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Construction: How can contractors bid below cost?

If you’re in construction you know it tends to be a cyclical industry with highs and lows. The highs seem a distant memory as we’re now in a very significant low. Competitors in a shrinking market sometimes lower their prices below cost; how can they do that? Isn’t it better to not take on a job than to lose money by charging less than your cost? Actually, it may make good business sense to bid below cost until the industry recovers and here’s why: your costs can be variable or fixed.

Variable costs in construction include materials, subcontractors and direct labor. You’ll incur these costs to complete a job; but, if you don’t take on a job you’ll not incur any material or subcontractor costs.

Direct labor is not so clear because even though pay is hourly (variable), some contractors pay their core employees even if there’s no work so they’re still with them when the industry rebounds.

Finally, fixed costs exist that must be paid regardless of whether or not you get the job. At a minimum, you should price the job to cover the materials and subcontractor costs. Next cover your direct labor, and finally cover all or some portion of the fixed cost.

Of course, pricing below cost is only a temporary measure to help you weather the stormy economy; cover all your costs whenever you can, even if you have reserves available to cover the fixed costs. If you need to bid below cost though, just make sure you know which are variable and which are your fixed costs.

If you need additional information or advice, give us a call (904-396-5400) or send us an email (Office@CPAsite.com).

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