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#158245 - 04/16/06 08:22 PM Pricing: An Overview  
renosteinke  Offline
Cat Servant
Joined: Jan 2005
Posts: 5,316
Blue Collar Country
I'm starting this thread, as a few recent threads have discussed pricing, and I think the subject is just too broad for any one thread. It's also quite close to our hearts, and as such, tends to make us feel strongly!

To the customer, "pricing" can only mean "how much will it cost me?" In that regard, a simple fixed price is far better than some unspecified amount, contigent upon time, travel, shipping fees, and work by others that is not included. Price is accepted, work is done, bill is paid.... and all are happy.

To the contractor, "pricing" describes the way a bill is calculated. "Estimating" is the fine art of guessing how much it will cost -in time, parts, and other resources- to do the job.

If you quote a single "out the door" price, it is of no concern to the customer as to how you arrived at that price. It is not terribly relevant what price someone else may have quoted.
When you have quoted a job, and the customer has accepted, it is absolutely improper for the customer to attempt to re-negotiate the deal after work has begun. It is positively dishonest for him to do so after the work is complete!
I think that most of the times we find ourselves in conflict with the customer, it is because the original deal did not address the job we performed.

Now, there are various schools of thought as to how you go about estimating a job.
The most common is to make a guess as to your time, multiply that by an imaginary "hourly rate", and add the expected cost of materials. We then have a price to offer the customer.
Some contractors have been around long enough to have been able to document the actual time required (by them) to do a particular job. This speeds up the process, as they have a "rate book" to refer to- AND the experience to recognise factors that will make a job take more or less time.

Others take a more 'engineering' approach, using various formulae regarding square footage, counting holes, adding up 'labor units,' or polixhing Ouiga boards.

There are also the real SWAGgers, who look at the customer, the competition, and try to guess the maximum amount the customer can bear!

How you go about pricing is influenced by other factors, such as:
- Your business model;
- The type of work;
- How badly you want it; and,
- How great is your risk.

Business, Office, Estimating, Legal:

#158246 - 04/17/06 03:14 PM Re: Pricing: An Overview  
Tiger  Offline
Joined: May 2005
Posts: 706
Crystal Lake, IL USA
A very well thought-out post Reno. An important point you make at the end (that I consider often) is Risk/Reward. I may refuse a job if the risk is high and the reward is low.


#158247 - 04/17/06 07:42 PM Re: Pricing: An Overview  
LK  Offline
Joined: Jan 2003
Posts: 1,429
New Jersey
There seems to be a problem with the term FLAT RATE, some have the notion, that anyone using flat rate, belongs to a group of price gouging contractors, this has caused much heated discussion, so we might try, using the term contract pricing, and then understand that there are verious types of contracts,

Installation Contracts
Service Contracts
Repair Contracts

An installation contractor, may do only new construction, and little, or no service and repair work.

A service contractor, may do only service, and repair work, and little or no installation work.

Both, are electrical contractors, but their business operations differ, scheduling, planning, distribution of manpower, truck usage, tools, equipment, are not the same.

One can do the others job, but do they understand the cost of each operation?

#158248 - 04/19/06 06:36 AM Re: Pricing: An Overview  
mahlere  Offline
Joined: Nov 2005
Posts: 507
New Jersey

I agree with you. Pricing is all relative though and what determines unconcionable (is that spelled even close to correct [Linked Image])

If you are a contractor who does nothing but residential service. You have highly paid, qualified technicians (there are some out there) you run new, reliable trucks (so you don't have to call your customer and reschedule due to the truck not starting) You have Yellow Page advertising so that the customer can find you, etc.

You run your numbers, know that you need $125/hr to cover your costs and make a 20% profit. Since you are only residential service work, you know that your productivity is around 50%. So your billable hourly rate doubles to $250.

If you have a great day and get 10 billable hours, you make $2500. But your average day of 4 billable hours grosses you $1000.

To some that pricing is a uncon.....(you know the word [Linked Image]) So what do you do?

That being said, if you determine that you need $250/billable hour and you think you can get away with charging someone $1000 or $1500 /billable hour - just because you can- that is unconciounable. Know your costs, determine your rates and charge them.

But, how many T&M guys will raise and lower their hourly rate arbitrarily depending on how slow or busy they are?

Charge $100/billable hour to be closer to the 'going rate', even though you know that you are not covering your costs?

As long as you actually run your numbers and can show where your price comes from, it's nearly impossible to be guilty of unconciounable pricing. If I can show you where every cent goes, even if I am at $1000/hr, what is wrong or illegal with that?

How much profit is too much? 5%? 10%? 20%? 50%? 100%?

Where you get into problems with unconciounable pricing is when you simply make it up according to the going rate. Then you try to make extra money on a customer (to make up for the money you lost on other customers) and have no basis for your pricing structure.

Whether you are T&M or Flat Rate or you just guess at your pricing - do a calculation of all your costs. Know what you need to charge per unit (hour/day/month) to cover those costs. Don't drop your costs or change your lifestyle to fit what you make. Make what you need to cover the costs and lifestyle you choose.

Does that make any sense?

#158249 - 04/19/06 06:09 PM Re: Pricing: An Overview  
LK  Offline
Joined: Jan 2003
Posts: 1,429
New Jersey
What often happens, is a contractor may be working in construction, or remod work, he gets a service call and responds, does the work, bills at the same rate, not even checking, to see if the job, lost, broke even, or made money, he may never see the loss it produced, because he either has no cost basis, or lets the service call, melt into the unburdened costs, he may look at it as i did, before i understood the real cost of running a business, that seems like to much to charge, or i can't charge that much for residential repair work.

Once you do the math, it is easy to understand, i made these same mistakes years ago, and thanks, to fellow contractors, and my accountant, i was able to get back on track.

#158250 - 04/21/06 11:40 AM Re: Pricing: An Overview  
Active 1  Offline
Joined: Feb 2003
Posts: 687
Grayslake IL, USA
When you quote a customer a price to do a job you take a risk that you may loose money because of many factors. Can't get material at price expected, unforseen local fees, unknown problems inside walls, customer interfearance, or it just took longer than expected. Everyone may have different aproches to these problems. I'm sure quite a few including me knew they lost money halfway thru a project but still did a great job with a good atitude. You need to over estimate to be on the safe side. Also you need to factor your unproductive time.

It seems easy for some to sit on a high horse and avoid these problems with T&M pricing. They can knock those that charge for comming out to give a detailed price on a small job. I would think their estimate looks like this:

$60/hour x ??? + Material (???) = ????

Reminds me once I was at a auto shop and I herd the guy answering the phone. I was like this "How much to replace the cluch in XXXX truck? How would I know I have not done it yet? Bring it down here, I'll do it, then we'll let you know how much it is." Auto shops have labor guids that show how long most jobs take but this one chose not to do business this way.

If that's how they want to run a business fine. But don't knock the ones that give a firm quote based on costs expected time.

#158251 - 04/24/06 09:36 PM Re: Pricing: An Overview  
Romex Racer  Offline
Joined: Feb 2005
Posts: 57
Los Angeles, CA
I can really think of no good arguments against Flat Rate Pricing as it relates to service work. One huge advantage is all your technicians become estimators. They have a book they can reference and give prices in the field.

Let's face facts, running an electrical contracting business has become so expensive, the average residential customer would freak out if you told them your hourly rate, it's better to deliver a flat rate price and avoid shocking the customer.

Auto mechanics use flat rate pricing. They're probably getting $90+ an hour but know that consumers will balk at paying a "grease monkey" such a lofty sum. Consumers are incapable of understanding how business works, that's why they're employees.

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