Pricing your work
Pricing your work is one of the most difficult things to do, especially in the first year or two of operation.
Ignorance is Not Bliss
Every project is different. Once you have done a few projects you’ll have a better sense of how long things take to complete. You will need to know how to estimate material consumption and to keep track of the cost of materials.
Often, when I ask someone how long it has taken to complete a project, they respond, “I don’t know, but a really long time”. All they know is that they didn’t earn any money on the project. They should know their hourly rate on that project. You can’t improve your earnings without knowing the truth about how little you may be earning.
You can use your time and pricing records from one project to help you quote more realistically on the next project. Even with a custom piece that you have never built before, there are going to be similarities with other projects you have built. Even if you only have an idea of how long it will take you to build four table legs, or one drawer, it will be some help in quoting on a job.
Calculating Your Shop Rate
Before you start your business you should try to calculate your hourly shop rate as accurately as possible. Your projection will also have to consider realistic revenues and expenses for each month. The price of your work must reflect not just the cost of the materials and labour, but all overhead expenses over the time period you worked on the project. Start by predicting your total operating expenses per month and then add on the monthly salary you expect to draw. This gives you your total overhead per month. You can divide the overhead by the number of hours you expect to work in a month and that will give you an hourly rate. Add at least 10 percent for profit over and above your salary, which will allow you to invest in new equipment or take on other extra expenses in the future. This will give you the minimum hourly rate that you will need to maintain your business: your ‘shop rate’.
Keep in mind that you might be willing to earn less than your minimum hourly rate for really large jobs that will keep you busy for weeks. Large jobs save you a lot of marketing time, such as following up on leads or quoting on jobs. On the other hand, smaller jobs, such as furniture repair, might yield higher than usual hourly rates. Like any business, you will have some kinds of work that yield higher profits than others. With a variety of jobs, higher profits for one part of your business can cover losses for other parts, such as when you have quoted too low on a job.
Quoting on Projects
Your shop rate will help you determine a price to quote on any given project. This assumes, of course, that you can come up with a realistic number of hours that a project will take. Such estimation will be difficult to determine in the beginning, but you will get better at it as time goes by.
Here are some of the items you need to consider when coming up with a quoted price
1) All materials, including mark-ups. Mark-ups are meant to cover your time and expertise in sourcing the materials, picking them up, sorting them and returning defective merchandise. You don’t need to include your time for procuring materials if your mark-ups already cover your time.
2) Your time for the initial and any subsequent, client meetings, including travel time.
3) Your time for preparing the quote for the project.
4) Your time for drafting the contract.
5) Your time for designing the piece and drafting the plans.
6) Your time for building the piece, including sanding and assembly.
7) Your time for finishing, including any extra time for colour matching.
8) Your time for delivery and installation, including travel time.
Other than materials and mark-ups, everything else involves your time, which you multiply by your hourly shop rate. Remember that your shop rate already includes all of your overhead (including gas for your vehicle), plus your salary. After coming up with the final number, decide if an adjustment is necessary. If it’s a large project you really want or need and you don’t think you’ll be hired at the price you calculated, you might decide to adjust the price downwards. On the other hand, you might adjust it upwards if you’re already very busy and taking on the project will involve a lot of overtime, or if the project has some “unknowns” such as a very demanding design.
Tips
Here are some tips I can give you from my own experience:
1) In the early days of your business, you may never earn more than you expect, especially on custom work. This is a combination of two things: you’re probably hungry for work; and you’re probably going to underestimate the time commitment for most projects. You may try to impress a new client by under pricing jobs. But remember that if you’re learning new skills along the way, the unpaid time is your way of “paying for an education” in the real world.
2) Keep track of all your time on a project, including the time spent quoting, designing or just scratching your head. At the end of each project, compare what you really earned to your stated shop rate. In the beginning, you’ll be disappointed because you won’t come close to your shop rate. But your true hourly rate will increase over time. Mine started ridiculously low, but rose quickly over time. Building a good reputation takes years but pays off.
3) Sometimes you just plain goof up on your time predictions when quoting on a job. This is no reason to rush the job. Yes, you will lose money on that project. But every piece you deliver is an investment in your reputation and future. Even if the same client won’t be able to afford your prices five years later (as your shop rate increases), he or she can be an important reference in future. And you must build your portfolio somehow. This is called “paying your dues”. It’s like an initiation fee!
In Hendrik’s next article, he will answer the question “What do customers want?” He will also present ideas for good services, and let you in on what motivates people to hire you.
