What is Market Price for a Renovation?
Monday, February 12, 2024
What is Market Price for a Renovation?
And what “features” am I unknowingly paying for
There are two ways that construction companies come to how they charge for their services:
- Price-Led Costing
- Cost-Led Costing
This is a pretty simple concept.
In price-led costing a business looks to the market and figures out what it is willing to pay for a certain service and then works its business in a way that allows it to deliver this price in a way that costs their company less therefore making a profit. This is not the way that most renovation contractors work.
In cost-led costing a business will basically figure out what a service costs their company to deliver then add whatever they need to make on top of that. This formula gives them their price. This would be the standard in this industry.
The problem with this cost-led costing is that it makes it quite difficult for customers (and most contractors) to understand what true Market Price is. Once the Market Price has been determined they can then understand why some contractors are high or low vs this base/Market price.
Now this is a topic that I could go very deep into (and hopefully someday I will) but for now we will keep it simple. Here are the basic reasons every company is not at the Market Price...
- They don’t actually understand their numbers and are losing money all the time. They are constantly “robbing Peter to pay Paul.” Meaning they are using the money collected for the next project to complete the current one. This can keep up for quite some time before someone gets burnt. That burning can come in a variety of forms.
- They purposefully use loss or gain leading, which I suppose would be considered a marketing strategy.
- Loss Leading - They give a bid or estimate number that they no to be low and that might actually lose them money with the intention of getting in there and making all of their money on change orders(where the markup will be outrageous)
- Gain Leading - They purposefully markup the price to only acquire higher end clients. These typically come with an array of “feature” OR they have an abundance of work and are giving the “I don’t want this job, but I would take it at this outrageous price” bid.
- They have features, or a lack of features, that vary from one company to another.
- Insurance: Insurance for a construction company is extremely expensive. You will save a lot of money by hiring one that doesn’t have it….or you could lose so much
- Correct Licensing: This industry attracts a lot of fly-by-nighters. For some trades you may seek this out.
- Customer Service: This one comes in many different forms and all requires time, therefore money. Any time that a contractor is not hammering nails they are losing money. Some examples are - certain technologies that give transparency to customers, a dedicated person to field phone calls and convey information, time to go over all the details of the job at different point of the project, etc
- Experience
- Background Check on Crew Going to Jobsites (House)
- Appropriate Equipment and Tools
- In-House Utilities People - Mechanical, Electrical, Plumbing and Other Experts: This gives the contractor more ability to control the project and budget
- Administrative Personnel: To handle permits, utilities, paperwork, etc.
- Speaking English Well
Some of these features a customer will pay extra for. If a company is working on itself appropriately, these features will actually only work to keep their costs lower.
Market Price is a pretty hard number to come to in the renovation construction industry. Things that I know for sure are - You get what you pay for! If you do enough projects with your eyes open to the things explained above you will understand the price. Remember, the first price you see is rarely what you end up paying (see "5 Hidden Costs of Remodels (not what you think)")
Hi, I'm Ross Paller
CEO Of Larossa
After flipping over 300 houses, holding a portfolio of 150 properties, and creating a successful construction company for over a decade, I felt compelled to pay it forward by sharing the wealth of knowledge and experience I’ve accumulated on my journey.
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