Construction Contractor Pricing Explained
I have been in and out of the construction industry for years, and I can say I am quite versed in home building, its intricacies, quirks, and subtleties. Recently, however, as I added a second floor onto my house, I got a 2020 update into the construction industry. Here I discuss one specific aspect that stood out to me: how construction contractors are pricing their work.
Like a responsible homeowner, I got 3-5 estimates for just about every building trade involved in the project. Throughout this process, I discovered how unbelievably diverse contractor pricing can be.
Many will argue that builder pricing is a gauge of quality. I reject that notion when analysing my recent experience because, although some contractors differ in the quality of their work, they are not even invited to bid on my projects unless they meet my minimum standard. When comparing construction bids, quality was a constant among the candidates, thus it was not a concern.
Types of Construction Contractors
Based on my 2020 observations, there are 4 main types of contractors in the market. The type of estimate you get should differ based on the type of company they are.
- One Dude and a truck: This is your solo entrepreneur. Just one person, a truck full of tools, and a can-do attitude. This contractor is often hard to get a hold of, takes a while to give you a formal bid, and can be booked out weeks. The main reason: he is busy doing the work. When you are framing a deck you can’t be taking phone calls, typing up proposals, or heading out to bid a job.
- Two Dudes and a truck: Very similar to the solo entrepreneur, but often 2 friends working together under the same company. No real employees. This type of business tends to solve some of the issues a one-man construction company has. They can, for example, divide and conquer. While one partner works on the current project, the other bids the next project. I find this to be a good hybrid of customer service and dedication to the actual work.
- One Dude with employees: With this structure, you typically have the owner and a team of employees. The owner is often out giving estimates, and meeting with customers while the employees do the work. In this scenario, the owner usually works from his home office rather than a commercial office. Customers feel well taken care of because the owner is the liaison for the project.
- Big company construction: This corporate structure likely started out as one of the above-mentioned contractors, but grew over time. This company has a big well-known office, project managers, salespeople, dedicated employees to do the work, bookkeepers, and an infinity of other capacities. These types of businesses often have been around for years, and plan to be around for many more years to come.
Maybe you figured out where I was heading with this — each one of these types of contractors has their own unique business overhead to account for when setting their pricing. The dude and a truck maintains very little overhead compared to the big company construction contractors.
Pricing Based On Company Type
Now the question is: for the same work, and same quality, should all 4 of these businesses have the same pricing? I submit….no.
I reckon this is why I get such a wide range in pricing when trying to bid out my personal projects. Each contractor thinks about this differently. And they should. Because, as outlined above, their product - not only the final outcome on the project, but all they offer as contractors - can vary wildly.
It is very common for an employee to leave a big company after learning that an hour of work was being charged $100, thinking he can make the same $100 an hour on his own as a dude and a truck.
It is very common for an employee to leave a big company after learning that an hour of work was being charged $100, thinking he can make the same $100 an hour on his own as a dude and a truck. In his mind he is delivering the same service the big company is offering, so why should he not collect the full wage? Very simply put, he is missing the additional infrastructure the big company is offering.
The big company offers a dedicated project manager who will resolve any issues in near real-time, and make sure the project goes off without a hitch. This person removes any possible frustration a customer could have throughout the project.
The big company also has a reputation and assets. When you have a reputation and public assets you do right by your customers. You build things right, you warranty things when they go wrong. You have something to lose, the customer has something to come after if you don’t hold up your end satisfactory. If a dude and a truck moves out of the area or stops answering your phone calls, it is really hard to track them down and force them to resolve any outstanding issues. When a customer hires a big company, they are getting the peace of mind that, in case anything goes wrong, now or into, the future they are likely covered. And they are paying for that peace of mind.
So no, a solo entrepreneur should not be priced anywhere near what a big company is pricing projects at. Those who understand this differentiator tend to win more jobs with customers because their pricing is typically 30% - 60% of what a big company charges. With a solo entrepreneur, customers should be getting much better pricing. They are, however, taking on a bigger risk with a less established construction contractor.
Pricing should be a scale based on how you organize your business. So of course pricing should change accordingly for the other 2 types of contractors I mentioned above.
Lessons to be Learned Here
If you are a homeowner hiring a new contractor, ask questions and try to truly understand how they are organizing their business. Use that knowledge to evaluate the pricing they are giving you, considering the overhead that led to it. Ignoring that relationship can give you a false sense of what you are getting.
If you are a construction contractor, remember these factors when setting your pricing. Are you confused about why you are not landing projects when your pricing is the same as the big guys? Or maybe you are discounting your price by 10% compared to the big companies. Likely 10% is not enough to make up for your lack of establishment and structure. You may think you are giving a customer a deal, but they would rather just pay a bit more for the comfort of having a big company behind the work.
Markets are efficient. There’s probably no such thing as a good deal or bad deal when hiring a service provider. Pricing simply matches what is being offered.