How to calculate the right price for a job (without guessing)

Problem: most people in construction calculate prices using a fixed markup, the market price or gut feeling. Three methods that seem to work, until you open the accounts at year-end.

Solution: a system based on the hourly contribution margin (CM/h) that tells you exactly how much every hour invested in a job earns you.

Result: knowing before you sign whether that job makes you money or loses you money.

"I am trying to understand whether the costs we put in our quotes are correct"

A business owner said this to me during a consultation. He is not the only one. Out of ten companies in Northern Italy we analyse, at least eight have the same doubt. Is the price they put in the quote based on something solid, or is it a number pulled more or less out of thin air?

Working a lot does not mean earning a lot. Yet too often we are the last to know whether we are actually making money.

The 3 wrong ways to calculate a price

1. Fixed markup on the price list

"We take the supplier's price list, the discount they give us, and apply a percentage markup on every product." That is how a client explained it during an analysis. Simple, fast, the same for everyone.

The problem? A job worth 10.000 € and one worth 100.000 € have completely different management costs. Same percentage markup, but hours of surveying, quoting, coordination and after-sales that have nothing to do with each other. On the small one, the markup does not even cover the overheads. On the large one, you make double the margin without knowing it.

2. The local market price

"We base our selling price on the local market price, so we keep labour costs very low." Another business owner described the second classic mistake perfectly: adapting to what everyone else does.

If your competitor sells below cost because they cannot do the maths, and you follow them, now there are two of you losing money. The market price tells you what the client pays, not what it costs you to do the work. Those are two different things.

3. Gut feeling

The third method is the worst: "It feels like the right price." No calculation, no data. Just experience and intuition. It works when everything goes smoothly. But when something unexpected comes up on site, that gut feeling costs you dearly.

One company I follow did the numbers after the fact on 10 jobs. On 3 of those 10, the actual margin was below 5%. They had worked three months almost for free without knowing it.

The number to become obsessive about

If there is one single concept to take away from this article, it is this: hourly yield. How much does one hour of your company's work earn you?

The correct way to calculate it is called the hourly contribution margin, or CM/h. It is not an accountancy term. It is the tool that tells you whether a job makes you money or is wasting your time and money.

Here is how it works.

Contribution margin (CM): take the job revenue, subtract all variable costs (material, direct labour, transport, subcontracting). What is left is the CM. It is the money that job "contributes" towards paying overheads and generating profit.

Structural hourly cost (SHC): take all your annual fixed costs (rent, administrative salaries, depreciation, insurance, utilities) and divide by the total productive hours your company works in a year. That number tells you how much it costs per hour to keep the business running.

CM/h: divide the job's contribution margin by the total hours spent on it. If the CM/h is higher than the SHC, that job makes you money. If it is lower, you are working to cover the cost of the structure and there is little or nothing left over.

A concrete example

Take a job worth 20.000 €.

If your SHC is 50 €/h, this job earns you money. Every hour you work on it, after covering overheads, you are left with 17 € of profit.

But if on that same job the hours climb to 180 because of unexpected issues, the CM/h drops to 44 €/h. Below the SHC. You worked three extra weeks and in the end you barely made anything.

Quote vs actual: the report that changes everything

The CM/h serves you twice. Before the job, to decide whether to accept it. After the job, to understand what went wrong or what worked.

After the fact, the report that matters has these lines:

If you see these numbers, you know exactly where you lost. Revenue dropped a little (maybe you gave a discount). Variable costs went up (extra material, an unplanned subcontract). Hours exploded. And the CM/h tells the whole story in a single number.

Do this report on ten jobs and you will see a pattern. You will understand which types of work earn you money and which eat your margins.

How to get started

You do not need to overhaul the company. You need to start from the next job.

1. Calculate your SHC. Take the fixed costs from the last 12 months, divide by productive hours. That number becomes your benchmark.
2. On every quote, estimate total hours (not just installation, all hours: survey, quoting, ordering, management, installation, after-sales). Calculate the projected CM/h.
3. If the projected CM/h is below the SHC, you have three options: raise the price, reduce planned hours by finding efficiency, or decline the work.
4. At the end of the job, calculate the actual CM/h. Compare it with the quote. Learn.

After six months of this, you will know exactly which jobs to accept, at what price, and where you are losing hours and money.

BAU Gest

Calcola il MdC/h con BAU Gest

BAU Gest calcola in automatico il margine di contribuzione orario su ogni commessa. Preventivo, consuntivo, delta. Un report che ti dice in un numero se quel lavoro ti ha fatto guadagnare o ti ha fatto perdere soldi.

See how it works

Swiss
Made

BAU Gest

Net margin24,2%

Active jobs8

Hours deviation+12%

The real point

The right price does not come from a price list, the market does not decide it and you do not feel it in your gut. You calculate the right price starting from how much it costs per hour to keep your business running and how much margin you want to take home.

If today you set prices with a fixed markup or the market price, I am not saying you are doing everything wrong. I am saying you are driving without looking at the speedometer. You might still get there, or you might not. But you definitely do not know how fast you are going.

Start from the SHC. Calculate the CM/h on the next job. If the number you find worries you, let us talk about it. The initial consultation is free and with no obligation.