Being profitable doesn’t mean getting rich off your clients; it means being able to pay your bills, provide for yourself and your family, and set aside a cushion for your business. The first step to being profitable is charging the right price for your work.Costs Profit

The right price starts by knowing your minimum price. Your minimum price is determined by calculating and using the correct markup for your business. The math necessary to calculate your markup isn’t usually a problem; most contractors use math all the time in their layout work, so putting the correct figure together isn’t difficult once you know the formula.

The difficult part is using that markup correctly on every job. Not some of the jobs, ALL of them. That’s the decision that trips up so many contractors. They focus on selling price, rather than making a profit, so they reduce their markup to make the sale.

People outside our industry, who don’t know or understand construction or sometimes even business, will tell you that you must be competitive. What they mean is that your price must be the lowest. They think that if you sell a lot of jobs you’ll win, and you’ll sell more jobs if you have the lowest price. If you’ve been in business for very long, you know that that kind of winning can often mean losing.

The only way you are going to win as a business owner is if you’re profitable. The only way you’ll be profitable is if you sell your products or services at a price that covers your direct job costs and all overhead, and makes a reasonable profit.

If you aren’t profitable you’ll eventually go out of business, but not until you’ve suffered through many sleepless nights and stressful days trying to figure out how to pay your bills. Being competitive sounds good until it’s your business that’s failing.

Construction has one of the highest failure rates of any industry, and most of those failures are because they didn’t charge enough for their work or service. There is a minimum price you have to charge if you want to survive. If you’ve bought the lie that you have to price your jobs with a 10% overhead and 10% profit in order to be competitive, you’ll fail even faster.

When you focus solely on price and sell jobs below your minimum markup, you’re ignoring the financial needs of your company, your employees and your family. You’re taking care of your clients first, and that sounds noble until you realize it’s hurting your business and your employees. At times you’ll forgo your salary to pay the bills, and your employees work for low wages because that’s all you can afford.

Can you charge more than the minimum? Yes. I’m not always comfortable with that practice, but it’s your business so it’s your decision. Some believe in raising their price if they think a client can afford a higher price, or raising their price if the client perceives a higher value than what the minimum price calculates. I think that practice can come back to bite you down the road with a loss of referrals and possible damage to your reputation.

My issue is that you need to know and charge at least the minimum price for your jobs if you want to stay in business. You’ll get your financial house in order when you charge a price on every job that allows you to cover all your job costs, cover all your overhead expenses and make a fair profit.

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July 8, 2020 10:45 am

Great topic! It’s sometimes frustrating how much you have to educate your customers with each qualified estimate you go to but it does pay off. For many customers, their remodeling education comes from HGTV and DIY videos online. Once you sit down with a customer and tell them you have what it takes to do their dream remodel and at the right price (for your company) most people will come around and see your logic enough to sign the dotted line on a contract. There is no point in getting upset about the people who refuse to be educated and… Read more »

Scott Schilthelm
Scott Schilthelm
May 17, 2017 7:30 am

Wow, lots of passion on this topic and lots of good points.I would agree with Mr. Pattison. There is a lot of competition from the “I do for half” folks streaming into the country and we can say that eventually they will be out of business for underbidding work. Maybe true but there is a never ending stream of those folks and young hammer swingers just starting out who have not taken the time to figure how much it is costing them to be in business. I was one of them 17 years ago. “What over head, I already own… Read more »

Big River
Big River
May 12, 2017 3:27 pm

I attended Michaels course a year a ago. Nice man with tons of successful experience of selling in the remodeling business. Unfortunately 2017 the dynamics have changed dramatically. What was common sense decades ago no longer applies. Here’s the reality. The new breed of contractor is more likely to have arrived here from another country. Their idea of being successful and profitable is to continually book jobs at the lowest price. A lot of them do great work but their mindset is as long as they’re working they’re keeping their guys working their successful. This folks is no joke ..… Read more »

Big River
Big River
May 12, 2017 2:50 pm

Well with the advent of cheap labor pouring in over the last 20-30 years no other industry outside of construction and remodeling has taken a hit and actually and in some instances wiped out longstanding professional contractors. no matter what you do no matter what you say.. how many pictures you have testimonials no matter if your suit is been dry-cleaned and your tie has been pressed today’s consumers all they care about is the bottom line Rock Bottom lowest price even where I do business in lower Fairfield County CT which at one time was the wealthiest community in… Read more »

May 11, 2017 9:09 am

All that sounds wonderful but is in fact entirely impractical seeing as how it’s the consumer that needs educating. Even at a 15% markup ( no where near enough ) here in Charlotte NC the lowballer gets the job. Every time!! We get our bids from trades, add 15% and submit only to be rejected by an under educated, under prepared consumer who doesn’t care about our bottom line. They care about their bottom line so the rotten contractor ultimately gets the job. That’s the facts.

Ben Hudson
Ben Hudson
May 10, 2017 11:13 am

I would highly recommend reading Michael Stone’s two books and attend his two day class. I recently attended his class, went back home and calculated my correct markup and then priced and got my next remodel job. It works. If clients want the low bid, let them have it with your soon to fail competitor.

May 11, 2017 5:18 pm
Reply to  Ben Hudson

Did they tell you, in the class, exactly where to go find these educated consumers that aren’t so cheap? Seems like all we have in the south.

May 10, 2017 5:25 am

Excellent article. People should realize that perception by a prospect may be the catalyst for someone saying “What is the best you can do to lower your price?” So make believe someone says “I want a car, what is the best price since I can get one for under 20K?”. Why would you want to bring your price to 19K if you are selling a Lexus when the person was comparing the car to a Kia. Yes, both are cars. Yes, both go from point A to point B. But there is absolutely no reason for the salesperson to even… Read more »

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