During a recent survey we conducted, a few comments were made about price fixing. These comments referenced the Sherman Antitrust Act and association warnings about the appearance of price fixing.
We’ve heard this before – some groups and associations have refused to bring us in to speak because they think we are engaging in price fixing. Nothing could be further than the truth.
Wikipedia defines price fixing as an agreement between business competitors to sell the same product or service at the same price.
Same product or service, same price. No two contractors will sell the same product or service, and they won’t set the same price.
Our book, Markup & Profit; A Contractor’s Guide Revisited shows construction-related businesses how to calculate their markup and use that markup to determine the correct sales price for their work. Each business needs to set their markup based on their overhead and profit requirements – and every business has different requirements. When you know how to properly price your work, you realize it isn’t possible for someone to tell you what price to charge.
Even if two businesses happen to have the same markup, the job price is determined by applying your markup to your estimated job cost – and no two contractors will come up with the same estimated job cost.
In our Profitable Estimating Training class, I comment frequently on the variables that arise when doing a takeoff. These variables are subject to interpretation by the estimator. I look at the estimating sheets contractors have sent me with pictures of the job, and see the takeoff differently than they do almost every time. That doesn’t mean either of us are right or wrong. It just means we see the job differently. Each of us comes from a different background with different job site experiences, and we deal with different labor rates and material and sub-contractor costs.
So, even if we use the same markup, we arrive at different job costs based on our own interpretation of the plans, physical evidence of the job and costs for labor, materials and subs, so our price would be different.
Price fixing can happen when one business sells the same product as another, but to claim price fixing on a construction related project, where pricing should be cost based, doesn’t work.
Unless . . . let’s talk about architects, project managers and city, county and state governments who put language in their spec sheets that state a contractor can only charge 10% overhead and 10% profit. Or documents that state a contractor agrees, if they are awarded the job, to do any and all change orders at cost with no ability to recover overhead expenses or make a profit on those changes. Isn’t that price fixing? Maybe it’s “reverse price fixing” – an agreement between buyers to force the price of a product as low as possible, eliminating profits for the seller?
The Bottom Line:
No. Price fixing means competitors agreeing to sell the same product at the same price — and no two contractors have the same costs, estimate a job the same way, or land on the same price, even using an identical markup. Setting your own markup isn’t collusion. The article also flags the “reverse price fixing” that owners and agencies try to pull.
Related Articles:
Pricing Jobs Right
How to Calculate Markup
Proprietary Business Information
Overhead and Profit on Change Orders
There is No Industry Standard
The knowledge and experience Michael Stone gained in his 60+ years in construction has helped thousands of contractors improve their businesses. He is the author of Markup & Profit Revisited, Profitable Sales, and Estimating Construction Profitably, and is available for one-on-one consultations. More here.