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Lump Sum Pricing Works ― and Customers Prefer It

We are one of only two or three contractors in our market who consistently develop lump sum prices for all of our projects. Yes, lump sum pricing requires extra time and effort, but it can be done.

So, why do we commit ourselves to estimating this way instead of estimating by time and material? Read on.

Lump Sum Pricing Is More Customer Friendly

First, the customer always knows what he is spending with lump sum pricing. If I were a customer, I would never enter into a contract that was “estimated to be $200,000, but could be more or less, depending on what you choose.”

You know what kind of message you are sending customers with such vague estimating? It’s, “Hi. I am a contractor too lazy to work with you to develop the specifications for your project and price this project based on those specifications. So what I am doing is guessing at the price. And if it runs over, I will blame it on your selections, not my inefficiencies or lack of effort.”

Second, as a contractor, you have an obligation to provide a customer with a project that meets his desires and budget. How can you do that without giving him a guaranteed price for the work? You can't.

I have been estimating construction projects for 14 years. Maybe I am not too smart, but I have yet to be able to consistently provide customers with accurate ballpark estimates. I use cost tracking to help accurately estimate projects and I only enter into a contract after I have thoroughly estimated their projects.

Lump Sum Pricing Helps You Track Your Costs More Accurately

Time and material projects do not have accurate budgets. There’s no need or incentive to be accurate because with time and material all you do is keep charging the customer ― for everything. That sounds very appealing, but this lack of accuracy can hurt other parts of your business.

Cost tracking, however, not only allows you to create accurate estimates, it lets you track costs against budgets so you can have more accurate budgets.

Time and Material Opens the Door to Second Guessing — and Dissatisfaction

Third, time and material projects allow the customer to second guess the entire project. They will review invoices, review the time your company spends on the projects ― they will review everything.

They will wonder why they are billed for overhead when nobody is at the project. They will ask why they received a bill for delivery of material. They will want to know why they are being billed for sheetrock repairs when they already paid for it to be installed.

Do you really want to open that door?

In addition, with so many contractors doing time and material contracts, customers are being asked to make decisions on options and changes without knowing how that decision will affect the final price. Instead, projects just keep getting more and more expensive as they proceed.

No wonder customer dissatisfaction is so common in our industry. Whenever a person spends more money than he anticipated, he gets upset.

Lump Sum Pricing Increases Efficiency — and Profitability

The final reason for using lump sum contracts over time and material contracts is so you can make more money.

Your project will not cost more, but because you are more efficient, you can make more money.

Ask the best contracting companies in America how they do their projects and lump sum will win hands down.

It will take some time to convert to the lump sum process, but in the end, you will have a much better company and be even more profitable. You will also help improve the image of our industry.

Erik Anderson, CGB, GMB, CAPS, is vice president of Anderson-Moore Builders, Inc. in Winston-Salem, N.C. He also currently serves as vice president of the Home Builders Association of Winston-Salem. For more information, contact Anderson via e-mail.

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