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A Foolproof Method on How to Calculate Your Selling Price

No single factor creates as much havoc for home improvement contractors as the price. The first complication is how to factor it; then, the issue becomes how to sell it against competition that always seems to have a lower quote.

Despite what you may have heard, a price has to be figured based on the individual circumstances of your business. Most contractors start in the right place – with the cost of labor and material necessary to produce the finished job, but many soon lose their way. Standard formulas, such as multiplying your direct costs by 1.5 or even doubling your labor and material, may not work for everyone, and it’s too late once you’ve sold and installed the work to find out that you have made little or no profit.

Pricing formulas have to be based on actual and specific costs within your particular business. You need to know (not guess) what your overhead costs actually are.

Start by separating your sales and marketing costs from your overhead. Every ad, promo, job site sign, yellow page cost, display piece, home show participation and similar is a marketing cost.

You have a sales cost even if you (personally) do all the selling. Not to allocate something for your preparation, prospect visits, sales follow up, and phone time is to deny your value in this part of the process. At the very least, allocate the percentage that you would or did pay your salesperson or what companies similar to yours pay their salespeople.

Once you have these costs separated, factor them against your total sales to achieve a percentage for each.

Next, project the net profit which you desire. Then the formula looks like this:

Marketing ________%

Sales ________%

(G & A) Overhead ________%

Net Profit ________%

Total of the above ________%

*your accountant would classify these under gross margins.

The total percentage above when subtracted from 100% (the selling price), represents the direct cost (labor and material) percentage which is required in each contract.

This is a basic formula. It often requires modification depending on the size and style of the project. Major remodeling jobs, smaller remodeling jobs and purely specialty contracts such as windows or siding all require several additional steps. However, nothing changes the fact that if these four classifications above listed were to total 41%, the cost of labor and material to complete the job cannot exceed 59% of the selling price or you are eating into your profit.

Unfortunately, most contractors don’t get the price that they are entitled to, and it’s not because the finished product isn’t worth the money. The problem lies in the inability to sell the value – however, that’s another story for a future issue.

Source by Dave Yoho

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