Why Most Contractors Price to Win Instead of Price to Profit | Ep 244

So let's face it, in construction, especially among specialty contractors, hustle and execution, they're the name of the game.

Get work, do work.

Get work, do work.

That's the cycle.

And most estimators and owners, they price to be competitive.

They win the job, and then they keep their crews busy.

The problem is that pricing to win and pricing to profit require fundamentally different thinking, and most contractors are only doing one of them.

So here's what I mean with competitive pricing.

Oftentimes, I'll go into companies, and I'll talk to their VPs, their pre-con department, or even their estimators, and I ask them about their estimating methodology, because in business, pricing is typically the number one lever that improves profitability, especially in construction among specialty contractors.

And so I'll ask them about their methodology, and then I'll ask them how they apply margin, and they usually say the same thing.

They're like, "Well, Steve, that's just what jobs are going for in our market." And so it's one thing to price your jobs to be competitive.

It's another thing to price your jobs based on what they need to be at in order for you to make a profit.

Now, when it comes to evaluating your bids that are going out the door, when you track them and you look at your conversion rate, and there's some nuances here.

I'll get into that in just a minute when it comes to tracking your conversion rate.

But what I'm referring to with conversion is your bid-win ratio.

So when you look at what percentage of the bids that are going out the door are you actually winning and converting them into signed contracts? When you look at that number, if you're below 20%, you probably have a problem with either your market focus and position, your offer, like how you're going out there and selling yourself, offering your products and services, or with your cost structure.

If your close rate is above that, let's just say it's like 50% or above, you're probably priced too low, and that may be why you're struggling to make money.

Now, I don't care what your friend said, Harry, Larry, Dick, or whoever you run into at a conference, and they say, "This is what I'm pricing my bids at.

This is what I'm winning at." I don't care if you keep going to competitive bids and they keep opening up that envelope and you find yourself too high and lose these jobs.

Like, I don't care about that.

If you're not pricing your jobs and if you're not running your business in a way where you can make money, it doesn't matter because you're going to be out of business.

You can't price your jobs based on what the market is necessarily dictating, to a point.

There's a lot of caveats here.

Before I get into all that, let's go back to your conversion rate because if you don't calculate this correctly, you're going to be tricking yourself.

So think about it.