Learning how to price a job in construction can seem daunting when you are just starting out in the industry. Coming up with a consistent pricing strategy is one of the most important skills in running a contractor business. Here, we break down the basics of residential construction pricing, detail why it is crucial to winning jobs and posting a profit, and share some common pricing and billing methods used in the construction industry.

Click on a link below to jump straight to the section you’re most interested in:

• Understanding the Basics of Job Pricing in Residential Construction
• Why it is Important to Get Construction Pricing Right
• Residential Construction Pricing Methods
• How to Price a Job in Construction
• How to Price a Job in Construction & Factor in Profit Margins
• How to Price Construction Projects Based on Market and Competition
• How to Communicate Residential Construction Pricing to Clients
• How to Manage job Pricing and Budgets in Construction
• Final Tips for How to Price a Construction Project

Understanding the Basics of Job Pricing in Residential Construction

Job pricing determines what you need to charge for all aspects of a project and serves as the basis for your bid. These are the four overall categories you need to consider when mastering the art of how to price a job in construction:

Materials - Make a list of all the materials you will need to complete the job and the quantity for each. Doing takeoffs of the project plans will allow you to calculate the material requirements. 

Labor - Figure in the type of labor and the number of hours it will take to complete a job. This includes determining your salary, and daily rate as well as the total cost of hiring subcontractors. 

Overhead Costs - Don’t forget the costs of doing business that go beyond the job site. Overhead costs include office supplies, advertising, accountant, insurance, utilities, office rent, legal fees and any other related expenses. 

Geraldine Smith, owner of All Inclusive Construction says, “It’s very important to look at your total overhead costs. Chances are your markup still isn’t covering your overhead expenses. You think you’re making money on a job, and you’re actually taking a loss.”

Profit Margin - After paying all the bills, you still need to post a healthy profit to grow your business over the long run. This is the amount of revenue that goes back into your business after all the costs are covered for a project. It is typically a percentage and an amount beyond what you pay yourself as a salary. 

Why it is Important to Get Construction Pricing Right

There are many benefits to taking the time to learn how to price a construction project like a pro. Here are a few of them:

Assure Profit - As mentioned, no business can survive without consistently making a profit which is the reward for all your hard work. An effective and accurate pricing approach takes profit into consideration for every project. 

Build Credibility - Having a tried and true pricing method builds trust with clients because they can see the logic behind the prices being charged. It also signals the professionalism they are seeking in a contractor.

Create Transparency - The value clients are getting for their budget is clearer when they understand the method behind the pricing of their project. 

Make Faster Estimates - As with any business process, those which can be applied project after project save time and effort. That is true when you have a framework in place to estimate a construction project. 

Residential Construction Pricing Methods

Learning how to price a job in construction gets easier when you choose a billing process that works for you and your business. Here are five common construction billing methods, but you can learn more with Your Complete Guide to Construction Billing Methods.

Fixed Price /Lump Sum - This involves charging a single price that covers every part of the project. Then, you either bill for the entire project up front or the client pays only after all the work is completed. 

Cost Plus - In this scenario, the client pays all of the project costs plus an extra fee for the profit margin. This helps ensure you will make a profit, but not all clients are comfortable not knowing all the costs ahead of time. Some contractors include a cap on costs to address those concerns.

Time and Materials - Similar to the cost-plus method, T&M makes the plus part an agreed-upon rate such as an hourly or daily wage. This method provides budget flexibility, but you will still need to account for all the costs and hours you bill to the client.

Unit Price - With this method, contractors bill separately for specific parts of a project. This provides the advantage of being paid incrementally through the life of the project, but documentation for each unit is essential. 

AIA Progress Billing - Traditionally, this had been a type of progress billing using American Institute of Architects forms, but it can refer to progress billing using other means. It is typically used for projects that will be completed over a long period of time and clients are billed based on the percentage of work completed.

How to Price a Job in Construction

Now let’s get started. Here is a step by step guide to how to price a construction project:

Understand the Project Scope:

• Location - The distance you and your crew have to travel to a job site matters so take that into consideration.
• Walk the Site - Measure everything, check for any existing damage or safety hazards and take photos to document any issues.
• Time Constraints, Special Requests - Is the expected timeline for this project shorter than normal? If so, factor in the costs of that. Ditto for any special requests from clients that may increase the price charged.

Estimate material costs

List all the materials you will need for the project, add the quantity and cost for each and then add a markup to reach your total. Include the overhead costs here also (see below). You will need to do research on pricing of materials that goes beyond standard lists. This includes checking with specific vendors and suppliers. 

Heidi Clark, owner of Clark Builders, encourages new business owners to “give yourself enough padding. A job is typically going to be more than you thought. There should be a line on your estimate or your contract for contingencies and consumables. Give yourself a percentage of the whole job cost for things that are unforeseen.”

Doing takeoffs of the project plans will allow you to calculate the material requirements for the job. Learn more about How to Do Construction Takeoffs

Establish Your Daily Rate

Before you determine all the labor costs for a specific job including subcontractors, start by establishing your daily rate as a contractor. This will give you a base rate, or the minimum you need to charge for every project.

• Set your salary -This is the annual amount you will pay yourself and it is not the same as the profit margin
• Your crew - Determine the salaries of your crew members
• Know your Billable Hours This will help you determine how much you need to charge per hour to meet the costs. Reach this figure by estimating the number of days you plan to work in a year excluding holidays, days off and vacations. 
• Add in Overhead Costs - These are the annual costs of running your business that we outlined above.
• Add any other employee-related expenses:

            - Worker’s comp

            -Health Benefits

            -Vacation & Sick Time

            -401 K plans 

• Set Your Profit Margin- The industry standard is between 10 percent and 20 percent
• Calculate your Base Daily Rate - Divide the total expenses listed above, including the profit margin by the number of days you intend to work. This is your daily base rate.  To know your hourly rate, do the same but divide the total expenses by the total number of billable hours for the year. 
  

Estimate Labor Costs for a Job:

Your labor costs are determined by your hourly rate multiplied by the number of labor hours that will be needed to complete the job. Additionally, you will need to determine the number of subcontractors, their salaries and time they will spend on the job.

• Consider experience and working conditions when calculating base salaries - Highly skilled workers with years of experience will cost you more than newcomers. Also consider what kind of conditions they will be working in and any of those factors that will increase the cost. Checking U.S. labor statistics on average salaries, as well as job postings in your region, can help you make these estimates for the price of subcontractor labor. 

Clark holds weekly meetings with her team to review profitability. “I track our estimated cost and our actual cost to understand if we made a profit or a loss,” she says. “If we lose money on a job, I dig into who worked on a job and try to get to the root of the problem. Maybe they aren’t as experienced as we thought and they need more help.”

•  Incorporate Overhead Costs - To figure overhead costs into a job, calculate these total costs for a period of time: monthly or annually. Then, calculate the number of hours worked during that time. Dividing those two numbers will give you an hourly overhead cost. Then, apply that hourly cost to a specific project by figuring the number of labor hours worked on the project and multiplying that by the hourly overhead rate. 

Don’t Forget:

Taxes - Remember to figure in taxes for labor and materials. These can add a significant amount to the pricing totals. Also, add a prorated amount for annual taxes such as business and income tax into your overhead costs.

How to Price a Job in Construction & Factor in Profit Margins 

It is important to make sure that your prices are high enough to cover all your expenses and earn you a profit so that your business will continue to thrive and grow. Your price equals the costs multiplied by your markup, and your profit equals your revenue minus costs and expenses. The industry standard for profit margins is between 10 percent and 20 percent, and here is one method for building in a profit margin:

Cost based method - Under this method, this is how you reach your price: You determine all the costs: materials, labor, equipment, and more. Then, multiply the costs by your markup factor. The markup factor is 100 percent of your costs plus your percentage mark up.  For example, if the markup is 20 percent then add 1.0 and 0.2 to reach a markup factor of 1.2.

How to Price Construction Projects Based on Market and Competition

Now that you have determined the base rate you will be charging for jobs and your markup factor, it is a good idea to compare it to your competitors to make sure it is not too high or too low. Pricing jobs significantly higher than your competitors can reduce your chances of winning the contract, and submitting bids that are too low could mean you will be covering some of the expense out of your own pocket.

Here are some ways to check how your prices fit your market:

• Reach out to a professional organization or construction trade association. They typically collect data that can help. 
• Contact competitors. It can’t hurt to ask, and they may be willing to share and compare, if you are.
• Talk to your clients and networks

How to Communicate Residential Construction Pricing to Clients

Delivering a bid or quote in a professional way and demonstrating transparency makes a good first impression on clients. Here are some tips for effectively communicating your pricing to customers:

• Use a quote template branded with your business logo
• Send your quote digitally
• Work off of a single source of truth to avoid sending outdated information
• Make financial documents accessible to clients via an easy-to-access client portal
• Allow clients to see as many pricing details as possible to create transparency
• Learn more about How to Do a Construction Estimate  and  How to Do a Construction Quote

How to Manage job Pricing and Budgets in Construction

Pricing a construction project is a key piece of the budget puzzle in residential construction but not the only one. Effectively managing budgets and adjusting them along the life of a project is important for assuring that your pricing estimates match up with reality. This also requires having a way to easily track construction time.

Geraldine Smith, owner of All Inclusive Construction, says that “making sure you do change orders immediately, and getting them approved, is incredibly important. I’ve learned from experience that trying to track down employee time or additional materials after a job is done is not efficient. You need to document everything and make sure the customer is OK with it too. There can be instances where you get a verbal approval, but it becomes an issue when you send a bill if the customer doesn’t realize what the actual costs are. That’s where Houzz Pro is great, because now I create change orders quickly and send them over to the customer. I just sent one last week. The customer texted me and emailed me with approval, but I require them to accept it within Houzz Pro since it’s easy and keeps everything organized.”

Here are some guides with tips to help you stay on budget and on schedule:

• Learn  How to Create a Construction Budget 
• Read more about How to Create Construction Change Orders

Final Tips for How to Price a Construction Project

Most construction pros will make job pricing mistakes early on, and it is important to review and revise your estimates based on those learnings. Smith encourages construction business owners to “triple-check everything and make sure everything is documented very well. There have been more times than I care to admit that I should have put something in an estimate and I did not.”

Using business software makes job pricing and budget tracking more accurate and faster than doing it manually through spreadsheets and pdf templates. Use the tips and techniques in this article to make the job easier every time you price a new job.

Conclusion

Taking the time to develop a consistent pricing strategy and method is crucial for staying competitive, winning the trust of clients and ensuring that your residential construction business maintains a healthy profit margin.

Start a free trial of Houzz Pro to explore our estimating, takeoffs, cost catalog and client portal features that can aid in pricing jobs accurately and getting paid fast.