What’s in a price?
It is easy to feel like the amount you are paying goes right in the seller’s pocket, but the reality is that 10% or less actually does. As seen in the chart above, on average, 50% of the cost of your project is going to the “cost of goods,” 40% goes to “overhead,” and 10% of the total paid is net profit. A net profit of 10% on each job is the goal, but often most companies aren’t even making that and are only truly making 3-8%.
Here is a cost breakdown example; estimate of your total gutter project cost = $1000.
The price that a company, contractor, or business comes up with for their product or service is based off of these costs and what is needed to cover all of these costs while still trying to make some kind of profit. So when a price is set at $1000, this company is essentially hoping to keep $100 after all the bills are paid.
So why the large price difference between estimates or bids?
- The simple answer is, companies that charge more, usually offer more:
- Highly trained professionals
- Top-of-the-line products
- Proper insurance
- Better employees
- Employee benefits
- Staff to answer phones and handle scheduling
- Companies that offer a lower price cut out some of these expenses to be able to do so, like:
- No office staff/less staff
- Staff/crews with less experience/training
- No benefits
- No Marketing
So when you ask a contractor to match another company’s lower bid, what are you really asking for, and how could this actually result in the client’s loss?
- When companies lower their price, it comes right out of their profit, and companies that cut their cost have to also cut something out of their service to make it work.
- This could mean a quicker job, which means possibility for more mistakes that wouldn’t normally arise.
- Less crews on the job
- Using subcontractors instead of staff
So in short, essentially the saying “you get what you pay for” holds true. When you receive an estimate or cost for a project, remember that this entire cost does not go in the company’s pocket, in fact very little of it does. The lower the price you pay, the less you should expect to receive, and the lower your expectations should be. If a contractor matches a lower bid, something will need to be cut out in order to make any profit and still pay all of the bills associated with both the general business and the individual job.