You will pay the "Price" if you don't know the "Cost"!

David Moyer
04-11-2022 12:46 PM Comment(s)

You will pay the "Price" if you don't know the "Cost"!

As a general contractor, you are required to know the price of getting the work done on any given trade, but also knowing the cost puts you in a far better negotiating position. If all you do is manage bids submitted by subcontractors, and you don’t have some level of budgetary estimate to compare those bids against, you only know the “price” of doing work, but you don’t know the “cost”.

Simply put, the price is the number you decide to “carry” from a specialty contractor. The actual cost for getting that work done can be entirely different. So, how can you go about better understanding the difference between cost and price on a construction project? It’s starts with performing a quantity takeoff, and developing budgets at some reasonable level of detail, for both the work you “self-perform”, but also the work you intend to subcontract out.

It's expected that the level of detail in the non-self-performing trades will not be as granular as it would be in the trades you self-perform. Still, performing a quantity takeoff and attaching values to the results will help you better negotiate with your subcontractors. It will also at provide a sanity check at the time you are analyzing subcontractor bids and deciding what numbers to carry.

Specialty contractors learn very quickly which general contractors they do business with that understand the difference between cost and price.

A general contractor shared a story with me recently, he said he went back and carefully analyzed the bids he was getting from his masonry subcontractor. He noticed the cost per sf varied dramatically from project to project, with the complexity of each project being roughly the same. When he asked the masonry contactor to explain why the large variance, he didn’t get an acceptable response. From that day forward, the company began developing budgetary estimates. He confided that the days of only knowing the “price” of work was not good enough, it was time to know the cost of work.