Business Management, Pricing Information
Information on pricing information. There is nothing wrong with soliciting information or picking someone's brain occasionally. What are the factors to be considered when developing a project cost?
by Len Hijuelos
and I’m not sure what language I should use to express my thoughts about some of the discussions, questions and responses: amazement, dismay, wonderment, irritation, etc.
One of the things that positively amazes me is the frequency of requests for pricing information. There is nothing wrong with soliciting information or picking someone’s brain occasionally. I get calls now and then from people who have attended my seminars and want to discuss something with which they might not be familiar, or perhaps just want to bounce an idea around — there’s nothing wrong with that. But when someone asks, “How much do I charge for painting a condo?” or a house, or some other nebulous thing, it really makes me wonder.
I thought it might be appropriate to do a little quickie review on developing a pricing structure, which may be of some help to the people who are asking these kinds of questions.
First, let’s review what factors need to be considered when developing a price. These are:
Obviously, there can be other factors involved, depending on the project, such as travel expenses, rental equipment, etc., but, unless you have a project involving owner-furnished materials, you will always be dealing with at least these four factors.
Of the four, labor is normally the highest cost item, particularly on commercial or residential work, and it is the most difficult to quantify.
Labor costs are based on production, or the quantity of work a person can produce in a given period of time. So, the big question is, where do we get production rates for the various work processes we have to accomplish? I suppose we could go online and ask, “How much should I charge to paint a room?” but somehow, that just doesn’t seem to do it for me.
I would suggest that the best and most accurate way is to develop and keep detailed cost records that you can refer to and use as a basis for future cost analysis. This process has to be detailed, accurate and realistic to be of any use.
In other words, you have to track your costs for a particular work process throughout the course of a job, or better still, through several jobs. I watched a relatively new project manager time an operation once. He timed a painter and an apprentice spraying shutters for an hour and came to the conclusion that the operation was coming in well under the budget.
To some extent, this was true, but I questioned the accuracy of his numbers. First, I was very doubtful that the painter, seeing a guy in a suit with a stopwatch in his hand, was not exceeding his normal production — the painter certainly couldn’t keep that pace up all day.
Secondly, set-up time, cleanup time, coffee breaks, non-productive time in general was not taken into consideration. If the figures this product manager developed were used as the basis for future costing, then this particular work process would be a loser. You have to be realistic about how you develop the numbers. I would suggest that anyone needing some basic guidance in developing pricing figures would do well to refer to the “PDCA Estimating Guide.” I have found this manual to be the most realistic guide available.
The other factors involved in pricing are not that difficult to quantify. Every contractor should know what his overhead costs are and what profit figure he wants to use. Material costs, unless you are dealing with high-performance coatings, are usually reasonably straightforward: price-per-gallon divided by spread rate will give you a unit price.
We are going to discuss this a little more in the next article, exploring some of the factors affecting labor productivity.
Len Hijuelos can be reached at email@example.com.