Cost control in construction can make or break your profits. And pricing construction projects right is pivotal to whether your costs overrun or not. Because construction projects often go over budget, and the numbers are staggering. Recent studies reveal that, on average, construction projects exceed their budgets by a minimum of 16%, and sometimes even more. In fact, lenders often suggest adding a 20% extra budget just in case costs exceed expectations.
To put it into perspective, suppose you estimate the project budget to be $10 million. However, as construction progresses, unforeseen challenges, material price fluctuations, and additional requirements arise, resulting in the final cost reaching $12 million. That’s a 20% increase from the initial budget– it’s a significant jump! And remember, this is the average for all projects, not just a one-time occurrence.
You must stay on top of the numbers to succeed in this high-risk, high-stakes, cost-based industry. And that’s why pricing construction jobs in a way that factors in your expenses while maintaining profitability is pivotal.
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How to price construction projects?
To price a construction job, you need to consider two important formulas:
Price = Cost x Markup
To determine the price, you multiply the cost of the project by the markup percentage. The markup represents the additional amount added to the cost to cover overhead, profit, and other indirect expenses.
Net profit = Income – Cost of goods sold – Expenses
Net profit is the income you generate from the project after subtracting the cost of goods sold and expenses. The goods sold include direct costs like labor, materials, equipment, and subcontractor expenses. Expenses encompass other costs not included in the major cost categories.
This is how you calculate the appropriate pricing for your construction job while accounting for both direct costs and overheads.
Let’s dive into the 4 best construction pricing strategies.
4 best practices for pricing construction projects
Successfully pricing construction projects involves finding the balance between competitive pricing and allowing for profitable margins. Here, cost control and pricing construction projects go hand in hand. By effectively managing costs and considering them when setting prices, you can increase your chances of achieving profitability and success in the industry.
- Get accurate quantity takeoffs
- Use the unit pricing method
- Consider margin for profit while pricing construction projects
- Consider competitiveness and value proposition
Get accurate quantity takeoffs
Getting quantity blueprint takeoffs is the first and most important step in preparing accurate estimates. Why? Because estimators or quantity surveyors review the project plans, complicated blueprints, specifications, and drawings to determine the quantities of different construction elements. This often includes measuring the length, area, volume, or count of various items, such as walls, floors, ceilings, doors, windows, fixtures, piping, electrical components, and more.
So, two things are crucial to getting accurate quantity takeoffs when pricing construction projects:
- Using automated construction takeoff software
- Double-checking quantities to minimize errors
Using reliable measurement software
Using an automated blueprint takeoff software minimizes errors and ensures precise cost estimation. Naturally, manual calculations are prone to human mistakes and inconsistencies that can have a significant impact on your business performance and ROI. By leveraging automation, you can mitigate these risks and enhance the accuracy of your estimates.
Besides, performing takeoffs manually using traditional methods such as printing plans, scales, and highlighters or drawing polygons on digital takeoff software is time-consuming and labor-intensive.
Automated takeoff software also allows for scalability and adaptability to project requirements. Your estimator can handle projects of varying sizes and complexities effectively as the software accommodates changes, revisions, and updates to the plans, ensuring that your estimates remain up-to-date throughout the project lifecycle.
By embracing automated takeoffs, you can harness the power of technology to achieve accurate, consistent, and efficient cost estimations. This brings us to our next point.
Double-checking quantities to minimize errors
Automating the tedious task of scaling blueprints opens up possibilities for your estimators to do so much more.
Estimators can focus their expertise on value engineering. This means– analyzing the extracted quantities, identifying potential cost-saving opportunities, and exploring alternative construction methods or materials.
By having more time for value engineering, estimators can thoroughly review the cost estimates and explore different scenarios to identify areas where cost efficiencies can be achieved. They can analyze the quantities and associated costs, scrutinize the project specifications, and collaborate with engineers, architects, and suppliers to find innovative solutions that align with the client’s requirements and budget.
Estimators can focus on refining the estimate, double-checking assumptions, and conducting thorough cost analysis, resulting in more accurate and reliable projections of project costs.
Use the unit pricing method for pricing construction projects
Are you tired of spending endless hours manually estimating materials and labor for each construction job? It’s time to turn to a game-changing approach that will revolutionize your estimating process: Unit Pricing.
Imagine you’re a roofing contractor preparing an estimate for a project. Exit: grappling with individual material costs and labor hours. Enter: a scenario where you have pre-determined unit prices for various roofing components, such as shingles, underlayment, and flashing.
By investing some time upfront to establish these unit prices, you can bid faster and more accurately. Here’s how it works:
Simplify your estimating
Instead of spending countless hours on tedious calculations, embrace the simplicity of unit prices. With a comprehensive cost database like the National Construction Estimator, you can access pre-determined pricing for a wide range of construction assemblies tailored to your specific region.
Let’s say the unit price for shingles is $40 per square, and for underlayment, it’s $0.50 per square foot.
Tailor unit prices to your needs
While the cost database serves as an excellent starting point, you can fine-tune the unit prices to reflect your unique circumstances. Consider factors like local labor rates, project complexities, and material variations.
Let’s say, based on your experience and market knowledge, you adjust the unit price for flashing to $10 per linear foot.
Bid faster and more accurately
Armed with your customized unit prices, bidding becomes a breeze. If you’re estimating a roofing project that requires 30 squares of shingles, 2,000 square feet of underlayment, and 100 linear feet of flashing. With unit pricing, you can swiftly calculate the material costs by multiplying the quantities with the respective unit prices.
In this example, your material costs would be $1,200 for shingles (30 squares * $40), $1,000 for underlayment (2,000 square feet * $0.50), and $1,000 for flashing (100 linear feet * $10).
By adopting unit pricing, you can streamline your estimating process, save valuable time, and ensure your bids are rooted in accuracy. As a result, you’ll experience enhanced productivity, improved competitiveness, and increased profitability.
Consider margin for profit
When pricing construction projects, covering your costs AND incorporating a margin for profit is a must. It’s a no-brainer, yes! But let’s dive deep into the why!
This ensures that your business remains financially sustainable and generates a return on investment. The profit margin represents the additional amount you add to the total cost of the project to achieve profitability.
For instance, suppose you estimate the total cost of a construction project, including labor, materials, overheads, and indirect expenses, to be $100,000. To determine your profit margin, you must consider various factors, such as business goals, industry standards, and risk assessment. Assuming you decide on a 15% profit margin, you would add $15,000 to the total cost. Therefore, your final price to the client would be $115,000 ($100,000 + $15,000).
Profit margin is not only a reward for your expertise, efforts, and investment in the business but also covers unforeseen expenses and potential risks. It’s crucial to strike a balance between setting a reasonable profit margin that ensures profitability and remaining competitive in the market.
Consider competitiveness and value proposition
Pricing construction jobs require considering market dynamics, competitor pricing, and your unique value proposition. Achieving the right balance between offering competitive prices and maintaining profitability is essential for winning contracts and sustaining business growth.
Suppose you’re a general contractor bidding for a commercial construction project. You must also evaluate your competitors’ rates and market conditions to determine your pricing.
Let’s say the average competitor price for a similar project is $150,000. However, you’ve developed a reputation for exceptional quality, on-time delivery, and superior customer service, which sets you apart from your competitors. Based on your value proposition, you decide to offer a slightly higher price of $160,000. This allows you to capture the attention of clients seeking premium services while justifying the additional cost with the value you bring to the project.
By considering the market dynamics and understanding your unique value proposition, you can position yourself strategically and attract clients who appreciate the benefits you offer beyond just price. This approach helps you differentiate your services and build a loyal customer base, ensuring long-term profitability.
Conclusion to pricing your construction projects
In conclusion, pricing construction projects accurately and effectively is crucial for cost control and profitability in the construction industry. Construction projects often exceed their budgets, making it essential to stay on top of the numbers and implement best practices for pricing.
By implementing these best practices, construction professionals such as yourself can navigate the challenges of cost control, achieve profitability, and position themselves competitively in the industry.