Pricing and estimating for profit.
Builders face a variety of challenges in today's market, including increasing costs of materials, clients with unrealistic expectations, and rising labor costs. Read on for guidance on how to effectively tackle these and shore up your business's profitability.
Procurement, tendering and pricing
- Procurement and tendering: Understand the different procurement strategies (traditional, cost-plus, design and build) and the tendering process (single stage, two stage) to ensure you are pricing apples to apples.
- Pricing documents: Prepare a clear and detailed pricing document that breaks down the costs into overheads, profit, preliminaries, and construction costs. This document should be based on a schedule of work and include specific details about what is and is not included in the price.
- Construction costs: Break down the construction costs into elemental summaries such as substructure, frame, and upper floors. This will help you identify areas where costs can be saved or value engineered.
- Labour rates: Research current labour rates for different trades in your area to ensure you are pricing your jobs competitively. Be aware that rates can vary depending on the location and the complexity of the job.
- Material rates: Obtain quotes from suppliers for materials to get accurate costs.
- Overheads and profit: Apply appropriate overheads and profit margins to your pricing document. The overheads and profit margin will vary depending on the size and complexity of the job.
- Risk management: Identify potential risks in the project and include them as provisional sums in your pricing document. This will help you mitigate risk and avoid cost overruns.
- Qualifications and exclusions: Clearly state any qualifications and exclusions in your pricing document. This will help avoid misunderstandings with the client later on.
- Presenting your pricing document: Present your pricing document to the client in a clear and concise way. Explain the different components of the price and answer any questions they may have.
Business protection practices
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Payment schedule: Establish a clear payment schedule outlined in the contract. It should define milestones and corresponding payments, ideally with a significant upfront sum to cover initial material investments. Consider progress payments tied to completed work stages, and avoid relying solely on a final completion payment.
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Retention clauses: Incorporate retention clauses into the contract, withholding a small percentage (typically 5%) of each payment until project completion. This protects you from potential client-driven changes or rework needing rectification after final payment.
Dispute management mechanisms
To anticipate and manage potential disagreements, consider these measures:
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Clear communication: Maintain open and transparent communication with the client throughout the project. Document discussions, changes, and decisions to avoid misunderstandings later.
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Defined decision-making: Establish clear protocols for decision-making within the contract. This clarifies who holds authority on various aspects, minimising room for conflict.
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Mediation and arbitration: Stipulate alternative dispute resolution methods like the FMB's free Dispute Resolution service in the contract. These approaches offer quicker and more affordable solutions than court proceedings.
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Legal advice: When facing complex disputes, seek legal counsel from a construction law specialist. FMB members can make unlimited use of our dedication helplines - their expertise can protect your rights and your interests.
Remember...
Clear contracts, robust communication, and proactive risk management are key to securing your hard-earned profits and navigating any challenges that may arise.
This blog is just a starting point. As an FMB member, you can access detailed guidance on pricing jobs and providing estimates in our exclusive webinar. The FMB is here to help our members' businesses thrive – whether that’s through our series of webinars, online training and mentorship, or with advice from our helplines, which can assist with practical matters like tax, HR and debt recovery.
Take a look at the benefits and start your application today.
