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Fixed Price Or Cost Plus Pricing – Which Is Better?

While showcasing your new business and establishing a point of difference in the market is crucial, if your customer isn’t willing to fork out the cost of your service, your business is invaluable. After all, that’s what can separate you apart from other competition, especially in a congested market. 

When it comes to delivering a quote, there are a couple of options to ensure that you give your client an accurate but fair estimate.

Cost Plus Pricing

“With cost plus, you (can) give your customer an estimate of the cost of the job (or you might not, it’s not necessarily part of the deal) but what they pay is how long it took at your hourly rate and materials and subcontractors plus your margin,” says Small Fish’ Jon Dale.

In this particular scenario, the client pays for the length of time it takes you to complete the job, as well as the materials used. It’s a low-risk method for the business and is common for jobs that are hard to price. 

However, you still need to give a rough but accurate estimate. If you underquote and the job ends up costing far more, the client won’t be happy and might even try to contest the final fee. Which in turn can damage your business reputation as one that over-charges or rips off its customers.

Fixed Price Quoting

“Fixed price quoting, on the other hand, has you commit yourself to a fixed price for the job. You have to estimate how long it will take, allow for how much stuff you’ll have to buy and how much you’ll have to pay any subcontractors and then, commit to doing the job for that amount,” says Dale.

When it comes to a job that’s difficult to estimate, this can prove terrifying and your budget may blow out – unfortunately, it’s up to you to cover any unexpected costs.

Which is best?

Well according to Dale, there’s only one right way: fixed price costing. Dale suggests that having a price in mind for the job brings certainty to the client – they know what they’re getting into and you don’t have to face any awkwardness should the job take longer than expected. 

“The problem lies in the communication of this,” continues Dale. “It’s rare that a customer hears an estimate and understands the difference between that and a fixed price quote. It’s common for documentation to be a bit loose or almost non-existent.”

When wires get crossed, that’s when you can run into trouble.

“It leaves the door open for things to go horribly wrong, for disputes and ill-feeling, work getting done and not paid for, all that.”

Reflecting on his own experience, Dale explains how one of his clients organised an extension and renovation on a cost-plus basis. 

Although the builder estimated a similar price to the customer’s budget, he also pointed out that there may be unexpected and additional costs. 

After a verbal agreement, more expenses arose and extra remedial work was done – the customers started running out of money earlier than the construction was progressing. Because of the initial estimate, the customers were still convinced the project would only set them back the quoted amount. 

“Despite open communication about the extra cost, it didn’t end well. No testimonials from those people,” says Dale.

“A fixed price quote, with rules about variations wouldn’t have solved their budget problem but it would have made the problem obvious sooner and in writing. A solution could have been found before work was done and money spent.”
 
When it comes to choosing between the two, the choice is obvious for Dale: fixed priced quotes help manage expectations and avoid any uncomfortable conversations.

Looking to start your own business? Head to Qualify Me! to see how a tradesman coach like Dale can give you the keys to success.

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