Do you have a pricing model?

    • What are pricing models?

    • The types of pricing models in construction

    • The factors influencing construction pricing

    • The estimating methods

    • Factoring risk Into your price

    • Cost control

What are pricing models?

Pricing models are a way that a business determines what they will charge customers for their products and services. Having a pricing model takes the guesswork out of it and means you can be confident that you are both charging a fair and competitive price while also making a profit.

Types of pricing models in construction

There are many different types of pricing models that you can use depending on what you sell or the scope of a project you are working on. Below are a few different pricing models you could use and when they might apply. It is important to note that depending on the scope of the project you might use multiple pricing models.

Fixed Price Pricing Model

This involves considering all construction costs such as labour, materials, and overheads to inform a set price. It is important when using this model to factor in potential unexpected costs so that you don’t underestimate as you can’t change more later.

Cost Plus Pricing Model

The actual cost of performing the physical work and a markup fee that covers any overheads and gives you a profit. The markup fee can be a percentage or a fixed amount. It is generally good practice to make the markup a percentage so that you can have certainty around what the profit will be.

Unit Price Pricing Model

A unit price method is determined by the product costs using a standard unit of measurement. This could be a unit of weight, volume, length, area or number. This is used when you are pricing based on a per-unit basis of certain materials or portions of work that are based on an anticipated quantity within a project scope.

Time & Materials Pricing Model

This is where you would charge on a time-based rate for labour and equipment on an hourly, daily, weekly, or monthly basis - usually established by a timesheet. This is useful when the scope of the work is not precisely defined.

Factors influencing construction pricing

Different market trends or movements can influence how you choose the pricing model you will use. Below are some key factors to consider or to be aware of when determining what your products and/or services will cost.

  • Supply and Demand - When demand is high pricing increases and when demand is low pricing decreases. In the same regard, if materials are hard to source or there is a shortage this will usually drive the price of the resource up meaning you can charge more. 

  • Labour Costs - A large portion of cost is determined by labour expenses such as wages and benefits you provide to workers. It can be difficult to find skilled workers so depending on the complexity of the project you may need to, way up the cost of hiring full time employees or engaging subcontractors to ensure the project scope can be met.

  • Equipment Costs - Depending on the type of equipment required to carry out the project, you may need to rent equipment, have regular maintenance checks, or pay for fuel which are costs you will need to ensure you can cover regardless of what the market is charging. 

  • Commodity Costs - This always plays a role in construction, when oil prices go down, so do petroleum-based products such as insulation, asphalt, and roofing materials. When steel prices increase due to new tariffs, the cost of joists, metal panels, and pipe increases accordingly.

  • Market Conditions - Whether it be the cost of living, inflation, interest rates or a natural disaster that has taken place, it will always impact what it costs you to deliver your product or service. It is important to be aware of what is happening in the economy so that you can forecast for any price increases. 

Estimating methods to determine price

Estimates are generally the foundation for setting project budgets. It involves determining what is needed to deliver the project using both rough and detailed estimates. There are several methods/tools that you can use to help with estimating the costs for a project.

Quantity Takeoff (QTO)

In construction, a quantity takeoff is a list of all the physical materials necessary to complete a job and their costs. It does not consider labour costs, permits, overheads, or equipment. It is the process of estimating the quantities for materials required based on project blueprints, drawings or models. The name of this method refers to ‘taking off quantities from drawings’. Once you have done this process you would then be able to apply the unit price pricing model.

Quantity Surveyor (QS)

A quantity surveyor is an independent contractor who has the technical skills to determine the cost of a project and how to complete it most efficiently. By assessing the design plans, discussing with builders/engineers/architects, and evaluating local rates and fluctuations, they can produce a bill of quantities (BOQ) that outlines estimates of material, labour, and equipment costs, room by room, line by line. A QS is great to engage for large complex projects. 

Construction Estimating Software

Cost estimating software automates the process and can allow for a more streamlined and time saving process. Software can allow users to input labour costs, equipment costs, and desired markup percentages to quickly provide you with a total cost estimate. This type of software can help provide faster estimates, increase cost accuracy, save data for future projects and tracking costs.

Historical Data

Look back at similar projects you have worked on to inform an estimate for the project coming up. This might be looking at the labour and productivity costs, equipment, and materials used on a smaller project and using this as the basis to inform what a bigger project might look like and cost.

Unit Cost

This method establishes unit costs for various construction activities based on industry standards or historical data. It requires putting together a list of each and every unit of material, equipment and labour required to complete the project.

Factoring risk into your price

Risk management is the process of identifying, assessing, and managing risks that may affect the delivery of a project. In cost estimating or pricing, it is important to acknowledge that costs are not fixed and are subject to uncertainties or risks that could ultimately impact the project costs. Here are a few tips that might help you navigate risk in a way that doesn’t see you out of pocket.

  • Cost Overruns - Cost overruns occur when project spending goes over budget and increases the total project cost. This can happen due to a variety of reasons such as material cost fluctuations, environmental conditions, design changes or project management oversight which can then lead to project delays, further rework costs, or even legal disputes. Make sure you have conducted a thorough risk assessment, contingency plan and monitor the costs and project performance to ensure that any speed bump in performance is captured, mitigated and monitored early to avoid cost overruns. 

  • Special Condition ‘Tags’ - Tags are additional conditions of clarification placed in a contract to avoid cost overruns. It is a way to signal that if something unforeseen happens then you are not liable to cover the cost and detailing how it will be addressed to reduce any potential financial burden. This could be things like: 

    • charges for inspections and consents

    • no allowance for any rot repair that may arise when doing renovations

    • no allowance for contract works insurance

    • assumption that power and toilet will be supplied for renovation

By ‘Tagging’ potential financial burdens in a Special Conditions part of your tender submission means that they will remain separate from the final price. However, some tender requests may outline that no tags will be considered, therefore it is important to read and understand the conditions and type of the tender carefully. 

Cost control

With any project it is good practice to have a process in place to monitor project costs to ensure that you don’t go over budget. It requires the ongoing management of business expenses such as materials, labour, overheads, change orders etc. so that you can ensure you make a profit. Without cost control, a project can quickly burn through its budget leaving you at a financial loss.

Here is a simple process to ensure cost control:

  1. Scope of Work - The specific tasks and responsibilities of the contractor.

  2. Payment Terms - The agreed-upon payment schedule, methods of payment, and any conditions related to payments.

  3. Timeline - This specifies the start date, completion date, and any milestones or deadlines for different project phases.

  4. Change Orders - Provisions that address any modifications or additions to the original contract scope, cost, or timeline.

  5. Insurance and Liability - This covers the insurance requirements for both the contractor and the property owner, as well as how liability will be handled.

  6. Termination Clause - The conditions under which either party can terminate the contract.

  7. Dispute Resolution - The process for resolving any disagreements or disputes that may arise during the project.

Further to the above, if you find there is a cost variance or cost overrun here are some steps you can take:

  1. Identify the root causes - Conduct an analysis to understand what factors contributed to exceeding the original budget. This may involve reviewing project documentation, conducting interviews with project stakeholders and analysing project data.

  2. Look for cost savings - This could involve renegotiating contracts with suppliers or subcontractors to secure more favourable terms and pricing, redesigning specific project components, or substituting materials.

  3. Renegotiate the price - If a cost overrun has occurred because of a genuine oversight or misunderstanding in the initial project scope, it could be worth renegotiating the price to better align with the actual scope and costs incurred.

  4. Determine scope creep and create variations - Variations outline any additions, substitutions, or omissions from the original scope of work and provide clarity on the associated costs and timelines. Creating variations ensures that reimbursement for any additional changes to the project scope occurs.