This is a question that many new business owners in virtually every industry ask themselves. How do I determine or establish my rates and prices? Well, this is tough question to answer for someone else, but you yourself can usually answer it very well.
Why is it important to know?
It's extremely important because you need to be sure that your business is profitable, right? After all, we aren't all in it just to have a good time and create jobs for everyone else. Unfortunately, it's just the reality. But the good news is, that you probably wan't to create many jobs, because that means that you're rolling in the dough, right?
Calculating your costs is really the only way to determine your rates. You have two different types of costs. Fixed Costs, and variable costs.
Fixed costs, are the ones that don't change and are constant all the time. So whether you are doing any jobs or not, these bills will come in every month. These are expenses such as:
How to use this information to establish rates
Now the fun part, actually establishing your construction rates and pricing. Well, first off, you determine what your monthly fixed costs are. This tells you what you need to bring in each month just to stay in business.
You can take a look at how much business you are doing, and what you realistically expect to do in the future, to ensure that you are very confident that you will easily bring in enough cash to cover these costs. For variable costs, you can be a bit more flexible. That's because there is less risk. You only incur variable costs when you have a paying job that is booked.
For variable costs, you should look at how much business you are doing, and expect to do. Just like with fixed costs. But now, you should determine what sort of mark up you should put on material costs. This varies depending on how much you are buying, the season, and what part of the country you are in. So only you can answer this one with relative accuracy.
Next, you determine what your hourly rate should be, whether that's your pricing model or not. Estimate the hourly job cost with accuracy so you can be sure that you can have enough hired help to complete a project in time, while still making money on top of their labor.
And that's it! you now have a basic understanding in determining your rates and pricing for your construction business!
Every business runs into a dark period at some time or another. Cashflow is the lifeblood of your business, and if it is disrupted, it can mean disaster. When running a contracting or subcontracting business, cash flow is especially important because you need to purchase materials and equipment in order to complete the jobs that bring in the revenue. It almost seems like a catch-22.
In this day and age, working with larger contractors can make this a reality for far too many subcontractors. The big guys generally take longer than 30 days to pay. In some cases, I've had clients that consistently get their invoices paid in 45-60 days. This is a huge drag on cash flow and financials, especially if your business is growing. But there are some solutions.
Can You Get a Business Loan?
I'm going to list this here, but be warned that it is extremely difficult in this day and age. Getting business loans is becoming harder and harder. Most of us don't even know why. Especially if you are in construction (which you probably because you're reading my blog!). There are some alternatives though, with the main one being peer to peer lending like Lending Club.
What Else Can You Do?
There are some other alternative to using a loan to fund your construction business as well. One of the most popular and effective ways to fund your construction business is using construction factoring.
Factoring, is when you sell your unpaid receivables at a discount, so you don't have to wait for your money. It's a pretty simple product actually, and it dates back centuries. Many of my clients have used factoring to successfully finance their operations, whether they are doing millions in revenue, or they are a small individual subcontractor working their trade.
This allows you to get cash much faster, so you can take on bigger jobs and ultimately grow and scale your business to new heights. Another major benefit, is that invoice or accounts receivable financing is based on your customer's credit and not your own. This makes it easier to qualify for, and is why it is most often used as an alternative to denied business loan applications.
The process can get confusing, but here it is in simple terms. A factoring company or a bank will review your invoices, and ensure that they are valid, the job is in fact completed, there are no disputes over the amount, and that your customer has solid credit history that proves they are able to pay the invoice. When that has all been verified, the lender usually forwards you between 75-90% of the invoice amount. The remaining is held in a reserve, just in case the customer doesn't pay the invoice. This protects the factoring company. When your customer pays, the payment goes to the factoring company. At that point, you are sent remaining balance of the invoice, and they take a percentage of the total face value out of this portion as their fee.
The overall fee usually ranges from 2-5%, and construction is unfortunately on the higher side of that scale in most cases. That's because it is riskier than many other industries.
But overall, construction accounts receivable factoring is a good way to fund your business, and I recommend it to more than half of my clients, because it is so flexible.
I've been browsing youtube a lot the past few days, and I've come across many really good material (and unfortunately, a lot that aren't so good). For the most part, I was looking for some ideas because I would like to start my own youtube channel about starting a construction business.
To begin, I'd like to share a few videos about starting a construction or subcontracting business.
Those two were a couple of my favorites, but there are tons more out there. Whether you like these two or not, you should be taking in as much information as you can if you are in the process of starting your own construction business. There truly is endless opportunity to gain knowledge on the internet.
So next up, here are a few more videos about actually financing your own construction business. Again, these are just very basic, and happen to be two favorite that I came across. Enjoy!