Contractor pricing - negotiating jobs

[Account Closed]

Let me preface this post by stating I am the type of person that will negotiate at McDonalds. I have no issues asking to see if I can get a better deal or save a buck. I'm pro negotiation. That said, I have been both customer and contractor, which gives me a perspective more unique than most people. As a customer, I would steer clear of someone who can instantly go down on price. If they could do the job for the price you are negotiating for, why didn't they quote that price in the first place? I know my prices are competitive and fact based, and I rarely change the price on my quotes once they are presented to the customer. There typically needs to be some extenuating circumstance that necessitates the price change - like a change in the scope of work or an error on my part in estimating the job.

In the past few days I have quoted on 8 different jobs. It's an involved process if done properly. Several of the potential customers have negotiated the quote once I presented it to them, and they seemed very surprised that I could not move off the price I had quoted.

When I quote jobs, I split each line item into material and labor costs. It is not uncommon for the labor costs to be significantly higher than the materials costs. Not all work is this way, but much of it is. By splitting these 2 components out, it allows me to make a realistic estimate of how much the job will truly cost. As an investor/customer, I was always leery of someone throwing out a random number - especially a round one like "I can do it for $3,500". That method is known as the PFA estimating method - Plucked From Air.

For labor, I take my crew's base rate of pay, and add both my margin and overhead costs to get to a cost per billable hour. I don't do much actual physical work, so technically my pay is overhead. Someone has to run the project, generate and sell new leads, handle inspectors, pull permits, purchase materials, write awesome posts on Bigger Pockets, and post great informational videos on YouTube. And my family has to eat too. 

For those unaware, there are numerous and significant overhead costs for a construction company/contractor. In no particular order: liability insurance, workers comp insurance, payroll taxes, advertising and marketing costs, professional services (bookkeepers, accountants, CPA's, etc.), fuel, permits and inspections, drawings and designs, bad debts (surprisingly not everyone pays their bill - this is what mechanics liens are for), and tools & equipment.

In Cuyahoga county, every town/municipality has different rules about what a contractor must do to work in their town. All of them require you to register your business annually - typically $100/$150 per town. Most require you to post a bond specifically for that town annually as well, another $100 per town. So if you do work in 20 towns in a year, that's $4,000 in overhead to satisfy these two requirements.

To clarify, none of what I covered above should be construed as whining/complaining. These are simply the costs of doing business in this area. My guess is most people don't know about these costs, and I think it's important as investors and business people to understand all sides of the business so we can all help each other be successful.

The overarching message of my post is twofold: First, if you have a contractor who can or will quickly reduce your price, you should proceed with caution. Second, there are numerous and significant costs to running a construction business that people don't know or consider. If you ever need help, I love to network and discuss projects with people no matter if I am involved in them or not. I learn so much meeting different people and learning about their goals, processes, and ideas. I look forward to connecting with you and learning more about who you are and what you are working towards.