Cost Plus or Fixed Price Quoting - which is best? How do you manage your pricing
or pricing your jobs up? Do you prepare a fixed price for a fixed scope and a proper firm quote
or do you give an estimate maybe but provide your services on a cost-plus basis. Which one's best,
which is the right way to do it? I dare say, if you've watched any of my videos before, you won't
be surprised to hear that I have a fairly strong opinion. And you probably won't be surprised when
I tell you what it is. First though before I get too excited and give all the goodies away,
you have to watch till the end of the video, but first I'm going to compare the two. Why people
prefer one over the other. So let's talk about cost plus. With cost plus, you give your customer
an estimate of the total cost of the job. Or you might, or you might not - it's not necessarily
part of the deal. You might just tell them the hourly rate and the margin you're going to charge.
But what they pay is unrelated to your estimate, what they pay is your hourly rate multiplied by
the number of hours that were spent on the job and what you spent on materials and subcontractors
plus your agreed margin. Sometimes called time and materials work, isn't it or hourly rate work.
Tradies like doing work on this basis because you're unlikely to lose out, aren't you? The
job takes as long as it takes you charge that to the customer, they pay for your time and for the
materials that you use and it's all kind of fair and reasonable, isn't it? Well it seems so - hold
that thought. In fact as far as pricing goes it feels like a low risk way to manage things.
It's especially attractive if the job's difficult to price, isn't it? You don't have to commit to
a price and risk that the job takes longer than you allowed and you end up losing money
and I'm going to come back to that in a minute I think. Now fixed price quoting on the other hand
is different. Fixed price quoting as you commit yourself to a fixed price
for the job for an agreed scope so you have some protection but it has you commit yourself to a
fixed price for an agreed scope of a job. You have to estimate how long it's going to take you
and you have to allow for how much materials or how much subcontractors you're going to have to
spend on, sorry you have to allow how much stuff you'll have to buy. Let me read my notes properly
and how much you're going to have to pay to any subcontractors and then you have to commit to
doing the job at the price you come up with with your appropriate margin inside. And it
can be terrifying particularly if the job's difficult to estimate, if there are unknowns
or things that could be discovered as you do the job. And that could end up costing you more money
without you necessarily being able to charge more because the scope hasn't changed.
Which is the right way to do it? And of course the answer is fixed price quoting every time.
It's the big boy grown-up professional way to do work as a trades person. There's no situation
where cost plus is a better way to price a job. There's only your fear of getting it wrong or
of something raising its head and biting you in the ass like a snake. Fixed price quoting is the
right way. It brings certainty to the situation as much as is possible given that trades business
particularly things like renovations are quite variable. It brings certainty
with certain conditions and you can put your rules. You can say, 'This is the scope and
you can put rules about the things that might change and this part's important, isn't it?
If things change, the price can still change but there are clear rules about that. There's
documentation and agreement to accepting additional charges and that part's important.
With cost plus though on the other hand, there's not so much certainty. It's a bit like asking
how long a piece of string is. It's going to take as long as it takes the strings as long
as the string that was cut. With fixed price the risk is on you. If you've misestimated,
it's your problem. With cost plus, if you've misestimated, it's the customer's problem,
you just "Oh well it took longer than I thought, here's your invoice". And if you've got something
wrong with fixed price, bad luck on you. With cost plus, the risk is on your customer.
If you got something wrong bad luck on them. You've given an estimate maybe because you're
nice but if you're wrong, it's their problem and they have to pay. So the problem of really here
and I hope you're coming along with me on this lies in the communication. It's rare that a
customer hears an estimate on a cost plus job and here's the difference between an estimate
and a fixed price quote, isn't it? It's common for documentation to be a bit loose or even almost
non-existent or at least that very clear clarity and distinction between a fixed price quote and an
estimate. It's rare for that to be made very clear and it's common for that to be misunderstood.
So you're thinking one thing the customer perhaps is thinking something slightly different and that
can lead to misunderstanding frustration and all the bad things that go along with that. Often this
is fine, mostly it's fine. It leaves the door open for things to go wrong. It leaves the door open
to risk which is what we don't want. It leads the door open for disputes, for ill feelings,
and even for you doing work and then not getting paid which is not fun. All of those things damage
to your reputation, all of those things which brings me to my story. I'd like to tell a story.
I have a client, a builder - he's a nice bloke, a genuine decent honest builder who does the right
thing by his customers. He built an extension of renovation for somebody. they had a budget
of about $400,000 and his estimate for the job was $400,000 and he was careful to point out
when he was talking to them that if once they started work they uncovered anything
unexpected, they could be up for additional costs. The customer said they understood. The
customer understood all they said they did and you can see where I'm going with this kind of
but sure enough some cladding came off and rot was found or termites or something and the problem was
identified. A plan to address it was discussed and agreed upon the work got done and everybody
seemed happy until they got near to the end of the project when it became clear to the customer
that they were spending all their money and there was still quite a lot of work still to do
and it was going to come out quite a lot more than the $400,000 that they had in mind and that
they had allowed. The customers started to run out of money, there was more work needing to be
done than they had money to pay for. The customer was still wedded to their $400,000 even though
my client, my builder had explained it to them and despite open communication verbally
they were still wedded to their 400k. It didn't end well. No testimonials for him from these
people. A fixed price quote wouldn't necessarily have solved this problem - a fixed price quote
with rules about variations but what it would have done, it would have made the problem show
its ugly head earlier in the piece and it would have had documentation around the additional costs
so nobody could pretend they hadn't understood because they'd been forced
to confront it the additional cost and the variation and have accepted the cost of a
variation earlier in the piece when the problem got uncovered and they would have had time
to think of what to do - go back to the bank and ask for more money
or redesign the solution so that they could fit in the build within their now shrunken budget.
So it would have wouldn't have fixed the problem of course but it would have
helped them deal with it instead of hiding from it or allowing it to be hidden and ignored
until it was a bigger problem. I'm going to talk about how to manage a fixed price quite properly
another day because I think this video is long enough. But if you're quoting and you're working
cost plus many of you are, please stop. Move to a fixed price quoting basis for a fixed agreed
scope. You won't regret it and of course get me to help you, this is what I help people
with all the time. Book a 10-minute chat so you can talk to people about whether business
coaching is right for you or book yourself on the next Tools Down Workshop. See you later