Managing Price and Costs On The Job

June 21, 2019
by silb
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Running any business means being on top of your finances, and part of that is devising a pricing strategy. Ask yourself, as a contractor, and taking into account all of the material and labour costs you need to consider, which pricing strategy is best for you?

Most customers can tell if a price is fair or not and are likely already comparing other prices. They will likely even know the figures better than you. So, here are two of the main pricing strategies you could consider, and how you can reduce prices if need be.

Which Strategy?

Cost-Plus Pricing

This strategy involves adding a markup to the cost of any goods or services you offer to arrive at the ‘selling price’. This means taking the material, labour and overhead costs for a project and adding it to a markup percentage to then come to the price of that product/service. This strategy can be used within a contract with the customer where they reimburse you for all costs incurred as well as a negotiated profit.

This strategy is simple, assures contract profits and is justifiable, but it does ignore any competition, have product and contract cost overruns and ignores replacement costs.

Hourly Rate

When your business is services based, like contracting is, this is likely going to be the most effective strategy for you. It’s simple, work out what you’re going to charge per hour worked. Take into consideration any running costs per hour, plus travel and labour and this will give you an hourly rate. Then you need to add on your overheads, and finally profits.

Once you’ve done all of this, you should be left with your rate per hour. However, if you look at the market average for other contractors and find your costs prove to be considerably higher, you can do one of two things;

  1. Consider lowering your overheads and variable costs
  2. Work longer hours and reduce your profit margin.

Reducing Costs

Identifying Risks

Identifying risks early on in the project is important, and it will save you a considerable amount of time and money later in the job. Make sure you consider both cost and time implications of the risk when analysing them. This makes it a lot easier to analyse how badly they might end up affecting your project and profits later down the line.

Manage Your Materials Effectively

Being negligent with your material management costs money, eats into your profits from a contract and ends up affecting the price of your job. Things like replacing tools, service & maintenance, losing materials or damaging them all have negative effects on your project.

Never Use Uncertified Vendors

Using vendors that are certified and licensed is the only way to go when it comes to contracting. Using unlicensed vendors is a way to run into trouble very quickly. Not only can this skyrocket your costs if anything goes wrong, but it can also lead to legal issues down the line, which will also add to costs.

All documents should be inspected before contracts are signed or orders are made, and materials should be inspected upon arrival at the job.

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