Real Estate

General Contractors Cost & Pricing Methods

The goal of every General Contractor is to provide excellent services and create good working relationships by doing profitable jobs while also minimizing project risk. This is accomplished through a contract that clearly defines the scope and cost and accounts for risk management for any job.

Contracts of all kinds need to be comprehensive to protect all parties involved. In the construction industry, a contractor prices a contract and clarifies what the project entails. When all costs are considered and all terms and conditions are clarified in the contract, a General Contractor can do a job successfully, be profitable and create lasting relationships with clients.

No matter how well you price your project, there are still risks involved. However, you can use general contractor insurance to minimize your risk, which is well worth the price for your peace of mind. Choose an insurance that protects you in all areas of your business and get one that is tailored to your specific needs.

Minimize Project Risk with Tailored Insurance

The goal is to make your business profitable and protect yourself against all types of risks. A clear contract with a definite scope and accurate pricing methods can minimize risk, but no matter how well these are defined, there are still situations that create risk for general contractors. Therefore, it’s important to identify and assess your risk to mitigate it.

Many types of insurance are available, and they can cover your business and protect you from unanticipated events. Contractors’ error and omissions insurance can cover faulty workmanship and expensive vehicles, tools, and equipment can all be covered to protect you from costs associated with accidents, theft, and loss.

Make sure you aren’t overpaying by talking to an agent about your specific needs. They can create a plan that covers your specific industry needs, but yet doesn’t over charge you for policy features that you don’t need.

Project Pricing Methods

The method by which a contract is priced is probably the most important decision you will make. There are three standard methods of pricing a contract. A contract can either be a fixed price, cost-reimbursable, or unit price contract.

There are advantages and disadvantages to each type, and it is good to have a clear idea of what each method entails before deciding how you will price your contracts.

Fixed Price Contracts

Fixed-price contracts, also called lump-sum contracts, are when the amount that will be paid is determined before the work is done and is paid without regard to the actual cost of the work. The only time that varies is if there is a change in the project’s scope and the contract is changed.

The biggest advantage of a fixed-price contract is that it is simple and certain. If there are savings, these will be to your benefit as a contractor. However, you must be very thorough in determining costs or risk considerable financial exposure due to cost overruns.

There will always be factors outside of your control, such as the owner changing their mind, needing to borrow more money for the project, or taking too long to make decisions. These can impact the length of the project and determine profitability.

Cost-Reimbursable Contracts

With cost-reimbursable contracts, unforeseen costs will be passed on to the owner, and you, as the contractor, do not have to bid as accurately to make a profit. Usually, a guaranteed maximum price (GMAX) is agreed upon for the scope of the project and terms that define what happens if it is not completed below that price.

With this type of contract, the owner is protected because the contractor has little incentive to take shortcuts, and any cost savings are passed on to the owner if it comes in under the GMAX. It’s also beneficial for the contractor if there are too many unknowns to determine a fixed price contract.

Unit Price

A unit price contract is where a contractor sets a price for a unit of work that needs to be done, such as in road building, where you would price the contract per mile of road to be built. This type of pricing method is used mostly in well-defined public works projects. It is rarely used in private building projects.

The Scope of the Project

Defining the scope of a project is just as critical to success and profitability as determining the costs and choosing a pricing method. Without a definite scope in a contract, project boundaries can be blurred, and price overruns can occur.

To develop a well-defined scope of the project, you must clarify these factors:

1) Definitions—make it clear what work is being done and define industry jargon.

2) Project Overview—is a simple statement that describes the work to be done.

3) Milestones—are critical to keeping everyone happy as the work progresses.

4) Details—are specifics that determine how to evaluate if the work is complete.

5) Timeline—defines when general tasks will be completed.

6) Administration—determines how to handle when something needs to be changed, how payments will be issued, and other legal requirements.

Stay Profitable

General contractors must pay incredible attention to details and schedules, while also being sensitive to the needs and desires of their clients. By being as thorough as possible in defining costs and timelines and making sure that you are covered when unforeseen events happen, you can create lasting client relationships and see increased profits for your business.

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