The longer you work in the construction industry, the more you’ll understand the changes in supply pricing. Periodically, you’ll notice a steep rise in the cost of steel, lumber or other materials you need on a regular basis. At times, you’ll need to consider raising your own prices. Here are a few factors to remember as you make a plan.
Research Pricing Trends
The best way to start evaluating effects on prices is to research trends. When the price of a particular material seems to go up practically overnight, you want to have a sense of why this is happening. Sometimes, there is a disaster or conflict that makes it more difficult to source materials that must come from a particular location. In these instances, you’ll need to figure out how long prices will be higher and if you need to adjust your estimates as a result. This is also a good time to evaluate your supply chain and build in a few ways to get materials when supply is harder to find.
Balance Short-Term Price Increases
Keeping your pricing relatively consistent is a good idea. It’s not always possible, but it makes sense to keep your strategy such that you can easily replicate it for most estimates. If the price increases on materials or services are limited and temporary, you may be able to balance them out without having to raise your prices. Many contractors choose to offer a variety of services, some of which have lower margins while others have higher margins. This way, you can avoid cutting into your own profits too much without having to notify clients about price increases that won’t last more than a couple of projects.
Avoid Underestimating Costs
Ultimately, you have to keep your business profitable so that you can continue to do it. The best way to do this is to set a minimum margin you need to make off of various types of projects and stick to it. In an industry where the contractor who bids the lowest often gets the job, it’s tempting to trim your margins down to nothing, especially after material price increases. But over time, you may notice your profits dwindling down as a result. Try to build a little padding into your estimates for price fluctuations, so that you’re not always having to eat the difference when it comes time to get paid.
Decide When to Increase Estimates
Increasing your prices due to material price hikes is a strategic decision. If you think of it this way, you’re less likely to feel like you’re taking advantage of your clients. Inflation naturally increases the prices for goods and services over time. It makes sense that you may need to increase your prices as well. After researching pricing trends and investigating what you can reasonably expect for your services in your area, you can set new prices. You’ll want to give yourself some time to roll out the price changes. For example, you may choose to wait until you complete a certain number of projects before you move to the new pricing model.
Notify Regular Clients
Once you come to the conclusion that you need to raise your prices, you need to publish this information anywhere your old pricing system was available. You will also need to notify regular clients who may expect to use the old prices. Keep in mind that increasing your estimates is a natural part of running a business. Explain to your clients how your prices will change, and when they can expect those changes to go into effect. Reaffirm your commitment to providing a quality service. These steps will minimize hassle or confusion once you get to payment.
Figuring out how you want to handle price hikes is an important component of running a contracting business. For advice on the best path to get started, visit CSLS today!