Bidding(fixed price) Theory

J

JoeNorm

Senior Member
Location
WA
I am trying to understand bidding( upfront fixed price) and can't seem to wrap my head around what the goal is. If I have calculated my hourly rated based on expenses and profit then it seems like a bid would be my hourly rate + materials+markup. So it begs the question why not just work T&M and arrive at the same place?

But I have read enough and actually done some fixed price work to know there is definitely a difference. I like not having to keep track of every hour, nut, and bolt after a fixed price bid has been agreed on. I also have made extra money this way by bidding higher than what T&M would be. But this leads to my main question, how much higher should the fixed price be than the projected T&M cost?

If I have a project that I am estimating will be $10K if done T&M, how much do I say it will cost as a fixed price? Is the answer "as much as the market will allow"? Or is there some percentage that makes sense?

I am in a market with low competition and plenty of higher dollar projects. I'd like to make the maximum profits but at some point it feels greedy to just add extra thousands of dollars to a bid(fixed price). Where is the sweet spot?

In my case, I do 100% residential work. Thanks for the thoughts
 
No overhead?

I think the main point is to avoid the admin of keeping track of the details. Also to avoid haggling with the customer or punishing them because you made a mistake that added time. And conversely, rewarding yourself for getting a job done more efficiently. I also think there is no harm in socializing the costs a bit between clients, i.e. the easy jobs subsidize the hard ones a bit but the clients pay kinda the same amount for the same thing and they aren't comparing notes and asking why did their job cost so much more.

It depends on the kind of work, too. And sometimes a combination is called for.
 
point of bidding is my mind, is to make the customer happy with a set price while trying to push my hourly rate to the highest I can and make sure I never go below my normal hourly rate.
 
Lot to unpack here, and I’ll try to tackle what I can.

First, some states, like mine (California) do not allow T&M for most residential, so that’s not an option.

Second, yes, fundamentally, it’s basically the same. However, the biggest difference comes in on the customer service side, where the vast majority of customers don’t want an open ended “it’ll probably cost this much” kind of quote. Maybe that’s my lifetime of living and working and California, but very few of my residential customers would go for that.

As @jaggedben mentioned, you’re missing a huge component of your bid, and that’s overhead. Just for comparison purposes, my OH last year was over 22% of my gross sales. Yes, that did include a decent amount of capital improvements, but still, that’s what enables me to be in business.

When I put a bid together, I add a percentage to materials to cover what I call incidentals or truck stock. That is going to vary for every contractor, but for me, it’s wire nuts, tape, a few locknuts, etc. it’s vastly more cost effective for both me and the customer to add a percentage in to cover that, than to try and keep track of every single item that used.

Having done both, I personally have found that fixed price bids are both quicker on the admin side, and generally more lucrative. Assuming I don’t screw up. 😳 Then I wish I’d done T&M. 😂
 
electrofelon said:
I would say top reasons are:

1. Customers like to know how much it will cost, not an estimate that will pretty much always be higher than you said.
2. I hides a "high" hourly rate which freaks people out.
3. Less paperwork and stuff to keep track of on your end (although you may be keeping track sometimes to audit your quotes).
Click to expand...
Works both ways....when you quote $400 for a task and you're done in 25 minutes.....that freaks people out too...and pisses them off
 
cdslotz said:
Works both ways....when you quote $400 for a task and you're done in 25 minutes.....that freaks people out too...and pisses them off
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You need to be realistic and honest with pricing. It's still better than having customers worry whether you're being productive every given moment.

I believe that the incentive for me to work efficiently benefits everyone.
 
cdslotz said:
Works both ways....when you quote $400 for a task and you're done in 25 minutes.....that freaks people out too...and pisses them off
Click to expand...
Well, as a homeowner who's had some things fixed... I hire someone who has the knowledge, the skill, and the equipment to do the job properly, to code, and not overcharge. When I moved into my house, while it was still empty, I had the carpet company come in to fix a couple of things-- the trim between the carpet and the kitchen floor was loose; in a couple of other rooms the carpet was loose. The fixer was in and done in about an hour. He was embarrassed to have to charge his minimum, which would have covered a couple of hours. I wasn't upset-- he had the tools, etc. etc. and got the job done.
.
One thing that did piss me off was the guy with the carpet steemer-- Flat rate for the house was maybe $100 (this was 35 years ago). Do you want Scotch Gard? Add another $100. Do you want XXX? Another $100. I was expecting them to go over the carpet 2, 3 times. Nope. Dump the Scotch Gard, and any other treatments, in the water tank. Once over the carpets, and done! I felt -I'd- been cleaned, too!
 
cdslotz said:
Works both ways....when you quote $400 for a task and you're done in 25 minutes.....that freaks people out too...and pisses them off
Click to expand...
If it was an honest quote and things just went your way, then tough. There are three other jobs that you barely made a profit on. If it was an unreasonable quote then shame on the customer for not getting a second opinion. And I am sure the electrician will get theirs in the end. Karma and all.
 
Why would karma get you?? If I tell you it’s 1k for a 10 minute job you did not want to do and you did not get more quotes, why am I at fault.

I value my time at whatever rate I want.
Pay stupid movie stars millions for a 1.5 hours of couch potato time.
I will set my value you determine if you like it.
No karma involved.
Plus you get the added benifit of getting a god fearing man instead of a pedo movie star. I should make 1.5mil
 
My flat rates are based more on perception than reality.

For instance, there's a perception that adding a subpanel is more time and more materials than adding a car charger. But the reality is that a 100a aluminum feeder is cheaper than a 60a copper branch circuit, and time is about the same

But based on perception, I can sell that subpanel for double the price I can get for that car charger.

One of my best money makers is device changes. My flat rates are based on the age of the house. The cheapest is $15 per device (not counting GFCIs) for a whole empty house and in a new-ish house I can change about 20 per hour ($200+ per hour). But $15 to change a switch sounds reasonable enough, so people say yes.

Older homes and occupied homes the flat rate goes up.

Also, many of my prices are the same because they're averaged. That makes it much easier to remember and shoot off a price quickly

Just make sure the average is high enough to take the good with the bad
 
There are multiple issues with Time and Materials (T&M) billing, and here are two of the top ones:

  1. When you start charging for the first hour, many new guys say things like, "I told the client I started at 7 AM when I left my house, stopped for materials, etc.," but they didn't arrive on-site until 9 AM. That's all the customer sees. Good luck trying to recover those first couple of hours without upsetting them—it's just reality.
  2. Having worked solo for the last three years, I often step out to take a call, respond to customer inquiries, or send an email from the truck. Customers paying you T&M will watch you like a hawk. I've heard from many contractors who've been confronted by customers, sometimes with video footage, showing employees texting, taking calls, or even taking breaks. In one instance, a customer complained about paying for the employees' breaks.
These two reasons alone are why you should never bill T&M. Another reason, from my personal experience, happened during my first few months in business. I went to a client’s house for a troubleshooting call on some exterior outlets around the property. I couldn't give a flat rate because I wasn't sure how long it would take, so I quoted an hourly rate. I got the job done in a couple of hours. Later, the same client called me for another job. As we were walking through what he wanted done, he said, "I figured you'd be at Y total based on your hourly rate of X." I was dumbfounded and realized where I had messed up. I told him that rate was for troubleshooting only and that I had flat-rate pricing for everything else. That was the last time I ever charged T&M.
 
cdslotz said:
Works both ways....when you quote $400 for a task and you're done in 25 minutes.....that freaks people out too...and pisses them off
Click to expand...
If that quote of $400 includes providing a $375 dollar part then you only had $25 of other charges. Sometimes you can have very little time and rather expensive items being provided and have to look at more than just time.
 
JoeNorm said:
I am trying to understand bidding( upfront fixed price) and can't seem to wrap my head around what the goal is. If I have calculated my hourly rated based on expenses and profit then it seems like a bid would be my hourly rate + materials+markup. So it begs the question why not just work T&M and arrive at the same place?

But I have read enough and actually done some fixed price work to know there is definitely a difference. I like not having to keep track of every hour, nut, and bolt after a fixed price bid has been agreed on. I also have made extra money this way by bidding higher than what T&M would be. But this leads to my main question, how much higher should the fixed price be than the projected T&M cost?

If I have a project that I am estimating will be $10K if done T&M, how much do I say it will cost as a fixed price? Is the answer "as much as the market will allow"? Or is there some percentage that makes sense?

I am in a market with low competition and plenty of higher dollar projects. I'd like to make the maximum profits but at some point it feels greedy to just add extra thousands of dollars to a bid(fixed price). Where is the sweet spot?

In my case, I do 100% residential work. Thanks for the thoughts
Click to expand...
With a fixed price you are saying it will cost $XXX.XX. If you missed something when you calculated that price, you can't just say oops I forgot this. If it is something rather minor you likely just eat the expense. If it was something that came up totally unexpected while doing the project, you then may want to try to re-negotiate with owner, but need to bring the information up as soon as it is discovered and not try to add it on with no warning after project is completed. Otherwise you also just eat the cost if you feel you can afford to do so and keep good customer relations. But when selling fixed price projects you generally are marking up items enough and overestimating labor enough to help cover some "what ifs". When a job goes well or even better than planned it helps cover the ones that did not go so well or even had a net loss.
 
The face-off is all about risk. With T&M, all the risk is with the customer. With fixed price, all the risk is with the contractor.
 
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