"We've always added 10% for overheads and 5% profit." It's probably the most common pricing model in construction. It's also one of the biggest reasons many contractors remain busy but never become truly profitable.
Most SME contractors don't deliberately underprice their work. They simply inherit pricing methods that have evolved over years of experience. A bit of judgement here. A percentage there. A quick comparison with last year's job. If the number "feels about right", the tender goes in. It isn't bad estimating. It's simply an early stage of pricing maturity.
The good news is that pricing doesn't have to change overnight. The best contractors don't leap from gut feel to sophisticated data analytics. They improve one step at a time.
Here's what that journey looks like.
Stage 1 – The Rule of Thumb
Every contractor starts here.
· Materials.
· Subcontractors.
· Labour.
· Add 10% overhead.
· Add 5% profit.
· Job done.
The problem isn't that this method is quick. The problem is that it assumes every project deserves exactly the same overhead recovery and exactly the same return. In reality, every project consumes different amounts of management time, estimating effort, commercial support and risk. A simple warehouse extension and a phased occupied refurbishment may have identical construction costs but completely different demands on the business. Treating them the same almost guarantees one will subsidise the other.
Stage 2 – Know Your True Cost of Staying in Business
Before you can price properly, you need to understand what your business actually costs to run. Many SMEs underestimate overhead because they ignore one significant item. The owner's market cost, as they take a proportion, often a large proportion of income from Dividends. This simply hides real costs. Your break even overhead calculation should include market-rate salaries for everyone—including directors—before adding profit.
This creates an honest overhead recovery percentage that every project should contribute towards. Only then do you know whether you're making profit or simply underpaying yourself.
A useful way to think about every tender is to separate costs into three buckets:
- Direct costs – labour, materials and subcontractors.
- Project overheads – site management, temporary works, welfare, plant and other job-specific costs.
- Company overheads – the office, estimators, directors, finance, software, insurance and everything that exists even when no projects are running.
Professional pricing keeps these categories separate rather than burying one inside another. As pricing maturity increases you can allocate costs to the appropriate “Pot”.
Stage 3 – Benchmark Before Changing OH&P
Once you've established your true overhead recovery rate, don't immediately double your prices. Compare it with what you previously would have priced the work at and adjust the profit. So now you may be pricing at 15% overhead and 0% profit. It’s about the same price, but you know you will achieve a true break-even and the overhead is covered. Then depending upon the wins and losses you can start to increase the profit add on, 1%, 2% etc or reduce the overhead to allow a profit to be added. Having a “clean set of figures” allows this fine adjustment and sets the business up to see if they can afford to recruit and grow.
Stage 4 – Stop Treating Project Management as "Free"
Many SMEs pay project managers, contracts managers and directors from company overhead. That means every project receives exactly the same allowance for management regardless of complexity. Professional estimators don't do this. They allocate anticipated management hours directly to each project, and include them in the preliminary costs, “prelims”. Large, complex schemes consume more management resource. Simple repeat projects consume less. As you move these costs into individual estimates, your company overhead percentage naturally falls because fewer management costs are sitting in the office overhead pot. Pricing becomes more accurate.
Stage 5 – Measure What Really Happened
This is where pricing begins to become evidence-based.
When a project finishes, compare:
- estimated management hours against actual hours;
- estimated labour productivity against actual productivity;
- estimated material costs against actual costs.
Don't simply review whether the project made money. Understand why. Every completed project becomes training data for the next estimate. This is exactly how contractors begin moving away from "experience" and towards repeatable pricing knowledge.
Stage 6 – Keep Refining Your Overhead Recovery
· Businesses change.
· The market outlook changes.
· Staff numbers increase.
· Software subscriptions grow.
· Offices move.
· Vehicle fleets expand.
Your overhead percentage should never become a fixed number that lives forever inside your estimating spreadsheet. Review it regularly – 3 months is often a good timescale as you should have a good feel for how the market will go over that period. Otherwise today's profitable projects slowly become tomorrow's loss-makers. If the market is expected to soften, you may have to make overhead cuts. If you are moving to larger premises, then they could be going up.
Stage 7 – Learn Which Projects Actually Make Money
One of the biggest mistakes contractors make is measuring success by turnover. Professional businesses measure gross project performance.
Review completed projects and ask:
- Which sectors delivered the best margins?
- Which clients paid on time?
- Which jobs generated repeat work?
- Which projects created endless variations and disputes?
- Which schemes absorbed huge amounts of management time?
Patterns soon emerge. Some projects are simply better businesses than others and this is where pricing feeds in to the business strategy.
Stage 8 – Price Less. Choose Better. Bid-no-bid.
Eventually the biggest improvement in profitability doesn't come from estimating better. It comes from bidding better. Instead of asking: "Can we win this?" Ask: "Should we even price it?"
Every estimate consumes valuable time. Every low-probability tender delays work on more attractive opportunities. Professional contractors develop a disciplined Bid/No-Bid process. They pursue projects that fit their expertise, their resources and their strategic objectives. They politely decline the rest. Winning fewer, better projects is often far more profitable than winning more work.
The Final Step – Pricing Becomes a Competitive Advantage
The most mature contractors eventually move beyond cost-plus pricing altogether. They understand their production rates. They know their true overhead recovery. They price risk deliberately rather than hopefully. Most importantly, they understand the value they create for clients.
· If your programme certainty saves a developer millions in finance costs…
· If your quality reduces defects…
· If your project management removes risk…
Then your fee shouldn't simply reflect what the project costs you. It should reflect what it's worth to the client. That is where pricing stops being arithmetic and starts becoming strategy.
The Bottom Line
You don't need artificial intelligence, complex software or a team of analysts to become better at pricing.
· You simply need a process.
· Know your true costs.
· Measure what actually happened.
· Learn from every project.
· Refine your overheads.
· Choose better opportunities.
· Improve the value you deliver.
· Repeat.
That's how contractors move from pricing by instinct to pricing like professionals.
And the businesses that make that journey rarely find themselves competing solely on price ever again.
For more about pricing like a pro visit www.profitablecontractor.co.uk
