How to Price a Construction Job: A Practical Guide for Small Contractors
Winning a job at the wrong price is worse than losing it. You spend months of your capacity, pay your crew, buy materials, and come out the other side with less money than you started with. Pricing correctly is not about being low. It is about knowing your costs.
Before you price
Start with direct costs
Direct costs are the costs that exist only because of this specific job. They go away when the job is done.
Labor: hours for each worker classification multiplied by the all-in cost per hour. All-in means base wage plus payroll taxes (FICA, FUTA, SUTA), workers compensation insurance, general liability insurance allocated to labor, and any benefits you provide.
Materials: quantities from your takeoff at the vendor price you will actually pay, including freight and sales tax. Use real quotes, not catalog prices, on anything significant.
Subcontractors: the price on their quote plus any markup your contract allows for managing their work.
Equipment: rental cost or an internal equipment rate that covers depreciation, maintenance, fuel, and operator when applicable.
Overhead: what most contractors undercount
Overhead is the cost of running your business that does not go away when a specific job ends: your office, your truck, your estimator, your bookkeeper, your tools, your insurance, your license fees.
Calculate your annual overhead. Divide it by your annual revenue to get an overhead rate. If you have $300,000 in overhead and $1.5 million in revenue, your overhead rate is 20 percent.
That 20 percent needs to come from somewhere. Each job needs to carry its share of overhead. A bid that covers direct costs but not overhead is a bid that loses money.
Review your overhead calculation at least annually. As your revenue grows, your overhead rate often drops. As it shrinks, the rate goes up. Track it.
Profit is not what is left over
Profit is what you plan to make. It is a line item in your estimate, not a residual.
If you add direct costs and overhead and then see what is left compared to the market, you are working backward. Price your work, then decide whether the market will accept your price. Do not let the market dictate your margin without understanding whether that margin covers your cost structure.
A 10 percent profit on a $200,000 job is $20,000. A 10 percent profit on a job you took at a price below your overhead recovery is a loss.
Contingency and risk pricing
Every estimate has unknowns. Contingency is the money you set aside for things that go wrong.
The right contingency depends on how well you know the scope and how much project risk you are accepting. A straightforward renovation you have done a dozen times needs less contingency than a first-time project type with a tight schedule and punishing liquidated damages.
Contingency is not the same as profit. It covers cost overruns on specific risks. If those risks do not materialize, the contingency becomes profit. If they do, the contingency covers them without eating your margin.
Check your number before you submit
Before submitting a bid, do a sanity check. Divide your total price by the total labor hours. What is your implied revenue per hour? Does that number make sense given what it costs to run your business?
Compare to jobs you have completed. If your all-in cost on similar work was $X per square foot last year, and this bid comes in at $X minus 20 percent, find out why before you submit.
Also check: what is the low bid threshold? On competitive public work, look at the engineer's estimate and prior bid tabs for similar work. If your number is more than 20 percent below the estimate, double-check your takeoff before assuming you are simply more efficient.