Christmas is nearly upon us again, and with lockdowns ending around the country, this holiday season will be critical for tradies. While onsite access will be made much easier without lockdown restrictions, many of the same woes that befell tradies during lockdown will still be in effect, writes Dan Pollard, founder of job management software startup, Fergus.

The pandemic has impacted supply chains in a moment of high demand inflating material prices. The cost of timber, for example, went up by as much as 20 per cent in recent months. The border closures have also restricted the labour market, creating salary pressures and project delays. Even as borders reopen, the shortage of labour will probably continue for months.

This scenario affects tradies in many ways, and I’ve seen several professionals in the industry having to re-quote their jobs, and renegotiate timelines. If a new agreement isn’t met, they need to decide whether to pass on the job or, endure losses by accepting cuts to profit margins. Most tradies haven’t faced a situation like this in their careers and are learning to navigate uncertainty.

One of the best things you can do is inform yourself and understand the risks to make the best decisions.

You should start by understanding your costs and choosing your price strategy.

What are my costs?

If you want to know how to price your work, there are five terms you need to be familiar with:

• Sales revenue – the price you charge the customer for a job.

• Cost of sales – the direct costs associated with the job, typically covering labour and material costs.

• Gross profit – the amount of money you have left after subtracting the cost of sales from income.

• Overheads – your fixed expenses for each month like rent, insurance, loan repayments etc.

• Net profit – the final amount you’ll end up with after subtracting your overheads from gross profit.

One of the most common pitfalls for tradies is pricing work based on the cost of sales without taking into account indirect overhead costs, which is a fast way to eat your profits. Your sales revenue needs to cover your overheads in addition to your time and materials, so there is still something left over for a net gain.

As a rule of thumb, you should limit your overheads to around 25-30 per cent of your sales revenue to ensure you have at least a 10 per cent net profit by the end. This means you should add at least 35-40 per cent on top of your cost of sales. If you add all costs correctly, there is a better chance to protect your profit.

What pricing strategy should I use?

The second step is to decide on your pricing strategy. There are three common approaches to pricing in trades:

• Estimate: A rough estimate of the final price that is not legally binding and subject to change

• Quote: A legally binding agreement where the tradie offers a fixed price ahead of commencing work

• Do and charge: Hourly rates, overhead charges and margins on time and materials are agreed in advance, and final invoices are based on the costs actually incurred on the job.

Each approach has pros and cons. Quotes can make it easier to secure larger jobs. Many customers like to fix prices to help them budget and plan. Most large organisations will also source multiple quotes to ensure they get the best price, so you’ll need to be prepared to offer a quote if you want to get your foot in the door.

The good thing about quotations is that they’re less likely to be disputed as everyone has already agreed on a fixed amount. The drawback is that you may run into unforeseen problems on a job that cause it to run over budget, meaning you’ll be the one out of pocket. You’ll pay the price if you make an estimation mistake on a fixed quote job.

One issue with quotes is that you never know if the customer will accept your offer. It can be tempting to ignore or underestimate costs to price the job at a point that the customer will accept, but this can easily backfire. If you’re running your business efficiently, you should be able to offer a price that the market is prepared to pay without leaving yourself short.

What’s your win rate?

A quick rule of thumb to pricing quotes is to look at your customer win rate. You should be winning around 50 per cent of your quotes. Much lower than this, and you may be overcharging and missing out on work; much higher, you could be charging less than the market average by leaving money on the table.

“Do and Charge” involves factoring in your gross profit margin on the job completion. Charging up gets trickier when the project ends, and it’s time to collect the payment. It helps if you manage customer expectations so they don’t get an unpleasant surprise over cost overruns. Managing customer expectations is much easier if you have clear discussions upfront to ensure your customer understands your costs and needs to make a profit.

Ultimately, pricing is a skill that needs to be practised until you get the hang of it. The fastest way to get good at it is to invest time and effort in the process. It will save you money and headaches.

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