It can be a tricky proposition.
What is the best way to determine how much a contractor should charge for services? The contractor doesn’t want to overcharge a client and possibly lose future work. However, the contractor doesn’t want to shortchange the company and end up turning a miniscule profit. There has to be the right mix.
Mike Morehouse has a formula he feels he’s perfected over the years. The CEO of Davids Hydro Vac in White Bear Lake, Minnesota, rolls all of his charges into an hourly rate. When figuring out the rate he looks at the company’s take-home profit, employee pay, equipment and vehicle cost, and drive time and mileage expense.
“I do estimates, but most of our stuff is time and material hourly,” Morehouse says. “That hourly charge covers everything. There’s different charges for going out of town, but it’s basically the same thing over and over again.”
MINIMAL PRICE CHANGES
Since Morehouse started his company in 2009 in a northeast suburb of Minneapolis, he hasn’t had to adjust his prices too often. Davids Hydro Vac, which employs union workers, generally has its costs increase because of variables that are out of Morehouse’s control.
“When the union gives out raises, I’ve got to change my price to compensate for that,” Morehouse says. “Fuel prices, if that skyrockets again you always have to increase. If I see the need for it, I’ll increase it. I’ve only done it a few times.”
When Morehouse was getting his business established, fuel was around $4 to $4.25 per gallon. Now that gasoline prices are half that cost, Morehouse is able to net a few extra dollars per job. “You never like to go down (with your rates), so I’ve never lowered my prices since the fuel prices went down. You just keep that the same,” Morehouse says.
WINNING A BIDDING BATTLE
For jobs that require bidding, determining what to charge for a project can also be tricky.
Dan Parsley, an instructor at Northeast Wisconsin Technical College in Green Bay, Wisconsin, suggests contractors look over the job site thoroughly to see what the project is going to entail before finalizing a bid price.
“Do you have anything to cross? Any utilities that are going to be in the way? Anything you’ve got to pothole?” Parsley says. “Kind of like all the extra stuff that you have to spot and visually identify before you can move on with the heavy equipment.”
Should contractors look at what competitors charge and base their figures off that?
“Depends on the job,” Parsley says. “If a contractor is looking at the bid, they’re going to give a timeline for that work to be completed by and how much it’ll cost and man-hours involved and that’s what you have to go by.”
If a contractor is the only company in an area that offers a specific service, charging a higher rate is sometimes a sound idea. However, Parsley notes that many contactors aren’t opposed to traveling and will move where the work is. That can eliminate a company that has a monopoly in an area. “Sometimes they’ll chase the utility,” Parsley says.
The region of the country a contractor is working can also affect prices for work.
“I can tell you that the contactors that we’ve spoken to on the East Coast, they charge more than they do here in the Midwest,” Parsley says. “You’re looking at wages and unions and all that stuff kind of filters into your workforce and what you’ve got and the equipment you’re using.”
CATCHING A BREAK
When Morehouse first started his company in 2009 he had a difficult time trying to figure out his service price scale. That can be difficult for any new business.
“I didn’t want to seem like I was desperate,” Morehouse says. “I had a business when I was younger and I did the deal where you beat everybody’s price by so much that they couldn’t tell you no. I learned that it’s not good to do business like that. You slash prices, then the next contractor does it and then soon nobody’s making money. It’s a waste of everybody’s time.”
More established companies can afford to charge higher rates. Building a business name with years of experience is a strong selling point to consumers. Newer companies can afford to charge less for their services since they generally don’t have as much overhead expenses as bigger companies, notes Morehouse.
“It’s hard when you first start out because it’s not about what you charge, it’s about your reliability that you’re going to be able to get there,” Morehouse says. To help set his prices, Morehouse is like other business owners who look at what their competitors are charging.
“There were already other contractors in my area doing this and I just stayed around that price range,” Morehouse says. “I was actually more expensive.”
For new contractors just starting out, Morehouse has some sound advice about setting prices for their work.
“Keep it simple,” Morehouse says. “Keep it as simple as possible. I think my customers like it. Don’t get creative with your charges and try to squeeze a dollar out of here and a dollar out of there. It just makes you look bad.”
