Setting next year’s prices from this year’s costs

Most contractors set next year’s prices the way they set this year’s: they take last year’s number and add something that feels about right. Then they spend twelve months discovering whether it was.

The alternative takes an afternoon in November or December, and it uses something you already have — a year of your own actual costs. Done properly it answers three separate questions: what your price has to be to cover what the work costs, what the market will carry, and what happens to volume if you move.

Start with what the year actually cost

Three numbers come out of the books, and every price decision rests on them.

Your real overhead. Everything you pay whether or not a job happens: rent, insurance, the office, software, truck payments, licenses, your own management time. Total it for the year. Expressed as a share of revenue, or per billable hour, it is what every job has to carry before anything is profit. The overhead rate calculator does both.

Your real burdened labor cost. Not the wage. The wage plus payroll taxes, workers’ compensation and benefits, divided by the hours you can actually bill rather than the hours you pay for. In most trades that figure lands well above what owners assume, and everything priced against the bare wage has been underpriced all year. The true hourly cost calculator works it out.

Your realized margin, by type of work. Not the margin you quote — the margin the finished jobs actually produced, split by the categories that matter in your trade. This is the number that identifies which work to reprice, and it only exists if the year was job-costed. See job costing for contractors.

Then find what moved

Compare this year’s three numbers with last year’s. In most contracting businesses at least one of these moved and was never priced in:

• Wages, including the raises you gave mid-year
• Workers’ compensation and liability premiums, which move with payroll and claims
• Materials, in trades where they are a large share of the job
• Fuel and vehicle costs
• Insurance and software renewals, which creep quietly
• Your own pay, which in many businesses has not moved in years

A price that was right in January is rarely still right in December, because the costs underneath it did not stay still.

Work out what a rise is actually worth

A price increase is not free: some customers leave. The question is how many you can afford to lose and still be better off, and it has a precise answer that depends on your margin.

The counterintuitive part is that the thinner your margin, the more a price rise is worth and the less volume you need to keep. Work out your own number with the price increase calculator before you decide how much to move.

Then sanity-check the floor: what you must bill to cover overhead at all. The break-even calculator gives it per month, per day and per crew.

Decide what actually changes

A single across-the-board percentage is the easiest decision and rarely the best one. Usually the year’s job costing points at something more specific:

• One type of work is consistently under-priced and needs more than the rest
• One customer or builder has been priced below everyone else since a job three years ago
• The minimum charge has not kept up with what it costs to put a truck on the road
• Something should be dropped rather than repriced, because no realistic price makes it work

It is also the moment to reprice the things that are easy to forget: after-hours rates, trip charges, minimum call-outs, and any recurring or maintenance agreements set years ago. Agreements are the most common place a business is still charging last decade’s price.

Tell people before the year turns

Whatever you decide, the communication is simple and it should go out in December, not be discovered on an invoice in February:

• Give notice. Recurring customers and agreement holders hear first, in writing, with the date the new rate starts.
• Honor outstanding quotes. Anything already quoted at the old price stays at the old price for a stated period. It costs little and it removes the argument.
• Do not apologize or over-explain. One line about rising costs is enough. A long justification invites a negotiation.
• Update everything at once — rate card, proposal template, software, price book — so nobody on your team quotes the old number in March.

The part that makes this possible

All of it rests on having the year’s numbers in a form you can read: overhead separated from job costs, labor costed at the burdened rate, and margin visible by type of work. If the books do not produce those, next year’s prices will be set the same way as last year’s — and so will the year after.

That is a fixable problem, and November is the right month to fix it.

Related

• Working out your break-even number
• How to bid a job so it makes what you intended
• A one-page annual budget you will actually use

General information. Every figure here comes from your own books — there are no benchmark percentages in this guide because the useful numbers are yours, not an industry average.