A note on "Pricing"

My father came off the road as a salesman traversing the Southeast and frequenting the Doral CC with tennis lessons with Arthur Ash in the mid 70's to tighten up the household. With an extraordinary aptitude for building, he began building new homes and remodeling homes in the Mountain Brook, Vestavia, and Altadena Forest areas. In the day, a builder was a builder, and the term, "Professional Remodeler," wasn't even on the charts back then. I would say that the vocation of being a professional, exclusive remodeler evolved during the last 20 years and is on the forefront of major publishing companies, building materials industry, and shapes the housing market.

Victoria Downing lecturing on sales and marketing in Baltimore, MAryland.

Victoria Downing lecturing on sales and marketing in Baltimore, MAryland.

Personally, I have attended numerous professional remodeling conferences lead by industry giants, a Board member for the Greater Birmingham Area Homebuilder's Association, and participate in Remodeler's Advantage Pro Remodeler University, which is a reference bank on all current topics including sales and marketing, accounting, legals, and general business management resources. This gets us to a note on pricing, which is still one of the most confusing and controversial topics because it cuts to the core to what the bottom line is on every project.

The more typical forms of pricing, or contracting on remodeling projects are fixed priced, otherwise known as a lump sum job, and the cost plus fixed fee job, that is essentially a time and material job with a certain fee attached to the end of it. On the former, the national gross margin for lump sum jobs, performed by professional companies, is 30%. The gross margin includes profit, direct and indirect overhead expenses, and a discretionary margin used by the builder to compensate for geographical, economic, or difficulty/risk considerations. Besides the direct costs of the project, the rest of the gross margin is competitive and left up to the builder to manipulate to serve the welfare of his or her own enterprise. On the later, cost plus fixed fee job, national averages also range between 30-40% gross margin: however, this is where most of the confusion, at least on the local level occurs. Several years ago, one of my attorney clients, turned mentor, helped open my eyes to the confusing, and often offended declaration of profit and overhead and how residential and large commercial operations either overtly or mistakenly "double dipped" on their overhead charges. William Stewart, Esq. helped me open my eyes to properly and ethically declaring direct and indirect expenses and how to evaluate what our market profit margin should be to run and maintain a healthy, competitive operation. Since then, these tools have repeated themselves contract after contract and conference to conference, as they are mainstream business tools used across the country by the professional remodeler. The key to presenting your pricing is to be very forthright and transparent with your client.

Slide of Profit and loss segment of a REMODELERS advantage workshop

Slide of Profit and loss segment of a REMODELERS advantage workshop

My office manager and I frequently analyze our overall operations and seek feedback from clients, and also compare notes among our professional peer group in Birmingham and with Remodeler's Advantage out of Baltimore, Maryland, in an effort to maintain our viability and competitiveness in our local market. Based upon some recent activity on numerous leads, feedback on our pricing, and personal conversations with an architect/client that I highly respect, I became motivated to flush out some of the misnomers, more particular, in the cost plus fixed fee jobs. The 15% mark up was recently referenced on a job that I had begun to look at but backed off until the scope of work and design was more fully prepared. By comparing the 15% mark up against our typical .235%, or higher gross margin, the homeowner asserted that they got a bargain by moving forward with the less expensive operator; however, that may be the farthest from the truth. The lightbulb that William Stewart clicked on for me over 7-8 years ago, and having been exposed to several bid forms from local contractors on jobs that we've taken over, the 15% mark up, among others, is ground zero for misrepresentation, loss of value added service, and quality workmanship. Our pricing is derived from a deliberate estimating process using specific goods/materials for each individual project, many of which are hand selected by the owner or architect, and current pricing from skilled and licensed trades. We have also implemented an user friendly pricing sheet that prevents the "double dipping" mentioned above by using line items for every scope of work, material used, with the specific supervision and expected profit for each and every job, as they differ in form from neighborhood to neighborhood, and client to client. This process is also presented at the front end of every introduction we make and is followed with on the pricing exercises that are conducted during the pre-construction phase.

Another misused, or misunderstood aspect of cost plus jobs is their degree of competitiveness, or for their tailor fitted nature, the lack there of. As we service a wide variety of clients, neighborhoods, and size of projects, our overhead varies, and in many instances, the simple equation of advertising a 15,20, or even a 30% gross margin cannot be compared "apples to apples" with another company's books. While we may not be competing head to head with other remodelers we do however offer superior service and a transparent pricing for our clients, whether it be for a roof leak or a whole house redo. I have cross referenced the Business And Project Management For Contractors Alabama Licensing Board's protocol for allowable overhead projections below (paraphrased):

Direct Costs (physically traced items to the specific job)

  • Materials
  • Subcontractors
  • Labor
  • Misc. direct costs (design, engineering, supervision, etc.)

Project Overhead/Indirect Costs (indirect expenses that are either "fixed" or "variable")

  • Superintendant salaries
  • Vehicle expense
  • Supplies and other consumables
  • Depreciation- Vehicles
  • Depreciation- Equipment
  • Repairs
  • Administrative expense

In closing, by utilizing the above guidelines, all professional remodeling companies are on their own to identify their respective target market, analyze their required profit and overhead margins, and then merge this pricing process into their own business plan to facilitate a successful, viable, and competitive operation, and then ultimately to make the pitch to their perspective clientele. There's just way too much data and inter-personal interaction with our chosen means of pricing and contracting within our market area, coupled with our professional experience, to vaguely compete against another operations advertised "markups."

Best of luck with your future project!