The ultimate guide to pricing for tradies

Know your numbers

Before you start quoting jobs or trying to win new clients, you need to get to know your business numbers — and we mean know them, inside and out. Understanding your gross profit margin is one of those lightbulb moments that will completely change the way you run your business.

5 numbers every trades business owner should know

You have to make enough gross profit to cover your direct labour, material costs, and overheads — and still walk away with money in your pocket.

This is where most tradies slip up. They price jobs based on the cost of sales (in other words, the cost of labour and materials), without thinking about all of the indirect costs that come with running a business.

For example, you might charge a job at $100 and spend $80 on contractors and materials, thinking that you’ll make a profit of $20, or 20%. But if you’re paying $30 in overheads, you’ll actually be making a 10% loss — all because you didn’t factor in these additional costs.

In this case, it literally pays to know your numbers!

With every job, your goal should be to generate enough gross profit to pay your overheads and still pocket enough earnings to make it worthwhile to run your business.

Now take a look at this example:

Say you’ve made an income of $100 on a job. You’ve paid $60 for your contractors and your materials, and calculated that another $30 will go to your indirect costs. This means that your overheads represent 30% of your sales.

If you want to make a net profit of 10%, then your gross profit margin should be 40% — $10 for your net profit, and $30 for your overheads.

Take a careful look at your overheads and the percentage these represent in relation to your sales turnover. If you’re tracking your business through a trade job management solution, this should be easy to find in the tool.

Different job pricing strategies

When it comes to pricing up jobs, there are three common approaches:

1. Estimate: An educated guess based on previous jobs, given either verbally or in writing.
2. Quote: A legally binding agreement where a tradie offers to do the job for a fixed price.
3. Do and charge (charge up): The tradie bills the client after the job is done. Both parties will usually agree on the hourly rate, overhead charges, and the margin on materials and staff ahead of time.

Most tradies go with one of two options: a quote or a charge up. Like with anything, each of these has its benefits and drawbacks, which we’ll dive into below.

Quoting: the pros and cons

Quoting for a job comes with plenty of upsides:

• Makes it easier to lock in big jobs. Most companies want a fixed cost up front to help them plan their projects. It’s also common practice for government organisations or big companies to get multiple quotes from different tradies before committing to one. If you don’t quote, you won’t have a horse in the race.
• Payment disputes go away: Issuing quotes take payment disputes off the table entirely. You’ve both agreed on a fixed amount up front, so there shouldn’t be any issues with the cost once the job has been done and the invoice has been sent.
• Clear roadmap of work. You’ll know what’s coming up and when, which makes it easier to plan ahead.
• Good cash flow. With quoting, you have a clear picture of how much money you’re bringing in. This helps when it comes to managing salaries or staying on top of bills.
• Less stress. Your customer already knows how much the job is going to cost. They’ll be less likely to watch the clock or rush you to finish work within a set timeframe.

But the biggest con?

You can lose a lot of money.

Why?

One of the most common reasons is the job runs over or you end up spending more on labour and materials than you anticipated. Because you and your customer have agreed to a fixed quote, it becomes very difficult to on cost these additional charges back to them.

The other thing to consider is this: if a home owner or project manager is collecting three quotes from different tradies, how often will they go for the highest one? Almost never.

They’ll most likely pick the middle option because they see it as the best combination of quality and value. This means you’re almost always quoting to come out in the middle — and more often than not, that can mean compromising on your profit margin to win work.

Beer with us: the psychology of pricing

Professor William Poundstone conducted a pricing study with a selection of beer. In the first test, there were two beers: a regular and a premium beer, both of which were priced differently. He found that 80% of people chose the premium option and 20% picked the cheap one.

When he introduced a third beer that was more expensive, every single customer ignored the cheapest option. The majority (80%) picked the middle option, and 20% picked the most expensive beer.

Moral of the story? When you’re going head to head with other tradies for a job, the quote that sits in the middle will most likely be the one that wins.

Do and Charge: pros and cons

Do and Charge (aka charge-ups) are straightforward. You finish a job, then you charge after it’s done. This pricing model comes with its upsides, but you’ll have to be comfortable trading off certainty for more money.

• You can make a good profit. With every job, you can factor in your gross profit margin as you go. This way, you know you’re making money on every single job.
• Easier to manage. You don’t have to worry about the cost of labour or materials upfront. There’s less need to get organised ahead of time, as you’ll be doing everything first then charging at the end.

The biggest challenge with charge-ups comes when it’s time to get paid. If you don’t manage your customer’s expectations well, you may end up having to discount to keep them happy — or risk losing them altogether.

• Grumpy customers and cost overruns. If a client expects to pay a certain amount for a job and the costs end up running way over, you’ll most likely end up with a very unhappy client. In the age of online reviews and repeat business, this can lead to poor reviews or your customers going to the competition.
• Steep discounting. A lot of tradies end up shortchanging themselves to keep customers happy. While this makes clients feel like they got a good deal, this practice hurts your business in the long run.
• Poor cash flow: When you do and charge, you don’t have as much visibility on the health of your business. If you get slammed with bills and you’re still waiting on a customer to pay, you’ll have to dig into your own pocket. Make no mistake, this can have a massive impact: poor cash flow is the reason why 40% of small and medium-sized businesses fail.

What your win rate tells you about your pricing

If you want to understand how your pricing stacks up, take a look at your win rate. This is the number of jobs you’re winning as a total percentage of the quotes you issue or the customers who contact you about a job.

Pricing in times of COVID

In normal times, it’s pretty straightforward to predict how much things will cost. During COVID, things work differently. Prices can be unpredictable based on supply and demand, which can wreak mayhem on your margins and your business.

For example, the cost of timber in Australia has skyrocketed by 10-20% in some states. While in New Zealand, the price of cable alone has gone up 40%.

At the same time, customers may experience delays or financial difficulties as a result of factors outside of their control. These can have a run-on effect on your projects or their ability to pay for the job, even if everything’s been agreed in writing.

Now more than ever, it’s important to safeguard your business against uncertainty. Your terms of trade need to be airtight, which means:

• Having a cut-off date for the validity of every quote, such as 21 days or 30 days.
• Giving both parties the right to cancel the quote within a certain timeframe.
• Including a price escalation clause for excessive inflation. Sounds simple, but you’ll want to ensure the wording is legally accurate, that you understand the criteria you must meet to pass on any price increases and have the evidence to back it up.

How to achieve your desired margin

We’ve covered what your gross profit margin is and the different pricing strategies out there. Now it’s time for the million-dollar question: how can you reach your desired margin and run a profitable business?

It’s all about the mark-up.

Mark-ups vs. margin: what’s the difference?

Let’s say you pay $50 for a cable and you want to achieve a gross profit margin of 50%. You’ll need to mark it up by 100%, or $50, to reach that margin, which means the sale price of that cable will be $100.

Your margin is the profit you want to make. Your mark-up is the amount you need to add to your costs to reach that margin.

Aim for a blended margin

Mark-ups sound simple, but the skill of marking up materials to hit a certain margin is just that — a skill. If you mark up a washing machine at 100% of its retail price, you’re going to lose customers fast. You’ve got to get strategic about what you mark up and by how much, in order to reach your desired margin.

In practice, it looks like this:

In this example, the big costs (like front of wall work) have a lower margin because they’re more expensive. Meanwhile, the smaller costs like screws, fittings and switches can be marked up more to help you hit your overall margin goal of $50.

Mark Ups? No worries.

Job management platforms like Fergus let you input all of your materials and labour costs, then play around with mark-ups to achieve your desired margin. You can also build templates for jobs you do often, saving yourself the headache of doing the calculations over and over.

Learn More

Discounting: should you do it?

Short answer: no. It can be tempting to discount a job to get it over the line or in exchange for a cash payment, but avoid this at all costs. Discounting your bottom line can have huge run-on effects on the overall health of your trades business.

To see how this works, let’s go back to that gross profit table from the beginning.

If you give your customer a 10% discount, that quickly eliminates all of the net profit you were going to make on the job. Discount it by 20%, and you’ll be in the red and losing money — fast. That’s because your cost of sales and overheads stay the same, so the only place to pull the discount from is your own pocket.

The secret to winning work

At the end of the day, there’s a lot more to winning jobs than the price you offer. How well you manage customers expectations will often determine your reputation and rate of word of mouth referrals. So it’s crucial you consider the customer experience when looking to win new work.

It starts by getting to know your customer.

By doing proper discovery with your clients, you’ll be able to understand what actually matters to them — and deliver a quote that’s tailored to their needs.

It’ll also be easier to manage expectations. When everyone knows what’s expected up front, your customers will be happy to pay, and your tradies and subbies will be happy knowing exactly what needs to be delivered and when.

4 questions to ask when pricing a job

Win more work and run a profitable trades business with Fergus

Want to get your pricing under control? We have your back. Fergus puts you in control of the numbers, so you know how your business is performing at all times.

Join thousands of tradies using Fergus to knock out quotes and invoices in minutes, easily manage margins and mark-ups and keep job profitability on track. Get started with a free trial today.