Covid has thrown us some huge curve balls over the last two years (ahh, how has it been that long?!). One of the scariest, from this estimator’s perspective, has to be the volatility of prices, making it very hard to price accurately. It has forced me to change the way I price, so that I can be confident that the profit margin will be there when the job is actually built in six to twelve months.
First, let’s look at what is happening. Almost all imported material prices, including timber, fixings, even irrigation parts have gone through the roof. Not to mentionsteel. We all know that steel often fluctuates, it’s one price I check monthly, but the current price increases are mind boggling. I priced some 90x45mm TP timber last week that had doubled in price in four months!
Why? Suppliers are blaming it on supply chain issues. The cost of freight has increased dramatically, coupled with an increase in demand (we can’t complain about being busy) and a shortage of labour to make the products. It all adds up to the perfect storm of massive price hikes, which equals a massive hit to your profit margin.
So, what do we do about it?
The first thing to do is change the way you price:
Check prices weekly
It is usually good practice to check material prices in January and July, when most suppliers increase prices, but it’s not often enough at the moment. I currently check prices weekly to ensure I don’t get caught out with a big price hike.
Be very clear about price fluctuations
Make it super clear (front and centre in your cover letter) to the client that prices are increasing all the time so the quote will not be honoured after the expiry date.
Reduce the time quotes are valid for
Most tradies send out quotes that are valid for 14-30 days, however we usually honour those quotes well after the quote date has expired. Not anymore. If the client wants to sign the contract after the quote validation date, run a quick check of the material prices first and be sure to update your offer if the price increases have eaten into your profit margin.
Build the price increase into your quote
Many of us price project for those that will not be built for twelve plus months after the contract is signed. It is very hard to pass the price increase onto the client once they’ve signed, so a method is to predict the increase and build that into the quote. This is a hard one to get right, because you ca easily price yourself out of the work and/or underpredict the increase. A two to five per cent increase will at least take the sting out of the rising material costs.
Once the contract is signed you need to be proactive. Ordering materials early is a great option if the project is small and going ahead soon, however if the opposite is true be aware that it costs money to order materials early. Not only do you need to pay for the material well before you need it (causing cashflow issues), but you also need to pay for storage and handling. In this scenario try to:a) Get a bigger deposit
b) Try to store materials on site
c) Place a deposit order, but don’t take delivery – this way your price is set but you don’t need to worry about storage
Plan for labour increase
The last consideration to make is labour. We are all so busy and it is hard to find staff, so the cost of labour has started to increase, and I can’t see that changing any time soon. Be aware that your labour costs will increase over the next twelve to twentyfour months and make sure that is reflected in you quotes. Labour is usually the largest cost, so a small increase in costs will have a huge impact on your profits.
The good news is that we are all super busy, the market looks good, there is plenty of work to go around. So, with that knowledge in mind, don’t be afraid to pass on the costs to consumers, or you will quickly find yourself working for free.