Pricing work has long been an issue for remodelers. I well remember my early days in the 1970s when, with no understanding of operating expenses or profit, I fumbled to justify any charges above direct costs. Only after frustrating business losses drove me to self-education through reading, workshops, and the school of hard knocks did I begin to understand concepts such as burdened labor, gross margin, and the need to make a real profit.
Over the past 30 years, industry educators such as Walt Stoeppelwerth and others have taught business principles to remodelers who essentially found themselves in business by accident as they plied their craft. One such principle was the need for remodelers to price their work at a markup of 1.5 to 1.67 for a gross margin of 33% to 40%.
Many remodeling companies have been built on this principle, and many of them have focused on doing large projects for fixed, non-itemized bids. Their pricing system consists of listing projected direct costs and marking up each item by their chosen multiplier to arrive at a total price. This system has the benefit of being easy to understand and, when costs are estimated accurately, effectively aligning individual job prices with company gross-margin needs.
However, there are also drawbacks to this pricing system — especially in a marketplace where proposals are scrutinized with a fine-tooth comb — and some companies using it find themselves struggling today. One drawback of lump-sum pricing is the difficulty it creates for explaining prices to clients. You may need an overall 33% gross margin, but do your clients see the fairness in marking up the Dumpster by 1.5? Should commodities and unique services be marked up equally? For good client communication and to build trust, it may be better to attach a higher markup to demolition and rebuild and a lower markup to the Dumpster.
Another drawback of lump-sum pricing is that it starts with a focus on your costs. What if your costs are out of line? What if your direct labor includes fat or your operating expenses include fluff? The marketplace rewards efficiency, especially in competitive times.
It’s often said that the major reason for lack of company profitability is the failure of remodelers to charge adequate prices, with the clear implication that the solution is a price increase. It is also frequently said that you can’t concern yourself with what others are charging; you must base your prices on your costs and charge whatever you need to be profitable. These statements are only half true. The flip side of prices being too low is that costs may be too high. If that’s the case, the solution lies in lowering costs not raising prices.
And while it’s true that your prices must be set for your specific business costs, we do still need an awareness of what others are charging for similar work. Our business costs do not automatically translate into client benefits. Potential clients compare options, and we must make sure that our higher prices are justifiable by higher value and are not simply the consequence of higher expenses.