A foolproof method on how to calculate your selling price

No factor creates as much havoc for home improvement contractors as price. The first complication is how to factor it; so the issue is how to sell it against the competition that always seems to have a lower price.

Despite what you may have heard, a price should be calculated based on the individual circumstances of your business. Most contractors start in the right place, with the cost of labor and material needed to produce the finished job, but many soon lose their way. Standard formulas like multiplying your direct costs by 1.5 or even doubling your labor and material may not work for everyone, and it’s too late once you’ve sold and installed the work to discover you’ve made little or no profit.

Pricing formulas should be based on actual and specific costs within your particular business. You need to know (not guess) what your overall costs really are.

Start by separating your sales and marketing costs from your overhead expenses. Every ad, promotion, job site sign, yellow page cost, display piece, home engagement, and the like is a marketing cost.

You have a cost of sales even if you (personally) make all the sales. Not allocating something to your preparation, prospect visits, sales follow-up, and phone time is to negate your value in this part of the process. At a minimum, allocate the percentage you would or paid your vendor or what companies similar to yours pay their vendors.

Once you’ve separated these costs, factor them against your total sales to get a percentage for each.

Then project the net profit you want. So the formula looks like this:

Marketing ________%

Dirty ________%

(G&A) General expenses ________%

Net profit ________%

Total of the above ________%

*your accountant would classify these as gross margins.

The total percentage above when subtracted from 100% (the selling price), represents the percentage of direct cost (labor and material) that is required in each contract.

This is a basic formula. It often requires modifications depending on the size and style of the project. Major remodeling jobs, smaller remodeling jobs, and purely specialized contracts like windows or siding require several extra steps. However, nothing changes the fact that if these four classifications above add up to a total of 41%, the labor and material cost to complete the job cannot exceed 59% of the selling price or they will eat up your profits.

Unfortunately, most contractors don’t get the price they’re entitled to, and it’s not because the finished product isn’t worth it. The problem lies in the inability to sell the value; however, that is another story for a future edition.