Pricing Mistakes

I want to share a note we received that asked a specific question but also raised a few concerns:

“I talked to you a few weeks ago, and I asked if an addition is considered New Construction or Remodeling. You said Remodeling, which after talking to you it makes sense.

The dilemma I have now is I bid an addition job based off a 1.27 Markup instead of a 1.5. What should i do? I haven’t got the job, and I want to do it. But I want to be paid the 1.5.”

My response:

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“Tell the potential customer that you made a math error in your calculations when you compiled your estimate, or prices have gone up since you gave them your original quote (if they have). You are withdrawing the original quote and the new quote is $XXX,XXX.

If they don’t accept the new price, then just walk away. Don’t take any job you can’t make a reasonable profit on, not even one. That is the first step in going out of this business.”

Everyone, and I do mean everyone, who has ever compiled an estimate has made a math error that put knots in their stomach once it was realized. I’ve been down that path more than once. Until a contract has been signed, you aren’t bound by a quote. Admit you made a mistake and revise the price. There’s an excellent chance you’ll lose the job, and that’s why you don’t want to make mistakes in the first place.

This isn’t about keeping your word, it’s about staying in business. Where is it written that you can’t adjust a quote before you sign an agreement/contract? If you decide to stay with your original quote, you better have a tidy reserve built up because you’re going to do this job at a loss and you’ll need something to pay the bills.

Now, I was certainly concerned that he didn’t know the correct definition of the work he was quoting. I was even more concerned about his markup.

It’s true that, generally speaking, the average markup for new construction is lower than the average markup for remodeling. New construction is a commodity business; you’re producing a product. Remodeling is a service business; you’re working in someone’s home and there is considerably more involvement with the client. Your overhead expenses in remodeling are usually much higher, which increases your markup.

That doesn’t mean you can use the markup ranges for remodeling or new home construction for your jobs and assume you’ll be okay. It’s important to calculate your own markup, based on your own sales projections, overhead expenses, and profit needs. If you wish to continue and survive in this business, you need to do the math and calculate your markup on the work that you do. If you’re doing both new construction and remodeling, it’s best to keep two sets of books for the two different divisions in your company, and calculate the markup for each division.

There’s a lot of information available on our website, but we don’t cover all the details in every article; that’s why we offer a book to do that. Don’t take one piece of information you find here and use it to run your business.

I appreciate that this young man had the good sense to ask questions. Remember, you are in business to provide a service and make a profit doing it. You are not in business to build jobs, or drive around town giving out “free” estimates, or employ people. In order to provide that service and stay in business, you must price your jobs to cover all job costs, all overhead expenses, and make a fair profit.

Everyone makes mistakes. When you find one, it’s important to own it, be strong, and make the needed corrections.