Step 1. Choose a pricing model

Pricing models can provide you with a general structure for how much to charge for a job. Subcontractors may change their pricing model based on the type of job and the length of the job. Having a solid grip on the different pricing models will help you better understand the cost of a job and how to maximize your profits. Here are some of the most common pricing models for subcontractors and when you should consider using them:

Fixed

Fixed-price contracts involve providing a single price at the beginning of a project. For these projects, the person creating the estimate must consider all the costs involved, so adjustments don’t need to be made at a later date. The idea of a fixed-price contract is that the total bill is all laid out upfront and doesn’t need to be changed.

Of course, that doesn’t mean a fixed-price contract can’t be adjusted, it’s just easier if it doesn’t need changes. If you do have to make changes later, the other party will need to sign off on the changes to approve them.

If a fixed-price pricing model is in place, there are usually two different types you can use. The fixed-price pricing structures include:

• Firm fixed-price contract — This type of fixed-price contract doesn’t allow for adjustments without customer approval. This is riskier for the subcontractor, but it can be reassuring for the customer since they know exactly how much the job will cost.
• Fixed-price contract with escalation — This type of fixed-price contract is good for projects that are subject to changes in the cost of material in labor. In other words, projects are expected to last a year or longer. These contracts allow subcontractors to escalate the price due to rising costs over time, with a maximum percentage cap.

Fixed-price contracts are good when a project is straightforward and when the cost is clear. If you can easily estimate how much a project will cost and you don’t foresee any issues that would change the price, you may want to consider a fixed-price contract for subcontractors.

Unit

Unit contracts involve breaking down each section of a project into a unit, itemizing the portions of the project so they’re separated. Instead of giving an overall price of the project, each smaller part of the project is assigned a price. 

By breaking down the price into units, you have a more flexible pricing contract that allows for extra work and unforeseen problems. 

Unit price contracts can be a good option when a project’s scope isn’t clear and if there’s a chance the project could have a lot of issues or changes during the process. For instance, if you’re renovating an old home, you can price each room and then make adjustments if issues from the age of the home crop up.

Cost-Reimbursement

Cost-reimbursement, sometimes called cost-plus pricing, is a contract type that ensures the expenses of a project are covered for the subcontractor. With a cost-reimbursement contract, you outline all the expenses for a job along with the profit for the project. The profit can be arranged to be a fixed fee or a percentage of the cost of the project.

Cost-reimbursement contracts are good for projects where it’s convenient to break down every expense. It’s also a good way for subcontractors to be transparent with their customers, showing them exactly how much the project cost and how much they’re making off it.

Time and materials contract

Time and materials contracts are fairly simple. The subcontractor sets a fixed rate for their labor and then lays out the expenses for the materials. They’re then paid per hour or per day, along with the cost of materials.

Time and materials contracts are usually best for smaller projects. Since you can’t always predict how long a project will take, doing a time and materials contract for long, complex projects could be more trouble than it’s worth.

Step 2. Understand the full scope of the project

Now that a pricing model has been chosen, you’ll want to get a full understanding of the project’s scope. This will help determine certain payment aspects of the contract, how long the subcontractor will be on the project and give you an estimate of how much they’ll be paid in total. Depending on the scope, length, and size of the project, you may want to reconsider your pricing model and make sure you choose one that makes the most sense for the job. While some subcontractors are firm in the pricing models they use, many are flexible and willing to work with you.

Every project is going to be different, so you’ll want to take a comprehensive look at what’s going to be involved as far as labor, time, overhead, and more.

Step 3. Create a detailed list of the cost of all materials

You’ll need to figure out how much all the materials for a job will cost. This list should be as detailed as possible and consider the market rates for all the materials involved. Subcontractors will also have a list of their own to compare to yours, allowing you to settle on a price that works for everyone.

Keep in mind that you may want to consider that the cost of materials could go up on a lengthy job. Depending on the pricing model you’ve settled on with a subcontractor, you may want to factor these potential increases into your estimate.

Step 4. Determine whether additional equipment will be needed

Another extra expense you may have to consider is additional equipment. If a job requires specialized machinery that you need to rent or buy for a project, this will need to be considered when you’re making your estimate. You want to provide subcontractors with anything they need to get the job done effectively and efficiently.

Often, subcontractors may have certain tools and equipment on hand. However, if they need more, you’ll need to talk to them about pricing and work it into your contract pricing. Consider if the special equipment may be something you’ll use in the future. If so, it may be worth purchasing the equipment instead of renting it.

Step 5. Calculate overhead

You should make sure to calculate overhead when negotiating a subcontractor price. There are various types of overhead, including fixed, variable, and semi-fixed costs. Overhead can be one of the most nebulous calculations when you’re making an estimation, but it’s important to try and get a comprehensive understanding of the overall cost of a project.

Of course, subcontractors will have to agree on the overhead costs too. Overhead costs can differ from project to project, so take your time laying out what the potential costs could be

Step 6. Ask subcontractors how they price their work

Of course, it’s always a good idea to figure out how your chosen subcontractors price their work. Make sure you talk to them about their estimates for the project, anything they think they may need, and other plans they might have for the contract.

Working with a subcontractor is a negotiation. They may have a pricing model that they prefer, but you need to make sure you work out a deal that is beneficial for you too. You want to make money off your job, and you bring a subcontractor on to help you get to the finish line and do the project right. It’s a symbiotic process that requires cooperation from both parties, so don’t be afraid to breakdown your estimate of the costs and what you’ll need from them.

Step 7. Determine labor costs

When you’re setting aside costs for a subcontractor, make sure to remember to determine labor costs. Your subcontractor will likely have workers of their own that need to be compensated. This will need to be factored into your estimate as well.

Find out what your subcontractor’s labor rates for their workers are so you can get a proper estimate. Labor costs can be expensive, so you want to have a full understanding of how much time and labor your subcontractor expects will be involved. You want to make sure to pay your subcontractor’s labor costs promptly to ensure the workers are compensated and ready to finish your project efficiently. You’ll also need to figure out certain stipulations like overtime and extra labor costs. 

When you’re fully prepared, you won’t be surprised by subcontractor prices and you’ll be able to maximize your profit on your projects. If you’re looking for a way to keep your invoicing and contracts organized, Hearth can help.

Get started today with Hearth

Hearth is a comprehensive estimate and invoicing platform for home improvement businesses. With Hearth, you can use our convenient contract templates or make custom templates to send out straightforward, professional contracts for new jobs. Hearth also provides invoicing and accounts payable features so you can get paid faster and make sure your subcontractors are getting paid automatically.

But Hearth is more than just a way to keep your invoices and contracts on track. You can also use Hearth for customer financing, sending quotes, marketing your business, and much more. Our all-in-one platform is a necessity if you’re in the home improvement industry. Get started and sign up for Hearth today!