Setting prices is a delicate process that can quickly go awry if not handled carefully. As a contractor, you must determine an amount that comfortably covers your overhead expenses and delivers a reasonable profit margin.
This is especially important, given the recent price shocks and fluctuations resulting from tariffs and trade protection regulations enacted by the federal government.
This guide covers strategies construction business owners use to determine their direct and indirect costs to set the correct prices. We’ll also review the various ways they utilize ServiceTitan to price their services while maintaining healthy profit margins.
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What Factors Should Contractors Consider When Setting Their Pricing Strategy?
Price setting is more of a science than an art. General contractors and subcontractors must understand the basic principles to determine the appropriate price to charge for construction projects.
Take a look at the key factors to consider when setting a pricing strategy:
Understanding the scope of contractor jobs
Starting construction projects before reaching a consensus on the exact scope of work only sets you up for failure. Clients tend to keep adding one item after another without adjusting the payment terms, and can get frustrated if you push back.
It’s also next to impossible to accurately estimate the costs associated with a project when the scope is unclear or open to interpretation.
To that end, your goal should be to understand the client’s specifications before setting prices. You can determine the true scope of the client’s request by visiting the site, as they may underestimate the required work.
Next, consult with the customers and the workers responsible for executing the project before and after creating cost estimates.
The agenda of the first meeting with both parties should be to clarify the full scope of the project.
The second meeting confirms whether what you’ve documented aligns with their expectations.
Assessing material costs in construction jobs
Forecasting material costs is crucial due to their substantial contribution to the project's overall cost. Quoting the wrong material costs makes it impossible to create accurate estimates.
To assess your material costs, first list all the materials you’ll need to purchase for the project. Do this in conjunction with the project manager to ensure that no material is left out.
Next, contact your suppliers to verify the current cost of materials. Then, add a buffer to account for potential price hikes caused by volatile market conditions.
Once you’ve assessed the material costs, proceed to the next step.
Pro Tip: Your pricing strategy should adapt to economic conditions to ensure you remain profitable. Use ServiceTitan's Job Costing Reporting feature to track your gross margins and material costs as a percentage of total sales.
From the reporting dashboard, you can also review and edit material costs associated with any project whenever suppliers update their prices due to sudden fluctuations.
This way, you can stay on top of prices in real time, protecting your profitability on every job.
Calculating labor costs accurately
Labor costs are the financial valuation of the hours it takes to complete the project. They include the wages of technicians working on the job site and office employees like dispatchers and CSRs who contribute to the project’s success.
The cost of labor significantly affects your total costs but isn’t as volatile as the material costs.
There are two ways to calculate the labor costs associated with construction projects. The first is the unit rate method, which is used for jobs that can be divided into measurable units, such as tiling (cost per square feet), framing (cost per linear foot of framing), and painting (cost per square feet).
Let’s say you have 500 square feet of tiles in a building. Here are the steps you would use to calculate your labor costs using the unit rate method:
Calculate the number of hours it will take to complete one square meter using data from the construction industry or similar projects you’ve done in the past. In this case, let's say it takes one hour to install a square meter, which means it will take technicians 500 hours to complete the project.
Multiply your hourly rate (derived from your shop’s labor averages or the industry’s wage average) by the number of work hours required to complete the project. Going back to our tiling example, if your labor rate is $15, the labor cost would be $7,500.
Finally, add a markup to account for employee benefits and tax to arrive at your total labor cost. In this case, your labor cost would be $8,000, assuming your tax is $100 and employee benefits are $400.
Another method for calculating labor costs is the detailed estimating method. It involves dividing a project into smaller tasks, finding their respective labor costs, and then summing them up to arrive at the total labor cost.
Let’s say you're painting a shopping center. Here are the steps you’ll use to estimate the labor cost using the detailed estimating process:
Break down the big task into individual tasks. For example, surface preparation (priming and cleaning the walls) and painting (cutting in edges, rolling the walls, and painting trims) could be included.
Calculate the number of hours for each task. For example, surface preparation could take four hours, and painting could take six hours.
Sum up the hours, which, in this case, amounts to 10.
Next, determine the hourly rate using the same methods mentioned in step two of the first method above. Let’s assume it’s $25 per hour.
Multiply your hourly rate by the total number of work hours to arrive at your total labor bill, which, in this case, will be $250.
Finally, an extra amount should be added to cover the labor cost of administrative staff, employee benefits, and tax. Assuming that the admin staff has an equal hourly rate ($15), spends four hours on the project, and we use four employees, $400 for employee benefits, and $100 for tax, you must add an extra $740. This will bring your total labor bill to $810.
You can use our labor rate calculator to accurately calculate wages.
Accounting for overhead costs
Overheads are all costs associated with running your business. This includes:
Equipment and vehicle maintenance costs
Transportation
Utilities (power, light, and water)
Marketing
Rent
Insurance
Legal fees
To operate profitably, you need to mark up each project with an extra amount to accommodate your business expenses. You can do this by spreading your total overhead across all ongoing projects.
But first, you need to calculate your overhead rate by dividing your total overhead for the entire year by any of the specific cost parameters associated with construction projects, such as:
Direct labor costs (the total annual direct labor costs)
Direct labor hours (the total annual direct labor hours)
Machine hours (the number of hours a machine is used to complete a project)
Total material costs (the total amount spent on materials in a calendar year)
After getting the overhead rate, the next step is calculating the extra amount to add to a specific project to accommodate your overhead using this formula:
For example, let's say you spend 5,000 hours across all projects and $300,000 on overheads for a calendar year. Now, you’re running a project that’s estimated to consume 300 hours. Your allocated overhead for that project will be:
The #1 newsletter for the trades.
Allocated overhead = 300,000/5,000 x 300 = $1,800
Other methods for spreading your overhead across projects include:
1. Project-based allocation: Divide your total overhead by your total direct costs and multiply the result by 100. This gives you a percentage of your overhead cost to add to each project’s cost.
The direct costs are all expenses directly incurred when executing the project. This includes labor, materials, and equipment rentals.
Here’s what this looks like for a company with a yearly overhead of $100,000 and a direct cost of $500,000:
So, you’ll be adding 20% of your direct cost to all future projects.
For example, if you’re bidding on a project with $50,000 in estimated direct costs, you would calculate the overhead cost like this:
$50,000 (direct costs) x 20% (overhead percentage) = $10,000 (overhead cost)
This means you would add $10,000 to your direct cost estimate to account for overhead, bringing your total project cost to $60,000 ($50,000 direct costs + $10,000 overhead).
2. Labor-based allocation:
Given your overhead, this method gives you the exact amount to charge for each hour. Here’s the formula:
This percentage is then applied to your wage rate.
For example, let's say your overhead cost is $200,000, and the total labor cost is $500,000. Your labor rate will be given by:
$200,000/$800,000 x 100 = 25%
Assuming the hourly wage rate for a project is $20, your overhead allocation rate becomes:
25/100 x 20 = 5 + 20 = $25
This means you’ll have to charge $25 for each work hour to accommodate your overheads.
Determining appropriate profit margins and markup
The last stage is determining your profit margin and markup. However, you shouldn’t conflate the two; they’re entirely different.
Profit margin is simply the difference between sales (or revenue) and direct costs (material and direct labor costs).
It shows your earnings relative to revenue generated and is expressed as a percentage of revenue.
Conversely, markup is the difference between the price and the direct and indirect costs involved in executing a project. It shows how much money you’re making on a project relative to its direct and indirect costs and is, therefore, expressed as a percentage of the project’s cost.
For example, let's say you charged a client $1,000 for a job but spent $600 in executing it.
Your profit margin will be $400, or 40% (400/1,000 x 100), while your markup will be $400 or 66.67% (400/600 x 100).
Business owners use profit margins to determine profitability based on past sales, while estimators add markups to the direct cost when creating estimates to account for profit. Thus, we’re more concerned with markups when pricing jobs.
Consider a contractor who has set a goal of earning a profit margin of 20% (or 0.2) after spending $1,000 on direct costs. Using this formula…
Markup percentage = [Profit margin/ (1 – profit margin)] x 100
…produces a markup percentage of…
[0.2/(1 – 0.2)] x 100 = 25%
Multiplying the result by the direct costs produces a markup of $250, which raises your price to $1,250.
How to Price a Contracting Job by Industry
The strategies for setting accurate prices we’ve shared above are generalized and may not apply to contractors belonging to specific industries. For example, a roofing contractor’s prices will depend significantly on the cost of the roofing materials used.
For this reason, we’ve written separate pricing guides for each industry:
How Can Contractors Develop an Effective Pricing Strategy?
Creating an effective pricing strategy involves the following:
Analyzing market rates and competitor pricing
Prices are not set in stone. They can change due to factors such as customers’ economic conditions, macroeconomic trends, and fluctuations in labor and material costs.
As a business owner, you must monitor these changes and adapt to them quickly so you’re not left behind.
Otherwise, you may be priced out of the market by competitors who reduced their prices due to a shift in consumer preferences. Or you may find your profits shrinking because you failed to increase your prices in response to market shifts.
One way to monitor prices is to pay close attention to the market. How much do local contractors charge for a similar service? What is the current price of materials and labor? Is there an upcoming policy shift that could drive prices up or increase customers’ sensitivity to prices?
Competitors’ digital platforms (websites and social media accounts), newsletters from top manufacturers, industry reports, and one-on-one interactions with industry peers can help answer these questions.
You can also download ServiceTitan’s Benchmark Report and use it to compare your prices with those of your competitors. This way, you can ensure you’re competitively priced and create profitable estimates.
Finally, listen to customer feedback; it’s the easiest way to determine whether to increase or reduce prices. When raising prices, be upfront and transparent about the reasons for the change. Ideally, this should be linked to the additional value you're providing.
Implementing value-based pricing in contractor jobs
Value-based pricing involves setting prices based on customers’ perceived value of your service. It involves shifting your focus from profit-making to understanding the customers' views.
However, only contractors with a unique value proposition can offer value-based pricing.
To that end, build up your brand authority and expertise so customers can differentiate you from competitors.
Then, position yourself as a trusted adviser and justify your prices using the value you offer. Explain how your expertise would help them, and offer social proof (testimonials and case studies) to back up your claims.
Utilizing technology to streamline pricing processes
Technology reduces the risks associated with manually calculating prices and estimating material costs.
However, some tools can complicate rather than simplify your pricing process. This is especially true for software isolated from your other processes, which causes you to switch between and copy and paste data from different platforms.
That’s why we designed fully integrated pricing tools that communicate with each other and streamline the entire pricing process.
Here are the various ways contractors use our tools to set prices:
Leveraging ServiceTitan's Job Costing Software
Setting prices is one part of the puzzle. You still need to monitor your project’s cost consumption in real time to ensure you don’t exceed the projected cost and deliver the project at a loss.
Clipboards and sticker notes may work for smaller projects, but they often cause confusion as the size and number of projects you’re handling increase. They can also get lost or destroyed, leading you to lose valuable historical pricing data you can use to set accurate prices now.
For this reason, we built a Job Costing platform that consolidates all financial data related to a specific construction project into a table containing:
Original budget (before a change order was issued)
Actual costs
Total budget
Committed costs
Percentage of budget used
The variance between the total budget and the actual costs
A summary of the expenses and billed amount
Profit margin
Clicking on Job Costing’s table expense area offers a detailed summary of all project expenses. The table also compares your initial budget for each expense item to your actual payment and shows their respective sources (e.g., the technician who billed for those hours, the vendor or purchase order tied to the material, and much more).
This allows you to keep all project expenses within your budget and stay profitable.
Utilizing ServiceTitan's Pricebook Pro for accurate pricing
A vital component of setting accurate prices is knowing precisely how much each material costs, even when the supplier suddenly updates their prices.
ServiceTitan’s Pricebook Pro software integrates with catalogs of top suppliers, allowing you to view the current prices of each material. Once a supplier changes their prices, the software’s system automatically notifies you to update the prices in your pricebook.
ServiceTitan's Price Insights feature further enhances your ability to set accurate prices.
It uses Titan Intelligence (our AI system) to fetch the cost of similar-sized competitors in your area for a specific service, computes a regional average, and then compares your charge with it. Even better, the regional averages are updated daily, allowing you to fine-tune your prices based on market trends.
On top of that, there’s a meter on the price insights page that shows how confident the software is in the suggested regional average.
In one of our webinars, Laura Thornton, President and CEO of TNT Home Services, discussed how her company uses these features to price its services competitively.
“For us, we never ever want to price ourselves out of the market. So, we have to pay very close attention to make sure we’re in the middle. I like to be a little bit on the higher end of the middle,” Thornton says. “If we need a little boost and maybe need to lower the price for something this quarter, we can do that.
“With Pricebook Pro and Price Insights, you can do it by individual item and service. You don't have to be all or nothing in your pricebook,” she adds.
Streamlining operations with the Field Service App
Field techs are often charged with the extra responsibility of closing sales in the field. To do that, they need a tool that automates key tasks, connects them to the office, and provides information about the customer.
ServiceTitan’s Field Service App allows technicians to check the current price of materials when creating estimates. From their tablet, technicians can access customer data such as previous job histories, special requests, and property descriptions.
Using the Field Service App eliminates the need for paper documents, which often go missing, and helps technicians create upsell offers with accurate prices on the spot.
What Are Common Pitfalls in Contractor Pricing, and How Can They Be Avoided?
Consider this scenario:
John is contracted to build a community center.
After reviewing the blueprints and evaluating his gut feeling, he concludes the project can be completed in three months. Considering the previous cost of material and his usual crew's wages, he estimates the project will cost $150,000.
However, his estimations were wrong, and the project failed.
He failed to account for the intricate electrical work, the specialized HVAC system, or the inspections and permits that took a while to process. He also had to hire subcontractors who charged higher than his laborers, rent concrete pumps and specialized tools, and pay massive dumpster fees.
Essentially, the project exceeded his initial estimated cost and timeline, causing the project to fail.
Although fictional, this scenario is all too familiar and typifies everything a contractor should never do when pricing projects.
Let’s explain.
Underestimating project timelines and labor costs
Like John, contractors sometimes underestimate a project's time and cost implications. This can be due to optimism, insufficient research or experience, or a poor understanding of the project’s scope.
To avoid John's mistake, follow these tips:
Always break projects into smaller tasks and set realistic delivery times for each one.
Contact experts for cost estimates for each aspect of the project. Do not rely solely on your gut.
Visit job sites in person before creating any estimate.
Overlooking hidden or unexpected expenses
Projects typically involve multiple expenses, some of which are unexpected or hidden. Setting prices that don't include these expenses leads to budget overruns and failed projects.
For example, John failed to account for equipment rentals, permit fees, and other expenses. This oversight disrupted the entire project.
You can avoid John's error by doing the following:
Sit with your team to create a detailed checklist of all project costs. This is easier if you break the project into smaller tasks or activities.
Use technology (such as ServiceTitan’s Job Costing Software) to consistently track your costs throughout the project and take corrective action when there's a budget overrun.
Create a contingency budget for each project to cover unexpected expenses. This budget should be 5-10% (for low-risk projects), 10-15% (for medium-risk projects), or 15-20% (for high-risk projects) of the entire project budget.
Failing to update pricing strategies regularly
Material and labor prices consistently change. Failing to update your pricing strategy to align with the current economic climate causes you to lose profits.
For John, using the previous price for materials and labor destroyed his bottom line. Here's what he should have done and what you must do to avoid his mistake:
Monitor market rates and changes in material prices, labor rates, and competitor prices.
Periodically review your pricing strategies, advisably every month.
Add an extra amount to the prices for long-term projects to account for inflation.
How Can Contractors Send Job Quotes to Clients?
After determining what to charge for a specific project, the next step is to create a quote and deliver it to the client.
Let's break it down:
Writing the quote using an estimate template
Use ServiceTitan's quote template to save time and mitigate errors. It contains all the fields a professional quote should have, including customer details, a project description, and payment terms.
Click here to download the PDF template and learn how to use it.
You can customize the template to your brand by replacing our logo and address with yours.
Listing detailed pricing information for services
Your quote should include a detailed breakdown of the project's expenses. Being this transparent about costs and letting customers know exactly what they're paying for minimizes disputes about the total cost.
To impress your customers, consider utilizing ServiceTitan’s project estimates to create detailed construction quotes. You can add all activities and materials and choose to build your quote from scratch or use pre-built templates.
With the software, you can label line items with specific color codes to make them easier for customers to read. Best of all, the software automatically calculates the price and markup for each expense item using data sourced from your pricebook.
This saves you the chore of manually calculating prices and markups, minimizing errors.
To earn customers’ trust even more, utilize ServiceTitan’s Financing Option to allow them to pay in installments for high-ticket or emergency repairs. Due to our partnership with third-party financial institutions, you can expect to get approval minutes after guiding your customer to submit a financing application.
Sending the quote to clients
Now that you've created the quote, the next step is delivering it to the client. To get a prompt response, we advise sending it via email or SMS—channels that customers are more likely to check multiple times a day.
It's okay to deliver quotes or invoices as a PDF. However, such static documents make it harder to track the status of each quote, and clients will be unable to approve them if they accept the quoted prices.
Conversely, customers can approve and digitally sign quotes sent directly from ServiceTitan. Additionally, they can view all their previous quotes and invoices and approve new ones via ServiceTitan’s Customer Portal, a personalized web interface.
This expedites the approval process, allowing you to maintain a stable cash flow throughout the project.
Following up with clients
Customers can forget a quote you sent, even if it was just a day ago. This can delay the payment process and affect the project’s delivery timelines.
To counter this, always follow up with clients after sending quotes. You can automate the entire process by using our Mobile App’s Follow-Up Tab, which allows you to:
Follow up on job quotes via calls, emails, and text messages.
Set up notifications about when to follow up on a job quote.
Document what happened in the previous follow-up so anyone who contacts the customer can pick up where you left off.
Create follow-up messages that are automatically delivered to clients at preset intervals, allowing you to follow up at just the right time.
Furthermore, all quotes sent directly from ServiceTitan can easily be tracked using the Opportunity and Follow-Up report, which reveals the following:
The date the estimate was created and when it was sent.
When you're supposed to follow up with the customer.
The date the job associated with the estimate was completed.
The status (Open, Not Attempted, Unreachable, Contacted, Won, or Dismissed) of the lead associated with the quote.
The status of the estimate—Sold, Dismissed, or Open.
The report also has filters for viewing the status of the quotes sent within a fixed or custom timeframe or those tied to specific business units.
This report allows you to track the status of all your quotes without having to chase them down or use cluttered spreadsheets.
Over to You!
Pricing is one aspect of business management that can be hard to figure out.
However, it gets easier with time as you get familiar with market trends that affect costs, the expenses needed to deliver each service, and the price points your customers are comfortable with.
Setting accurate prices starts with creating an organized pricebook, which ServiceTitan helps you achieve with an intuitive interface that fetches real-time cost data from supplier’s catalogs. Contractors who use the software report seeing:
A 13% increase in Revenue
A 4% increase in Close Rate
A 4% increase in Ticket Size
Ready to easily find the right prices to charge and empower field techs to create accurate estimates? Schedule a call today to get a live, one-on-one walkthrough of how ServiceTitan works.
ServiceTitan is a software solution that helps contractors run their business more efficiently by automating essential processes like invoicing and customer management. Join over 100,000 contractors nationwide who use the platform to boost revenue by 25 percent in their first year with us.
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ServiceTitan is a comprehensive software solution built specifically to help service companies streamline their operations, boost revenue, and substantially elevate the trajectory of their business. Our comprehensive, cloud-based platform is used by thousands of electrical, HVAC, plumbing, garage door, and chimney sweep shops across the country—and has increased their revenue by an average of 25% in just their first year with us.
