# PRICING CONSTRUCTION PROJECTS

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As I have written before (**Fast, Accurate Estimates**), there’s only one way to be successful in pricing construction projects — **know your numbers.**

**PRICING STRATEGIES FOR CONSTRUCTION PROJECTS**

Construction is a cost-based business. You have to know your costs for any given project, and mark up those costs by the appropriate amount to determine a price.

In this article for FineHomebuilding.com, I review three pricing strategies to ensure you are making a profit in your construction business.

Your price (and therefore your markup) must be high enough to cover your expenses and leave a profit.

Here are the equations you must know in order to determine your price and to ensure that price yields a profit:

**PRICE = COSTS x MARKUP**

**PROFIT (NET PROFIT) = INCOME – COGS – EXPENSES**

Those are the two key equations you must know.

Now let’s define some terms.

**COSTS** are the **Cost Of Goods Sold (COGS)** and these are the items you buy, markup and sell to your clients.

These are the items that you leave out in the field.

For a construction business the **COGS** are usually **LABOR, MATERIALS, SUBCONTRACTORS, and EQUIPMENT.**

**EXPENSES** are everything else.

For example:

Your cell phone isn’t something that you buy and sell to your clients. Your cell phone is not a **COGS**; it is an **EXPENSE**.

It’s very hard to operate your business without a cell phone, therefore your clients need to pay for that **EXPENSE**.

**INCOME** is defined as the total amount of money you receive for the work you perform or the sum of all the prices of all the individual jobs you produce in a given time period.

Now that we have those terms defined, let’s look at 3 different ways to calculate the price for your construction projects.

If you are priced correctly, then you have the best opportunity to make a profit.

**Pricing Method #1: The Cost-Based Method**

**PRICE = COSTS x MARKUP FACTOR**

**Step 1.** Determine your costs. Determine the **COSTS (COGS)** of your LABOR, MATERIALS, SUBCONTRACTORS, and EQUIPMENT.

**Step 2.** Multiply your **COSTS** by your **MARKUP FACTOR** to determine your price.*

**If your markup is 30%, then the markup factor is 1.3.*

Don’t guess at your **COSTS (COGS**). Calculate what these **COSTS** are.

If you are starting out, you may have no idea what things costs.

Do the hard work and figure this out.

Don’t guess.

Call other professionals.

Do your research.

At the risk of sounding self-serving, hire a coach or get a mentor.

Surround yourself with people smarter than you and with more experience.

Ask questions.

If you don’t know what you markup should be, then read **this article**.

**Pricing Method #2: The Price Method**

Let’s assume that you know you can sell a product or service for a certain **PRICE**, but you aren’t sure if the **PRICE** is high enough to cover your **COSTS**.

Then use the same equation from Method #1.

It will be formatted in this way:

**PRICE / MARKUP FACTOR = COSTS**

For example:

If you “know” that a project should be priced at $20,000 and your **MARKUP FACTOR** is 1.5, then you can calculate the costs of the project by dividing the **PRICE** by the **MARKUP FACTOR**.

**COSTS = $20,000/1.5 = $13,333**

Now calculate the **COSTS (COGS)** for this project – cost of LABOR, MATERIALS, SUBS AND EQUIPMENT.

If the **COGS** exceed $13,333, then multiply the *calculated* **COGS** by 1.5, and sell that number as the **PRICE**.

**Pricing Method #3: The Margin Method**

Let’s assume that you have calculated your **COSTS** and you want to determine the **PRICE** based on an *assumed* **MARGIN**.

The equation for this method is:

**PRICE = COSTS / (1-MARGIN)**

If your calculated costs are $10,000 and the **MARGIN** you need to make is 40%, then the equation looks like this:

**PRICE = $10,000 / (1 – 0.40) = $16,667.**

This pricing method is useful when your expenses increase because of the growth of the business, and you want to determine the new **PRICE** at which you need to sell a project.

The methods listed above are 3 ways to calculate the same result – **PRICE**.

Profit must be built into everything you build. The only way to realize a profit is to calculate your **COSTS** and apply the appropriate **MARKUP** to yield the **MARGIN** that you need to pay for your **EXPENSES** and leave you with a **NET PROFIT.**

## If you want to streamline your construction business and DOUBLE your profits next month...

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*Shawn Van Dyke is a construction industry consultant, business coach, and mentor to skilled trade business owners. He is a Brand Ambassador for Fine Homebuilding, travels across the US as a keynote speaker, seminar presenter, and the author of The Paperwork Punch List: 28 Days to Streamline Your Construction Business.*

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