Why Does So Many Small Business Fail to Make a Profit? How to Effectively Calculate Pricing for a Job

Profit is the most global aspect of a business, and it is cross-functional.

Carlos Ghosn

The art of pricing a job is a skill that many business owners have not mastered. Most entrepreneurs, when checking out a prospect, guesstimate the numbers. Hence, overlooking essential requirements costing the company, in some cases, a tremendous amount of capital. Usually, the cash flow of a small business low, and such errors could be just enough to push it over to the broken side. For most small enterprises making money is accidental.

When calculating labor, one can encounter many pitfalls. I have personally fallen into many of those. I learned my lessons by losing money, lots of it. If you do not have a robust system in place, you are likely to overlook small things; in the end, those end up costing a lot.
To accurately price a job, you have to account for each detail. Consider every aspect of the business, wearing and tearing of equipment, disposal products, the cost to and fro the job site, rags used and the cost to wash them, etc. Believe it or not, many fail to charge the above-said items.
Another critical factor is understanding the local market and competition — the price charged for a job in New York City substantially more in than in Atlanta.
Over the years, I have used a spreadsheet to input my data. This helps me to breakdown the scope of work and how much to charge per service done. However, calculating a job is very involving. This is especially true when it comes to commercial or large jobs. If you are not used to quoting a large job, I suggest you find a mentor. You must be thorough to ensure you are not missing anything that could cost you hours of unaccounted work.

 

1. Never give a ballpark price over the phone

It is not uncommon for a prospect to contact you and provide you with a bare minimum scope of work over the phone, requesting a ballpark price. Avoid spitting out a number at all costs. Giving a random number could jeopardize your chances of closing the sale. The goal is to set up a face-to-face meeting with the decision-maker. Ask open-ended probing questions that will lead to your objective. As the answers come, explain to your client that the job is complicated, and you would need to come to see it before giving a price. Immediately suggest a date and a range of time, “Mr. Prospect, by your description, it will be wise if I would come and look at it before giving you a price. Could I come by tomorrow between 3-5pm?”

 

2. When coming to a meeting, look professional

The first impression sticks. The way you carry yourself on the first meeting is how you are going to be remembered for a long time. I suggest dressing nicely. Invest a few dollars and purchase shirts with the logo of your company. I use Queensboro, their prices are affordable, and quality is excellent.
Always bring something to take notes. While many have gone paperless, I still prefer notebooks. All the pages are attached, and it is harder to lose than a loose piece of paper. My notes go through a lot, and it is hard to maintain them safe. That is why I love Rite in the Rain; it is water, grease, and mud proof. Fantastic for this kind of work. 

3. Do your measurements and take detailed notes

Most of the places I have provided prices, the person responsible was very confident in the size of the area to be worked. However, they were not as firm when I asked a more detailed question, such as: “What is the square footage of installed carpet?” or “How many light fixtures do you have?” Remember that you might not be able to return before providing a price. Use your phone to snap pictures, and take super detailed notes. 

For my cleaning business, using my measuring wheel, I take my time measuring all the rooms and everything that I might need. I also count the light fixtures and furniture, even if it is not included in the scope of work. At one point in time, if you are doing a good job, the client will request a deep cleaning, which might include the items you already have listed. It makes a lot easier for you to come up with a price. 

4. Understand your the end game

If you don’t understand anything from this article, strive to understand this point. If you have just started your own business, you are more than likely an owner-operator. If your ultimate goal is to maintain your company that way, then skip to the next item. However, if you are planning on growing read the next paragraph very carefully.

In a piece of paper, write down what you want your business to look like in five years, maybe ten years. How many employees you are looking to have, field managers, general manager, etc. When pricing for a job, consider the overhead as if you are five years from now. You have to price it as if you have a support office. This is especially crucial where long contracts are signed. In a year or two from now, when you do have more employees, those charges are already implemented. It avoids you making uncomfortable phone calls to inform of a 20% price increase.  

5. Determine labor costs

List the scope of work with details. For each item, add an estimated time to complete it and sum it up. Multiply the result by the average salary you pay. For this example, the total hours were 25 manhours. You have a team of two field workers ($10/hr each) and one supervisor ($12/hr). The rate already includes employee overhead. The average would be $11 (10+10+12 = 32 / 3). Total labor = $11 x 25 = $275. 

6. Determine the cost of your supplies

This topic is crucial for any job. Any lack of supplies can cost you money. Walkthrough every step to accomplish the job and create a detailed list of all supplies you will need. For anything provided by you, add a markup. For my cleaning business, I add 30% for anything that goes out of my office. Which includes cleaning and paper products, mop heads, fragrances, etc. Let’s say that for this job I will be spending a total of $85 in supplies. In this case, I would charge $85 x 1.30 = $110.00 (the 30 represents my 30%). 

7. Driving time

There is so much to consider here under this subject as driving time is often forgotten when calculating a bid. First, the pricing will depend on what kind of service you are offering and your geographical location.

Several of my jobs, the field tech, start in one place and drives to three or four other sites before the day is over. They are still on the clock while doing so. Now, the area I service has light traffic. If I were to service Miami, FL area, my approach would be different. 

Nonetheless, for each job, I calculate the distance from the office to the site and charge by the mile – traffic is not an issue. For my example, the length is 12 miles from my office. For a light job where a diesel truck does not have to be deployed, I charge $0.80/mile. The total would be $10 (12 x $0.80).

8. Wearing and tearing 

For any job you take, you should always consider the tool usage. If you are building a deck, you should charge your customer for a new blade for you saw, or the nails and screws you are using. But, you cannot forget about the miter saw, the drill, the nail gun. You had to purchase it, and sooner or later you will have to buy again. I charge 4% of the total of each job, and that is for tools alone. 

9. Adding your overhead

This might seem crazy, but most business owners I speak with have no idea how to calculate their overhead. Knowing how much you are spending to keep your business running will also tell you where your sales need to be.

Overhead is an extensive subject, and it will be featured in another post. In this example, my overhead is 15%. 

10. Profit Margin

Do not forget to add your profit margin. It comes after all the expenses have been listed. It should be the last thing you add. If you want your business to grow, never negotiate your profit margin. I might change the scope of work, or use different products or supply, but my profit margin is always 20%. 

11. Putting it all together

To finalize let’s put it all together. 

Labor = $275.00

Supplies = $110.00

Driving expense = $10.00

Direct cost subtotal = $395.00

Overhead 15% = $59.00

Wear and Tear 4% = $16.00

Profit Margin 20% = $79.00

Total = $549.00

The final price on the bid would be $549.00

12. Checking your numbers

Now that you know the minimum you will take to do this job, you must check the competition. This step is crucial, especially if you are new and not familiar with the prices around you. If the prices are much higher, then you will have room to bump your some. If they are substantially lower, you will have to reconsider before placing the bid. 

Final thoughts

Many have asked what is the best form to price the job – by the hour or square footage. It does not really matter. There is no right or wrong way to price it. As long as you are taking a profit home, you should be fine. For me, it is easier to analyze each task and price them separately. For cookie-cutter jobs, I have established a price per square footage, provided the job remained true to the scope of work. 

Depending on the service you provide, some jobs might require a service call. In my painting service company, a simple patch of drywall started at $300. The high price is due to the two or three visits to the site to finish the job. On the other hand, if we were already at the location working, the price would drastically drop.