The biggest pricing mistake in the trades
Many small contractors price by intuition. Someone inquires for a price and you eyeball the job; then you think about what the last one was and throw in a little more before coming back with a number. It feels like skill. And for a while it is. But after a couple of years it’s usually why you’re working sixty hours a week and still barely making ends meet at pay day.
It’s not as complex as it sounds: you need to be able to account for three things when determining your hourly rate, not just one: your work, your expenses and your earnings. If all that’s on your mind while you’re quoting, you’ll pay for the other two yourself.
What overhead actually is
Name overhead to most contractors, they think rent and insurance. That’s right, but the real list of overhead items is much longer:
- Vehicle costs: payment, gas, insurance, maintenance, tires
- Phone, software, marketing, accounting, card processing fees
- General liability and workers' comp
- Office space, even if it's a corner of the garage
- Permits, dump fees, supplies that don't go on a single job
- Your own non-billable time: estimates, follow-up, paperwork, drive time between jobs
- Taxes, the self-employment kind that bite at year end
When you add it all together over the course of the year and divide it by actual billable hours, you get your overhead cost per billable hour and most one- and two-truck shops have a higher figure than the contractors ever imagine. It’s not uncommon for a contractor’s overhead rate to be higher than his labor rate, even if he has no clue of that.
The basic markup math
Once you get your true hourly cost of doing business (labor + overhead), add in a profit margin, not a tip, but a real margin, one that any viable business in any category would build in.
Picture it as a trio of numbers:
- Direct cost: what the job actually costs you in labor and materials
- Burdened cost: direct cost plus your share of overhead for the hours and materials on that job
- Sell price: burdened cost plus the profit you want to make on it
Run the math once for yourself and you’ll find that you’ve got to be charging substantially more than you are right now to break even, on a reasonable margin. That isn’t greed; that’s just reality catching up to where prices should be.
The constant fear is, will they turn me down? Sometimes they do. Usually, though, they don’t, because they never had the intention of shopping your real costs vs. a competing contractor in the first place. They wanted a price that was fair to go with a person that they trusted.
Time and materials vs flat rate
There are two ways to quote: hourly plus materials or one number.
Hourly rates are used for emergency calls and minor jobs, when nobody knows how bad the situation yet. But customers have to put up with it: the other alternative is no support at all.
The rule is to use flat-rate pricing for every larger job: A homeowner staring at a $4,200 quote isn’t thrilled, but at least they know exactly what they’re committing to. Quote them “$160 an hour plus parts” instead and they’re running math in their head the whole job, worrying, second-guessing every minute you’re on the clock. With flat-rate prices, however, there is no such issue for the homeowner. In addition to that, with the price already established, the faster you work, the more you make.
The trick here is that flat-rates only work if you’re willing and able to crunch the right numbers. If you flat-rate a $4,800 job at $4,200, now you’re paying your customer to work.
Quote speed wins more jobs than quote price
Here’s another little tidbit new contractors don’t seem to know: the quickest to provide a quote wins. I’ll tell you now, the one who quotes in an hour will beat the one with the lowest quote. A lot of the customers are just going to call the first ones, not even bothering to see the other quotes. Especially for anything non-urgent. Things that just go on a homeowner’s to-do list.
When you send a typed Word doc the following day, you’re losing work to the guy who sends the photo-laden estimate and a “sign here” link before supper. Price doesn’t play a big role in this; what counts is speed and looking like a pro.
“The contractor who quotes within the hour wins more jobs than the one who quotes the lowest.
Where ToolbagCRM fits
Pricing and quoting are the one thing that has a big impact on profit in a small trade. With ToolbagCRM, you create your price book once, then quickly and easily drop the right line items onto the quote in the field in less than a minute. Once the customer approves and pays the deposit right from their phone, the job shows up on your calendar. You then track actual labor hours and materials against your quote to identify the jobs that are profitable and those losing money.
Your entire team pays for the exact same single flat fee every month. Your fees won’t go up just because you start hiring more staff. Founders pricing will be frozen for you forever.
Labor plus overhead, not just labor. Sit down once a year, run it, adjust.
Write it down. "Whatever's left over" is not a margin, it's a wish.
Time-and-materials for the emergencies. Flat-rate for anything you can scope before you start.
Even a rough one counts. Speed beats polish, and both beat dead silence.
Every single job. The ones where you bled money are exactly what to reprice next quarter.
Don't go across the board. Find the jobs that are losing money and fix those first.