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A complete guide to contractor pricing

contractor looking at plans on work table
August 22, 2022
Written by Nextdoor Editorial Team
August 22, 2022 | Written by Nextdoor Editorial Team

As a general contractor, your pricing can be just as important to a construction project as your skills and experience. But that’s not just for the sake of your business operations. Clear and accurate pricing can benefit both you and your customers.

Setting your rates as a licensed contractor ensures you’ll be paid fairly for your skilled work. It can also help you to provide clear communication to your customers and eliminate any confusion about costs.

This contractor pricing guide has everything you need to know about how much to charge as a reputable contractor. With a few solid pricing models and an understanding of how to build a budget, you’ll be able to confidently set prices for any construction project.

Choosing your pricing model

Whether you’re a reputable contractor undertaking a two-day job or a multi-month project, you’ll want to ensure you’re charging appropriately. But how does the length of the job or even the type of work affect your pricing?

How you set your rates can certainly vary from project to project. But by understanding all of the potential pricing models (and when to use them), you can maximize your profits and customer satisfaction. 

Let’s look at four of the most common pricing models for general contractors.

1. Fixed-price contracts

With a fixed-price contract, you provide a single quote for a project. Your initial estimate should account for all overhead costs and profit margins. As such, you’ll want to have a thorough understanding of all aspects of the project before you create a quote.

Although it’s called a “fixed-price” contract, the total bill for the project doesn't have to be set in stone. If you write a fixed-price contract for a job and later find that the actual costs of the job are well over budget, you can always draft a second contract to cover these unforeseen circumstances. Keep in mind that you and your customer will have to sign off on any changes.

You can also adjust your fixed-price contract to allow more or less flexibility, depending on the length of the project and your customer’s needs. Depending on the project, you may want to settle on a:

  • Firm fixed-price contract – With a firm-fixed-price contract, the first price you quote is the final budget. These contracts can be risky, as there’s no room to account for unexpected expenses or material cost increases. However, they can also provide some peace of mind to your customer by guaranteeing they won’t have to pay more than expected.
  • Fixed-price contract with escalation – This contract includes an escalation clause that helps to account for market fluctuations. Both you and your client need to agree to a maximum potential increase (usually a percentage) and the situations that would trigger a price escalation. These contracts can be ideal for long-term, multi-year projects, as changing material and labor costs are more likely to affect them over time.

When to consider a fixed-price model

Fixed-price contracts work best for clearly defined projects. If your customer already has a vision and a firm budget, this pricing model can secure you a fair rate without piles of paperwork.

The fixed-price model also works well when promoting your contracting services online. Take Butler Contracting in Bastrop, TX, for instance. With fixed prices for common projects listed plainly on their website, potential customers know what to expect before reaching out for a full quote.

2. Unit price contracts

You can think of a unit price contract as an itemized bill. Rather than giving your customers one lump sum estimate for the entire project, you’ll provide them with a list that breaks down the work into smaller units.

For example, if you’re building a house from the ground up, you might have separate prices for:

  • Laying the foundation
  • Framing the house
  • Installing insulation
  • Pouring the driveway

By providing a unit price for each portion of the project, you offer more insight into its total cost. It’s also easier to update a unit price contract when extra work is required, as you won’t have to write up an entirely new one. Instead, you can add another unit.

When to consider the unit pricing model

The ideal situation to use a unit price contract is when you’re pricing a project that has the potential to grow. If you or your customer is unsure of the scope of the job, unit pricing allows you to remain flexible and avoid any losses that come with unexpected changes.

3. Cost-plus contracts

Also called cost-reimbursement, the cost-plus pricing model guarantees that all your expenses will be covered. When you write up a cost-plus contract, you outline how much the project will cost you, then add your desired profit. This profit can be either a fixed fee or a percentage of the overall project costs.

When creating a cost-plus contract, you’ll want to account for every cost associated with the project, whether a direct cost or indirect cost.

When to consider the cost-plus model

A cost-plus contract works well for mid-sized projects that are subject to change. Cost-plus models can also provide the most transparency about project costs and profit margins, which can help you to build trust with your customers.

4. Time and materials contracts (T&M)

With a time and materials contract, or T&M, you set out a per hour or per day rate that separately accounts for:

  • Your labor
  • The cost of your materials
  • Any behind-the-scenes business expenses

One potential challenge with using the T&M model is that you have to charge all of your expenses and margins at a fixed rate. Because there are so many variables involved in your average project—especially larger ones—it can be difficult to assign a one-size-fits-all value to your time. Still, this type of contract can help to ensure you’re paid fairly even when a project undergoes frequent changes.

When to consider the time and materials model

The T&M pricing model is perfect for smaller jobs with undefined specifications. Using a T&M contract for short-term projects allows you to maximize profits and ensure you’re compensated for all of your labor and materials.

How much to charge as a contractor

Rather than a standard dollar amount, most contractors earn a profit based on a percentage of the total construction costs. Regardless of the pricing model they employ, most contractors aim to charge between 20% and 30%.

Before you can decide on a price for a project and what percentage you expect to earn, you’ll need to determine how much it will cost you to complete that project. To do that, you’ll have to look at several aspects of your business.

Project type and size

Some projects are more cost- and labor-intensive than others—and your rates should reflect any changes in cost, workload, and intensity. You may want to consider having different rates for projects in the three main construction categories:

  • Residential
  • Industrial
  • Commercial

The size and scope of the project can also be a factor. For quick and easy jobs, you may not need to charge your full rate. For massive, multi-year projects, you might be able to negotiate higher rates due to the commitment your business must make to complete the project.

Depending on your involvement in planning a large project, you might also want to charge for any time you spend with the homeowners in development. 

For example, Nehemiah General Contractors of Denver, CO, requests a variable fee based on their involvement in the design process. By having a hand in the early stages, they can bring the utmost detail to the construction portion of the job while still receiving compensation for their time.

Location

Where you do your contracting work plays a significant role in your pricing for two reasons.

First, the average cost of a contractor in your city will determine how much people are willing to pay for your services. To identify this average rate, try looking around at competitors on sites like Nextdoor and seeing what they charge.

Second, the cost of living and materials in your area will impact the overall rates you need to set. The more expensive it is for you to run a business and purchase materials for projects, the more you’ll need to charge for your contracting skills.

Business expenses

To understand how much it costs to run your business, you need to look at your overhead and general expenses. These may include:

  • Materials – From wood and nails to power tools and machinery, materials will make up a significant portion of your overall budget.
  • Labor costs – If you employ subcontractors or supervise other employees, you’ll have to factor in their wages as well. You’ll also need to consider your personal salary.
  • Insurance and licensing – If you’re the general contractor at the job site, you’ll usually be the one in charge of securing insurance. Your city or state may also charge a fee for a business license.
  • Vehicle costs – To make your way to and from a job site, you’ll usually need your own transportation. You’ll want to account for the cost of buying a vehicle, gas, car insurance, and regular maintenance fees.

If you decide to lease or buy a physical space for your contracting business, don’t forget to factor the initial purchase and any upkeep costs into your overall business expenses.

A physical business location allows you a space to store tools and materials, but you can also use a brick-and-mortar space to showcase your talents. Normandy Remodeling, a contracting company in Hinsdale, IL, has a design studio that doubles as a showroom. Potential customers can come and see their handiwork up close, or even walk in off the street and strike up a conversation. 

Land your next big project with Nextdoor

As a contractor, providing clear, consistent pricing is an excellent way to build strong, mutually beneficial customer relationships. To reach your customers in the first place, however, you’ll need a way to start the conversation. 

Nextdoor gives you the ability to reach those around you like never before. Claim your free Business Page on Nextdoor to start connecting with your community. From there, you can drum up even more business with Nextdoor Ads — the hyperlocal approach to reaching new customers.

 

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Claim your free Business Page to get started on Nextdoor. For resources on how to use Nextdoor to stay connected with your local customers, pertinent news affecting business, and more, follow us at @nextdoorbusiness on Facebook

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