No factor creates as much havoc for home improvement contractors as price. The first complication is how to factor it; then the problem becomes how to sell it against the competition that always seems to have a lower price.
Despite what you may have heard, the price should be calculated based on the individual circumstances of your business. Most contractors start in the right place, with the cost of labor and material required to produce the finished job, but many soon lose their way. Standard formulas such as multiplying your direct costs by 1.5 or even doubling your labor and material may not work for everyone, and it is too late once you’ve sold and installed the job to find that you’ve gotten little or no. gain.
Pricing formulas should be based on actual, specific costs within your particular business. You need to know (not guess) what your overall costs really are.
Start by separating your sales and marketing costs from your overhead. Each advertisement, promotion, job site sign, yellow page cost, display piece, startup program participation, and the like is a marketing cost.
It has a cost of sale even if you (personally) make all the sales. Failing to allocate something for your preparation, lead visits, sales follow-up, and phone time is to negate your value in this part of the process. At a minimum, assign the percentage that you would pay or paid to your seller or which companies similar to yours pay their sellers.
Once you’ve separated these costs, factor them against your total sales to get a percentage for each.
Next, project the net profit you want. So the formula looks like this:
Marketing ________%
Sales ________%
(G and A) General expenses ________%
Net profit ________%
Total of the above ________%
* Your accountant would classify them as gross margins.
The total percentage above when subtracted from 100% (the sale price), represents the percentage of the direct cost (labor and material) that is required in each contract.
This is a basic formula. It often requires modifications based on the size and style of the project. Major remodeling jobs, smaller remodeling jobs, and purely specialized contracts such as windows or siding require several additional steps. However, nothing changes the fact that if these four classifications listed above totaled 41%, the cost of labor and material to complete the job cannot exceed 59% of the sales price or you are consuming your profits. .
Unfortunately, most contractors don’t get the price they’re entitled to, and it’s not because the finished product isn’t worth it. The problem lies in the inability to sell the security; however, that’s another story for a future issue.