As a general contractor, one of the most important aspects of your business is pricing jobs. This means considering all potential costs, including labor and materials, while remaining profitable.
It’s a balancing act, but with the right tools and techniques, you can price your contracts accurately and efficiently.
In this article, we’ll cover why it’s important to know your operating costs and how to calculate each of them. We’ll also cover how to track time and use job costing to increase efficiency and boost your bottom line.
The Importance of Properly Pricing Construction Jobs
It’s important to properly price construction jobs because the margin between profit and loss is often very slim. To be successful, contractors need to consider all potential costs while remaining competitive. This includes materials, labor, operating costs, and the time it takes to complete a project.
If you’re not careful, it’s easy to underestimate the cost of a project and end up in the red. This is why it’s important to have a clear understanding of your operating costs and how to calculate them.
Now let’s look at the specifics of calculating costs for labor, materials, and overhead.
How to Calculate Labor Costs
According to the Construction Labor Market Analyzer (CLMA), one of the biggest expenses for any construction project is labor, averaging 20-40% of the total project cost.
Direct and Indirect Labor Costs
Labor costs are determined by direct and indirect costs. Direct costs include the hourly rate you pay your workers plus any required benefits or taxes.
Indirect costs are a bit more difficult to estimate. These include things like overhead expenses, training, and the cost of tools and equipment.
Once you understand these costs, you’ll need to know what these costs add up to. You can approach this with these steps:
- Determine how many workers you need to complete the job.
- Outline the different types of workers (e.g., tilers, painters, plumbers, etc.)
- Calculate how many hours each type of worker will need to contribute.
For example, if you’re bidding on a bathroom remodel that involves a complete demolition, the job may require general labor, plumbers, electricians, tile layers, and painters.
Each of those roles will need to spend different amounts of time on the job. The plumber may only need a half-day, but the tilers will need three days.
Determining Employee Rate
Once you have estimated the type of labor needed and the time required, you’re ready to put the numbers together. If you have your own crew, you need to determine what their rate is. If you’re using subcontractors, you can request rate information or verify that the last amount they charged is still accurate.
There are a few different ways to calculate labor costs:
- You can use an hourly rate. This is the most common method, and it’s how most contractors charge for their services.
- You can use a per-project rate. This is less common, but it can be helpful if you’re working on a large project with many workers.
- You can use a percentage of the total project cost. This is usually used for larger projects and allows you to charge a fixed fee for your services.
No matter which method you use, it’s important to track your time. This way, you can see how long it takes to complete each task and adjust as needed.
How to Track Time
Tracking the time of a construction project is critical to being able to price the job. Several factors, like material delays and severe weather, can impact your timeline, but accounting for these can help you plan for these potential events on future projects.
There are a few different ways to track time, including:
- Using a time clock
- Using a timesheet
- Using a time-tracking app or software platform
You should begin tracking time as soon as you start working on a project. This includes communicating with clients and planning and preparing for the project. These aren’t numbers your client sees—this is to help you understand how much time you invest into a project.
The time to do a job won’t always be the same. But with this data, you can review averages and offer more precise timelines and costs to your customers.
Calculating Material Costs
Another major expense for construction projects is materials. The cost of materials can vary depending on the type of project you’re working on.
To get an accurate estimate of your material costs, you need to know how much it will cost to buy the materials you need. You can get this information from suppliers or by doing your own research.
Accounting for Profit Margin
Once you have an estimate of your material costs, you need to add a profit margin.
This is the difference between what it costs you to produce the product and what you’re selling it for. It will likely be different for every job. Some you’ll need to come in more competitive, while others may have leeway for a higher markup. It will depend on the size and scope and the budget.
For example, if it costs you $100 to produce a product and you’re selling it for $200, your profit margin is $100.
To calculate your profit margin, you need to know your cost of goods sold (COGS). This is the cost of materials plus the cost of labor.
To calculate your COGS, you need to track your time and material costs carefully. This way, you can see how much it costs you to produce each product and adjust as needed.
Once you have your COGS, you can calculate your profit margin by subtracting it from your selling price.
For example, if it costs you $100 to complete a project and you’re selling it for $200, your profit margin is $100.
The higher your profit margin, the more profitable your business will be. However, you need to strike a balance between pricing your products too high and pricing them too low.
You also need to consider the time it takes to complete a project. If you spend two hours on a project and you’re only making $100 profit, you’re not going to be profitable.
Use Job Costing to Be More Efficient
When pricing construction jobs, you’ll need to find a balance between pricing your products correctly and producing them efficiently. Job costing can help you do this by tracking your time and material costs.
Job costing is an accounting method that allows you to calculate project expenses. In this approach, you are looking at the complete scope of the job and all the costs associated with it.
The more detailed job costing is, the more accurate you can be at tracking costs and hours. It’s also a way to identify possible issues that could impact your profit margin.
It’s important to be as detailed as possible when using job costing. The more details you have, the more efficient you can be in pricing and tracking them. It provides a way to assign expenses to specific projects and monitor the associated budget.
Benefits of Job Costing
Job costing can be beneficial to pricing out construction jobs. Here are some of the top benefits of job costing. The benefits of using job costing allow for better tracking of:
Construction job costing allows you to compare your estimates with actual costs. You’ll know exactly where every dollar is going and can watch for any new expenses.
With job costing, you have a transparent view of how the project is going and can identify bottlenecks that could impact the budget and timeline.
Job costing offers insight into how your team manages resources. You’re tracking labor, materials, and overhead, so you’ll know if cost overruns or mismanaging materials impact the bottom line. It’s also a way to identify trends and compare projects.
You will likely have to pay upfront costs for projects not covered by a deposit. The ability to pay for them on schedule depends on completing projects per timelines. This helps you track this, so there’s less of an impact on cash flow and profitability.
Pricing Your Next Contracting Job
Now that you understand how to price jobs as a general contractor, you can start pricing your next job with confidence.
Remember to consider all your costs, including labor, materials, and overhead. You should also track your time carefully to ensure you are pricing your products correctly and making a profit.
Job costing can help you manage all these factors and improve your business efficiency.
Here are some next steps to get started:
- Determine your rate for each employee. Will you be charging hourly, by salary, or by project? Knowing this can help you with your calculations.
- Begin tracking your planning time. While your phone calls and prep work may not be at the project site, this work helps get the project started so it’s important to track it.
- Choose a time-keeping method. Select a way for your team to track their time, whether it’s manually or through a software platform.
- Shop around for materials. Material costs will fluctuate, but you can save on costs by checking prices at different vendors for costs that fit your budget.