Banishing Pricing Myths

Twenty-eight percent of the construction bids generated in the landscape industry are originally bid at a loss, according to Frank Ross, consultant, Ross-Payne & Associates.

To decrease this percentage, Ross exposed contractors to pricing basics during his session, “Take the Myth Out of Your Pricing” at the Green Industry Expo in Nashville, Tenn.

To understand pricing, first Ross listed the five ingredients of an effective pricing strategy, which include an understanding of financial management, an intelligent chart of accounts, a comprehensive budget for the year, a consistent estimating system and a logical method to recover overhead.

Then, Ross explained the pricing process. Step one is to figure direct costs (labor, material, equipment, subcontractor, etc.). Step two is to apply overhead (support, shop, administrative expenses, etc.). Step three is to figure profit (capital for growth, debt retirement, fixed asset purchases, bonuses, income taxes, etc.) Adding the results of those three steps will result in a selling price.

Most contractors leave out the profit part of the equation and Ross said that is one of the main reasons their pricing suffers. “If you are interested in making a profit, you have to add it to your jobs or you won’t make a profit,” he added.
There are four main pricing methods, and below Ross explains them and where they are best used:

· Markup on direct material – Best used in retail, wholesale or other businesses that are material sales oriented.

· Markup on total direct costs – Best used in brokerage businesses, such as a general contractor, or any business where there are very high material and subcontractor expenses against very low labor and overhead expenses.

· Markup on direct labor and burden – Best used in all types of service businesses, especially maintenance, where both labor and overhead are high against low amount of material and subcontractor sales.

· Dual overhead markup – This strategy can be used in any situation, whether it is a high material organization, a high labor organization or a middle-of-the-road scenario where there are substantial values of both material and labor being sold.

Once contractors find a way of figuring price that works for them, then Ross suggests sticking with that one method. “Consistency is the key to accurate pricing every time you estimate a job,” he said.

The author is Managing Editor of Lawn & Landscape and can be reached at nwisniewski@lawnandlandscape.com.