By Craig A. Shutt
Remodelers wage a constant war to find just the right price. Charge too much, and you'll be accused of gouging customers, or you won't get the job. Price it too low, and you run from job to job without making money — and go out of business. Finding the right price requires knowing all of your costs, so you can mark them up appropriately to ensure you receive the proper margin and don't give away all your profit.
The biggest problem remodelers face in setting prices is not understanding all of the costs they incur in conducting business, explains Leslie Shiner, president of the Shiner Group in Mill Valley, Calif., which works with remodelers on business management. "You have to look at what each activity truly costs you in materials, labor and variable costs," she stresses.
Here are some of the key areas where remodelers accrue costs that never make it into their estimates:
- Employee Costs. "I'm a big proponent of remodelers understanding what it takes to really put one employee in the field," Shiner says. It includes the employee's wages, payroll taxes and all benefits, of course, but it also extends to vehicle use, cell phones, small tools, supplied uniforms and other requirements that can be overlooked. In some cases, she notes, contractors can look at what subcontractors charge to do parallel work on another activity to see if the remodeler's own labor charge is sufficient.
- Variable Expenses. Many remodelers make the mistake of loading up their overhead category with costs that aren't set but vary with the job. Expenses that change if more jobs come in or if the jobs have different needs should not be counted as overhead, she says. Rent and utilities, for instance, remain the same each month, but workers' compensation, liability insurance and even gasoline expenses vary. Charging off a set amount for travel expenses to a job may not cover jobs further away, which require longer travel times and more gasoline. Taking these variable costs out of overhead allows remodelers to better charge for the expenses each job incurs.
- Waste. Material waste is a key expense that often isn't included, Shiner notes. Calculating board lengths, plumbing runs and other materials as if they can be installed in just the right quantity means their true costs are underestimated. Running 12,000 linear feet of wiring, for instance, may require 13,000 or 14,000 feet to make the installation work properly. That extra 2,000 feet isn't accounted for between the estimated length and the final purchase of wire.
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