
First, it’s important to compare your potential customer’s needs and requirements against your budget and capabilities. Consider the project’s scope, complexity, and timeline.
Next, assess your potential customer’s financial stability and reputation. This ensures that you’ll select clients that are likely to make timely payments. You can also consider the potential for future collaborations and referrals in this step.
Note: Be careful here not to offend your potential customer by questioning their integrity.
Finally, you should examine the industry and market trends to determine if the project aligns with your long-term business goals. This way, you can focus on opportunities that promise sustainable growth for your contracting career.
Pricing considerations for contractors
There are a few more considerations you need to make in order to fully understand how to price a job as a contractor. As mentioned, effective job pricing for contractors needs to take into account factors like:
- Costs related to materials, equipment, and overhead.
- Project scope and complexity.
- Market research.
- Profit margin.
Beyond those, here are some more factors influencing contractor job pricing.
Square footage of project area
The size of the project area is a critical factor in most contractor cost estimation approaches. Typically, it correlates to the amount of work involved, the materials required, and the time it will take to complete the job.
Larger places that need work generally require more time and resources, which you must account for in your pricing strategy.
Time constraints of the job
One aspect that’s often overlooked when learning how to price a job as a contractor is that a project’s time constraints should factor into its pricing.
When customers require you to complete a project within a tight timeframe, it often requires additional resources, overtime work, and rescheduling.
It’s important to assess the impact of any time constraints on your ability to complete a job effectively. Then, factor that into the price you’re charging.
Calculating the day rate for the job
For certain projects, you may choose to go with a day rate pricing model. This is another way you can learn how to price a job as a contractor. Unlike other pricing methods for contractor jobs, it involves charging clients a fixed rate per day for your services.
Estimate how long the job will take, and calculate a rate that factors in costs, materials, and your profit margin for that timeframe. On average, a contractor makes around $300 – $500 a day.
As one of the more broad pricing models for contractor projects, make sure that your day rates reflect the value you provide while remaining competitive. Conducting continuous contractor price analysis and optimization ensures that you’re always charging a profitable, competitive rate.
Differentiating between construction business and other businesses
The construction business has several distinctive characteristics that set it apart from other industries.
Here’s a list containing some of the unique aspects of construction:
- Project-based nature: Construction is usually a project-based business, so contractors work on specific projects with a defined start and end date. Projects require contractor bidding and pricing strategies, and each has its own set of requirements and challenges.
- Physical output: Construction businesses produce visible, tangible results in the creation and maintenance of physical structures and infrastructure, such as buildings, roads, and bridges.
- Equipment requirements: Construction projects require some of the largest capital investments for equipment, including specialized tools, heavy machinery, and safety gear. As a result, learning how to price as a contractor can be a very different experience for construction workers and require different best contractor pricing techniques.
- Regulatory and safety considerations: The construction industry is dangerous and has strict regulations and safety standards. Construction workers must carefully comply with building codes, permits, zoning regulations, and occupational safety guidelines.
- Seasonal and weather dependencies: Construction projects are easily impacted and delayed by weather conditions. This requires careful planning and adaptability compared to other industries.
Considering supplies needed for the job
You should carefully consider supplies for all contracting jobs to ensure smooth project execution, cost-effectiveness, and customer satisfaction.
Here are some key considerations to make before calling up any sales reps:
- Quality and suitability.
- Cost and price of alternatives.
- Reliability and reusability.
- Availability.
- Budget.
- Ordering, lead, and shipping time.
Once you have the supplies, make sure you follow your industry’s safety and compliance regulations when using them.
You should also properly store the supplies when you’re not handling them. This might include protecting them from damage or weather exposure or implementing an inventory management system to track usage and avoid wastage.
Key takeaways
Overall, accurate pricing is crucial for profitability and sustainability for any contractor. This blog ensures that you have a solid understanding of how to price a job as a contractor and any contractor pricing best practices.
It’s a multifaceted process that requires the careful consideration of several factors, including:
- Materials, equipment, labor, and overhead costs.
- Market conditions.
- Customer expectations and the project scope.
- Your capabilities and limitations.
- Your value and an appropriate profit margin.
By following the contractor pricing strategies and tactics outlined in this guide, you can develop an informed approach to pricing. Done properly, you’ll achieve a win-win situation by offering competitive pricing while maintaining profitability.
Frequently asked questions (FAQs)
How can I ensure the profitability of my contracting job while maintaining a fair price?
You can ensure the profitability of your contracting job while maintaining a fair price by adding an appropriate profit margin to your services. Most general contractors have a markup percentage of around 10% – 20%.
How does the size of the project area affect the job pricing?
The size of the project area majorly affects the job pricing. This is because, generally, the larger a project space, the more materials, equipment, and labor you’ll need to get the job done.
Are there specific tools or software that can assist in calculating accurate job pricing for contractors?
There are several great tools and software that assist contractors in calculating accurate job prices, such as Method. These tools automate calculations to save time and avoid costly mistakes.
Not to mention, many also simplify your estimate, invoice, and proposal processes.
Humans make mistakes, but software doesn’t. Start your free trial of Method.
Image credit: snowing12 via Adobe Stock