How to Make the Most Profit: Contractor Pricing Guide

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Whether it is a basic remodeling or an elaborate construction project, a general contractor cannot afford to go wrong when estimating the project cost. Each building project has its unique requirements, overhead costs, and subcontractor labor costs, each quotation must be unique, making it a hectic process.

Thankfully, there are various general contractor pricing models contractors can rely on to optimize profits and mitigate risks—all while providing the best construction services, exceeding the client’s quality expectations.

Here’s a contractor pricing guide to make the construction estimating process a bit simpler and more profitable for you. But before we start exploring different pricing methods for your next construction contract, let’s first understand what a construction contract is.

What is a Construction Contract?

A construction project, regardless of its size and scope, tends to involve more than one stakeholder, such as general contractors, clients, subcontractors, engineers, designers, architects, and suppliers. A construction contract is drafted to protect each stakeholder’s interest.

Hence, by definition, a construction contract is a legally binding document between all the involved parties that:

  • Specifies project requirements, timelines, and the scope of the project in detail
  • Defines roles and responsibilities of all the stakeholders
  • Identifies and distributes risks among the parties involved
  • Minimizes project uncertainties
  • Provides total construction project cost information, including the payment cycles and stages
  • Protects rights and interests of everyone involved

How Much Does a General Contractor Charge?

In most cases, general contractors charge a percentage of a project’s total construction costs. For small projects, the pricing may be between 7 – 15% of the total project costs, and it may rise to 20-25% for larger projects.

Since the cost of the project determines contractor fees, let’s look at some of the several factors that influence construction project cost:

Contractor pricing: how general contractors charge

  • Type of the construction project
  • Scope and goals of the project
  • Requirements of raw materials and labor
  • Labor cost and materials cost (including market fluctuations)
  • Level of risk and its management
  • Anticipated duration
  • Zip code of your company (location)

The Most Profitable Pricing Models for General Contractors

Many construction companies have their unique contractor pricing methods. However, here are five pricing models widely used in the construction industry:

Contractor pricing: profitable pricing models

  1. Fixed-Price Contract Model

    In a flat rate, lump sum, or fixed-price model, the general contractor quotes a fixed fee for all the construction services agreed upon with the client. Contractors estimate the project cost on the basis of project scope, detailed construction drawings, and any additional specifications. They then sum up the overhead expenses and revenue to calculate the aggregate costs. It’s vital to note that the labor and material costs are usually also included in fixed-price contracts.

    Most contractors envisage potential delays in the timeline while drawing up a fixed-fee contract type. This helps cover up for the sudden zero activity days instead of being in a position to ask for timeline extensions. The contractor bears all the risk in fixed-pricing contracts, and the project cost often reflects the perceived risks.

    Ideal For:

    Projects with a well-defined scope and specifications as it helps general contractors tender accurate estimates.

    Lump-Sum Contract Pros Lump-Sum Contract Cons
    • Less management resources, paperwork, and accounting processes are required leading to lower administrative costs for both parties
    • Little financial risk for the client as the cost overruns fall under the contractors’ responsibilities
    • Limited supervision by the client
    • Payments at mutually-agreed milestones
    • Rigidity in project scope and specifications
    • Possibility for the client to be billed higher than the average cost as contractors don’t have to define how they resulted in pricing for materials, labor, or project risks
    • Unexpected changes or market price fluctuations could run into the contractors’ profits
  2. Time & Materials Contract Model

    In Time and Materials or (T&M) contracts, a general contractor is entitled to receive reimbursements towards the costs of materials. Also, the payments in this construction pricing model are calculated per hour or daily and often include additional business expenses that may be incurred at the commencement of the project.

    What’s vital to note is that T&M pricing rates require you to include the aggregate costs while classifying them into direct, indirect, mark-up, and overhead expense costs.

    Ideal For:

    Projects that may not have a well-defined scope and specifications. It is also suitable for small-scale projects and projects with a strict timeline.

    Time and Materials Contract Pros Time and Materials Contract Cons
    • Flexible payments structure
    • Expense coverage for potential roadblocks, sudden delays, and changes in the work scope
    • Hassle-free negotiations to finalize the hourly rate
    • Simpler to chalk out rules for material cost estimates
    • Minimization of risks for clients as they can set up definite duration or price cap for projects
    • Difficult to monitor the time efficiency and cost of materials
    • Tracking cost of materials is time-consuming
    • Potential likelihood for clients to run out of money before the project is completed
    • No incentive for timely or early completion of projects
  3. Cost-Plus Contract Model

    With a cost-plus or cost-reimbursement price model, the client agrees to pay the general contractors for total project costs plus an agreed amount as profits. The profit margin in this scenario is usually calculated as an agreed percentage of the overall project cost.

    In this method of contractor pricing, contractors must provide proof of direct and indirect costs and other related expenses.

    Ideal For:

    Projects where it’s likely that actual costs may be far less than earlier anticipated.

    Cost-Plus Contract Pros Cost-Plus Contract Cons
    • Coverage for the cost of additional material or labor required for the execution of the project changes
    • Flexible in negotiations
    • Hassle-free negotiations to finalize the hourly rate
    • Inaccuracies in initial contractor bid don’t lead to losses
    • No risk for construction companies in case of increase in costs of project execution
    • The client bears all the risks in this type of price agreement
    • Client heavily involved in the project’s administration
    • No incentive for efficiency to lower labor costs
    • Difficult to track average cost and expenses
  4. Unit-Pricing Contract Model

    Also known as measurement contracts, this contract model is implemented by splitting entire projects into individual units. The contractor then provides the client with estimates for each of these units rather than estimating the cost of the entire project.

    In other words, contractors charge for the independent tasks of the projects, and as a result, the exact cost of the project is unknown until project completion. However, the client can estimate the possible total cost by summing up the unit prices. This type of costing method is mainly used by construction companies and federal agencies.

    Ideal For:

    Projects with some uncertainty about the quantity of work required from the start. It is also beneficial to projects with repetitive work scope or high dependency on the cost of materials.

    Unit-Pricing Contract Pros Unit-Pricing Contract Cons
    • Flexibility in managing differences between actual and planned work
    • Increased transparency in the evaluation of each unit’s costs
    • Simplified invoicing process due to pre-determined unit price
    • Inaccuracies in initial contractor bid can be amended
    • Easy inclusion of supplementary work as add-on units to the project scope, enabling uncomplicated management for the construction manager and the client
    • Difficult to determine the overall cost of work
    • Chances of inflated general contractor fees
    • Client comparison and verification of units prices may slow down the payment cycle
    • The client bears the maximum risk
  5. GMP Contract Model

    A GMP or Guaranteed Maximum Price model for construction contracts empowers the property owner (the client) to put a price limit on the general contractor’s services. In this case, the contractor bears the liability even if the project requires additional work, labor, material costs, or overhead expenses.

    Since the contractor bears any added expense in the GMP pricing model, it becomes crucial for the general contractors to come up with accurate estimates and refrain from undercharging or overcharging clients for their contracting services. The risk in this general contractor pricing model shifts to the contractor.

    Ideal For:

    Projects with a clearly defined work scope with fewer uncertainties or changes.

    GMP Contract Pros GMP Contract Cons
    • Involves a rapid bidding process for contractors
    • Offers additional opportunities to obtain more finances as the projects have a guaranteed maximum price limit
    • Incentivise contractors to cut costs on overheads
    • Encourages contractors to complete the work before schedule
    • Relieves clients of the burden of cost overruns
    • Implies more risks on contractors and increases the possibilities of running into losses
    • Includes a relatively lengthy negotiation process as clients may take more time to review quotes
    • Higher chances of contractors quoting a higher maximum price in their estimate to cover for potential rising costs and unforeseen events

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Importance of Choosing the Right Contractor Pricing Method

Without the right costing model, contractors would end up undercharging or overcharging clients. Every reputable contractor insists on understanding the project requirements to decide the best pricing method for their construction projects.

The ideal pricing model thus ensures contractors are adequately compensated for their services without compromising on quality. It also acts as a safety net, protecting them against unreasonable liabilities that may arise in the future.

Final Thoughts

As a general contractor, it’s impossible to use the same estimates for all project inquiries. Therefore, it is imperative to carefully evaluate every project to quote an appropriate price for each proposal. And that’s when knowing the right contractor pricing model to implement comes in handy.

With lots of different costing methods available to suit diverse project requirements, a contractor must review the project requirements and client expectations to determine which model would be most profitable for them without compromising on quality.

When sending your invoices, it’s a good idea to ensure clients know what they are paying for. And one way to ensure clients understand your invoice is by using a trusted estimating and invoicing software solution like InvoiceOwl.

InvoiceOwl helps contractors create free estimates and invoices in less than a minute and send them to multiple recipients. InvoiceOwl simplifies the estimation process, helps achieve unparalleled accuracy, and saves your time. And with multiple customizable invoice templates specifically designed for contractors, this invoicing solution saves you the time and effort required to create invoices and estimates from scratch.

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Author Bio
Jeel Patel
Jeel Patel
Founder

Jeel Patel is the Founder of InvoiceOwl and is the main curator & writer of the content found on this site. With ideals of quality, commitment, and perseverance, he believes in creating lasting business relationships with the clients.

Philippines

Cebu City

PH