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Using Flexible Pricing to Achieve Your Construction Profit Goals

Article-Using Flexible Pricing to Achieve Your Construction Profit Goals

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A flexible strategy can help you offer great deals for customers and provide the margins you need. Here's how.

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 benefits 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.

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TAGS: management
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