Knowing how much you should charge as a contractor will help ensure your company is profitable
At the core of any successful project is effective cost management. Price too high and you may lose the bid. Price too low and you sacrifice profit. Rates for general contractors depend on several factors. Business expenses, labor and workers’ compensation, insurance, taxes, and material costs all play a part when setting your rates.
When it comes to pricing, you need to think strategically. What are the different pricing models, and what else is there to consider when determining your best price? Learn common general contractor pricing models and how you can find the best rate for your business.
A general contractor will charge between 10% and 20% of the total cost of the job. Some contractors charge a flat fee, but you should calculate it as a percentage in most cases.
For larger projects, the average cost a contractor might charge is closer to 25%. Naturally, how much you charge will vary widely based on the type of project. For example, your pricing would vary drastically if you’re bidding on a new home build versus a bathroom remodel.
Contractors use many pricing models. One model may work best for small remodeling projects, whereas you may prefer another model for larger jobs. Some general contractors choose to use only one pricing model for every job, which can simplify accounting practices.
These are several of the most common types of pricing models. You’ll notice some overlap in terms of getting paid.
You define the fixed price for your services and the work you’ll perform. If there are any services required outside the contract, you may need to draw up a separate signed agreement. For that reason, it’s important to consider all costs before determining the price.
A firm-fixed-price contract cannot be changed even if an expense arises outside of the original contract. You, as the contractor, take on the most risk in a firm-fixed contract, while your customer takes on minimal risks.
A fixed-price contract with escalation allows you to increase your price if costs rise during the contract period. Use this type of contract if a project spans more than a few months, and it’s possible materials and labor will increase before the contract is complete.
A time and materials pricing model is a kind of pay-as-you-go contract. As you complete the work, your customer pays for your services. You will usually base your payments on an hourly rate plus any materials used, up to a not-to-exceed amount.
This is a standard pricing model in construction, especially for smaller jobs. Both you and your customer agree on a lump sum (hard costs) for the entire job before the work begins. It’s a simplified estimating method and a good choice when the project’s scope is well-defined and unlikely to change. However, with a lump-sum contract, it may be difficult to raise your prices if the project’s scope increases.
With this contract, payment for your services includes your standard project expenses plus a fee. This is usually a fixed dollar amount or a fixed percentage of the total job costs. Your customer takes on more risk with this method, as you have complete control over the project costs, which may be lower than was calculated in the contract.
Contractors use unit pricing when embedding both overhead and profits into the price. This pricing method works best if you know the materials cost and your hourly rate for the project, but you’re unsure how much time the project will take.
Beyond pricing models, there are additional items you should consider when estimating and setting a price for your contracting services.
As a general contractor, you will have costs related to each project or job beyond direct material and labor costs.
Additional general contractor fees may include:
Rent and utilities
Engineering and architectural services
Legal costs
Staff payroll
Permits and land acquisition
Jobsite offices and other onsite costs
Taxes and insurance
To ensure you receive the best rates on outsourcing work to a subcontractor, it’s not a bad idea to compare quotes. Rather than accept a cost-plus bid, it may be better to find a subcontractor who will provide you with a firm estimate subject to the scope of the project.
Of course, your homeowner may want to take the bull by the horns and outsource a subcontractor themselves. If this is the case, you may want to consider protecting your company by ensuring each subcontractor has their own liability insurance. If they don’t, you may want to go a step further and add them to your own policy for the project’s duration.
It’s not uncommon to see new construction projects average about 3.9 pounds of waste per square foot of building area. That’s nearly four tons of waste materials and trash from building a 2,000 square foot home, according to Junk King Removal Services. The majority of those costs—rough cleaning and final cleaning—are done by you as the general contractor.
Construction is a cost-based industry. As a general contractor, you need to know your costs upfront for each individual project. You’ll also want to mark up those costs to come to a final price. Your price must be high enough to cover all of your expenses and show a profit.
Markup is the difference between what you charge for a project and the actual cost to get the job done. The formula looks like this:
Gross Profit [Job Cost ($) + Overhead (%) + Profit (%)] x 100 [Job Cost]
General contractor markup considers labor, materials, fees and permits, insurance, and more for each specific job. The higher the markup, the more revenue your company makes. Several factors, such as the availability of materials, time of year, your company’s reputation, and what the competition is doing, all factor into your markup.
There is no industry standard for calculating markup, just like there is no industry standard for indirect costs or overhead.
Overhead is the actual cost of running your business and includes all indirect or ongoing costs not linked to a specific job. Determining markup on overhead is important for your business as it ensures you make a profit.
A few indirect costs may include:
Accounting expenses
Rent and utilities
Company car
Business insurance
Equipment and tools
Marketing, advertising and website costs
There is no industry standard for labor costs. Even so, general contractors often miscalculate labor, which can vastly change your bottom line. But keep in mind that you may lose a bid if your labor costs are too high. You also risk a substantial loss in profits if you don’t mark up your labor costs high enough.
Marking up your material costs for each job is vital and will likely vary from one job to the next. You’ll want to cover all your expenses, like sourcing, storing, purchasing, and delivering the materials to the construction or remodeling site.
As a general guide, the typical markup on materials is between 7.5% and 10%. However, some contractors will mark up their material costs as much as 20%, according to the Corporate Finance Institute.
This seems obvious, but if you complete a job and have little left over in terms of profit, you may decide to forfeit paying your own salary, just this once. However, it’s important to calculate the compensation you need for yourself based on your skills and experience.
If this is your first general contracting job, it may be more challenging to determine the best pricing model to cover all of your direct and indirect costs. Even if you’ve been in the business for years, general contractor pricing can hit or miss, mainly because there are so many factors to consider.
But as a general contractor, you plan, execute, monitor and control every project stage. Calculating your price correctly can not only save you headaches but raise your profit margin when you bring the project to a successful closure.
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