Pricing Basics

      A skilled cabinetmaker gets help with his weak area: pricing and estimating. October 3, 2011

Question
You would think that after nine years of building custom cabinets and countertops, I would have a grip on pricing. I still don't feel confident that my numbers are right. Sometimes the lack of profits at the end of a project confirms my feelings.

1. When calculating an hourly shop rate to figure labor on a project, do you count your own salary in the shop rate?

2. How do you figure your salary into a job that you will not be the only one working on? It's easy to figure out what your employee costs are on a job because they stay working on that job, while I on the other hand may be bidding other work, ordering supplies, setting up a machine for something else, etc.

3. Is a "man hour" the amount of time one man works, or the total of all the guys in the shop? (For example, if a job has 40 man hours in it, is that one man working forty hours, or two men working twenty hours?

4. How do you guys who use linear ft pricing figure angled corner cabinets?

5. What about ref enclosures (small cabinet on top with legs that extend to the floor)?

6. How do you price a raised panel end versus a flat end? If you are calculating based on Materials + Labor + Overhead + Profit = Bid, do you figure the amount of materials, labor, overhead and profit to make just one raised panel end, or to make all of them for the job? (I think the amount you would charge would be different for just one than for six.) I get people who ask me, "How much more for raised panel ends?"

7. How do you price laminate tops, wood edge, with 4" splashes? Linear feet? Square feet? Material + shop rate + profit?

I have been quoting jobs by figuring all the materials, estimating the amount of time to complete, multiplying that by a shop rate that includes my salary, labor, overhead, etc., and adding a profit margin. Here are some observations about that method...

1. It takes hours to produce a quote. This really hurts when the customer says "that's too high!"

2. I find it very difficult to accurately estimate the amount of shop hours.

3. It is difficult to itemize the various things that people ask me to price separately.

My product is nice quality, but not high end residential face frame cabinets in a market primarily driven by price. There are a lot of folks who shop different cabinet shops to find the best deal. I need a pricing structure that doesn't tie up 4-6 hours just to produce a bid. The majority of people I deal with are looking for a nice looking cabinet that they can afford. There isn't much wiggle room in these jobs because often there are half a dozen shops competing for the job.

Forum Responses
(Cabinetmaking Forum)
From contributor J:
1) Yes, your time should be included. It could be counted as overhead to cover managerial tasks, etc, as well as direct labour for work you actually do on the project.

2) See number 1. It requires keeping accurate notes of your and your employees' time with respect to the job you/they are working on.

3) A man is 1 man's hour. If you have 3 men that work for 1 hour, you have 3 man hours.

4) Sorry, don't use linear, but one method would be to use a set cost for straight runs, then add an upcharge for corners, etc.

5) Same as 4.

6) Sorry, I outsource, but I would think the labour for 1 versus 6 would be nothing, since you should be making these while you make your doors so it just gets all lumped together.

7) I outsource counters, but all my pricing is based on Materials + Overhead + Labour + Profit = Selling Price

For your observations:

1) Software, see below.

2) Start taking notes and tracking time. It gets easier.

3) Don't do it, or software, see below.

To speed a quote you have 2 routes. Look into Business Partner by True32 or Exodus by Alder Corporation. Both of these will quote without drawings. If your market expects drawings with a quote, get KCD, Cabinetvision, etc, with the pricing module.



From contributor K:
Review your last 10 sets of cabinets. Which ones were profitable? Adjust the prices of those that were not. Take these prices and figure a linear foot price for each of them. Now you have a high, mid, and low price structure to give quick bids.

Fridge surrounds are 6 lineal feet for me on pricing. Diagonal corners both go to the wall for measuring. Straight blind corners only go to the wall on one side.

For drawer banks, I add per drawer pricing. You should have a set price for lazy susans, trash pull outs, etc. Based on old bids, you should be able to get a percentage difference on different woods or door styles.

I give ballpark bids on the spot and they can go up or down based on their taste from there. I spend more time visiting/selling than on the quote. With a little homework, you should be able to give 30 minute bids. The most important thing to do is cost out the job at the end to see where you did well and where you didn't. Adjust your bidding as needed from there.

You make sawdust with your tools. You make money with your pencil.



From contributor A:
1. Absolutely.

2. If you have incorporated your income into your shop rate, this is done for you. If you are a one-man shop, and doing everything, then you are charging your shop rate for everything you do. So if you have it figured that you are going to spend, say, 100 hours from start to finish, drawings to completion, then you are charging 100 hours x shop rate plus materials (which should include a markup) plus company profit.

In other words, you are doing 100% of the work involved which incorporates your income. Now, if you have an employee (your shop rate goes up to accommodate) that is going to work 70 of those 100 hours and you 30 hours, it still works out to 100% of the hours. If you work more hours, his share of the hours goes down, but the ending percentage of the hours is still the same - 100%. You both need to be paid.

Now, here is where accurate estimating for labor comes (see below on how to address until you get more accurate at it) and the importance of a company profit... If there is no company profit incorporated into your bid, if you overshoot on the hours, the employee still needs to be paid, so guess where it comes out of? You guessed it... directly out of your pocket. If you have a company profit, it can absorb some of this loss. If not, you pay.

3. One man working for an hour = one man hour. Two men working for an hour = two man hours. Theoretically, two men working can get it out twice as fast, but don't tell that to the roadside crew.

4. Measure the back of the cab into and out of the corner. For a 36" cab, this will yield you 6lf. If you did this with the front, it would only yield you 2lf, which would not be sufficient.

5. Measure top and bottom to come up with LF. So a 36" wide unit would equal 6 LF.

6. If you are making them yourself, it will cost you more to make one versus six, but that does not mean you lower the price. If you get it from a supplier, they will charge you the same for each whether you order 1 or 6. When they ask, "How much more for raised panel ends?" - give them a per unit price, the same as if they were to order multiple pull-outs.

7. For your internal costing, by the SF, as all your materials for laminate are based off SF. This is converted to LF pricing for customers. Your labor needs to be estimated (materials ordered, shop fabrication and install hours X shop rate + profit) and the result added to your SF/LF pricing.

"I have been quoting jobs by figuring all the materials, estimating the amount of time to complete, multiplying that by a shop rate that includes my salary, labor, overhead, etc., and adding a profit margin."

You're on the right track, however I suggest that whatever you estimate for time to complete should also include ordering, etc. and that until you have a strong understanding of how long things actually take, you should multiply that estimate by a factor of 1.25 to allow for overages. If you are so inclined you could always rebate them the difference if your estimate was accurate, but if you are not accurate, this provides you a buffer.

Observations:

1. A price list will go a long way into alleviating this problem. Whether you use a computer program or not, this will entail knowing your costs. Takes time. Keep modifying until it represents reality. The good news is that you are on your way.

2. This is why you should always multiply your guesstimate by a factor of 1.25 until you have a more accurate process.

3. Price separately... Why? Can you give an example or two?
.
"I need a pricing structure that doesn't tie up 4-6 hours just to produce a bid."

Then you need to invest in the time to know your costs and create a price list. It makes you more professional and accountable to your pocket. If it takes 4-6 hours to do the bid alone, why is it taking so long?

"The majority of people I deal with are looking for a nice looking cabinet they can afford."

And you have to recognize that you have to charge what your business needs to operate, which includes your salary and company profit. If what the prospect wants to pay is less than what you need to make as a business, they are not your customer and you need to spend more time on finding customers that match your business needs. If you do take them on as a customer, you need to recognize that you are now entering a robbing Peter to pay Paul cycle. You won't see it at first because you will be focused on the fact that you have a job. It will catch up to you soon enough, especially considering you are having trouble estimating labor. Learn how to qualify prospects.

"There isn't much wiggle room in these jobs because often there are half a dozen shops competing for the job."

I find it rare, even in these times, that prospects take a detailed look at more than 2-3 companies. The reason for this is that there are a lot of details on a project and people get worn out and then start to confuse themselves with the details when they add too many to the mix. The consumer experts also advise getting three quotes, and taking the middle bid. They just don't want to sit through a bunch of sales presentations. So your challenge is to find ways to close the project by making the prospect comfortable with you and your company and alleviate the pressure of having to keep looking at other companies.

Two classic books, "How to Master the Art of Selling" by Tom Hopkins and "How to Win Friends and Influence People" by Dale Carnegie are excellent for getting into the mind of the buyers, and soft-sell techniques and learning ways to guide the customer to making a decision to use you.

"There are a lot of folks who shop different cabinet shops to find the best deal."

The best deal is not always the best price. You are placing too much emphasis on price. People buy based on company, product, service and price (in that order). If you position your time with the customer talking about, "I'm the lowest price around" and other such statements that place the focus on price, that is what the customer will focus on. Price is part of the equation.

Don't get overwhelmed. Just keep refining until you get it down pat. You'll be able to reduce that bidding time dramatically and get business that matches your personal and business income needs.



From the original questioner:
Thanks for the responses!

When estimating the number of hours to multiply the shop rate by on a job, do I base it off of how many hours it takes for one man to do 100% of the work, or for two men to do 100% of the work?

Let's say we have a custom bathroom vanity...
Materials = 275.00
Shop rate (myself and a helper) = 12 hours at 38.00 = 456.00
Profit 10% = 73.10
Total price = 804.10

Now let's take the same vanity with only myself working on it...
Materials = 275.00
Shop rate (just me) 18 hours at 38.00 = 684.00
Profit = 95.90
Total price = 1054.90

Wow! I really would make more money by myself! LOL! Obviously the 38 dollar figure would have to be adjusted for when the helper wasn't working. Do you have two shop rate variables for the same project? Should I estimate the number of hours I work on a job alone and multiply by a lower figure than when I have a helper? Does this make sense or am I making it more complicated than I need to?



From contributor R:
It would be total man-hours. What you're saying with your example is the helper will get half as much done as you. That he would get less done than you is understandable, even if he is good, since he doesn't have to take time to figure out what you want/would do.

For your shop rate I think you need to come up with one rate that works for both of you. You will find it too complicated to have varying rates for quoting. For job costing (figuring out what happened), by all means do a different rate if required. Again, a man-hour is a man-hour. In your first post, item #3, the man-hours are the same, 40. I don't think you're as confused as you think you are.



From contributor L:
If employee pay skill is equivalent to pay rate, a 2 man hour job at two journeyman hours should cost the same in time as help that takes 4 hours. The labor cost is the same, the hours are different. We bid based on the higher skilled employee rate to account for this.


From contributor A:
The shop rate would not be the same in your examples. If your shop rate of $38 includes paying yourself at $38, it will necessarily go up to accommodate the employee's salary also. So that would change your example. Add the employee salary (etc.) into your shop rate and then run the numbers.

When figuring in employee salary, make sure you include the variables such as taxes, benefits (if any), etc.

With regards to overtime, what we do is figure a factor of 1.15 x the salary (including all the above) into the shop rate. This covers their salary and overtime (up to 50 hours).

Example:
$20/hr x 40 hours = $800
$30 (time and a half) x 10 hours = $300
Subtotal = $1100 (before taxes, benefits, etc.)
$1100 / 50 hours worked = $22/hour

So while a factor of 1.10 covers the overtime up to 50 hours, the factor of 1.15 gives you a buffer.

This is why so many struggle with robbing Peter to pay Paul cycles (we used to also), because they are not accounting for all their costs. They come back and get you one way or the other. Doing the above allows you to know how much needs to be deposited in payroll out of the checks you receive.



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