Contractor pricing and project estimation can be challenging without the right system and understanding of costs. Many contractors and handymen struggle with guessing prices or relying on market rates that don't reflect their true expenses. The GPP system offers a straightforward, reliable way to estimate jobs that ensures profitability by fully accounting for all expenses and labor costs.
Step 1: Know Your Numbers — Understand Your Overhead Costs
A profitable estimate begins with having a clear grasp of all your business expenses, especially those that don't directly relate to billable work. These are known as overhead costs, and they encompass expenses such as:
- Non-billable or "unbuildable" time (e.g., truck maintenance, meetings, shop cleanup).
- Small equipment and tools.
- Licenses, safety equipment, and rentals.
- Vehicle and business insurance.
- Indirect salaries.
- Accounting and rent.
- Marketing and fuel.
- Software subscriptions.
- Interest, depreciation, and miscellaneous expenses.
- Bad debt from clients unable or unwilling to pay fully.
- Warranty and legal fees.
- Vehicle repairs and maintenance.
By listing everything that costs your business money regardless of work performed, you can calculate the total overhead. For example, the business case here has overhead expenses totaling approximately $1,551,000 annually.
Understanding these costs upfront prevents unexpected financial hits and allows you to project true profit after covering overhead.
Photo by Step 2: Recapture Your Overhead Through Man-Hours
To cover your overhead in your pricing, express it in terms of man-hours. A man-hour equals one field worker working for one hour. For example, a four-person crew working for one hour equates to four man-hours.
The steps to calculate sellable man-hours include:
- Multiply the number of field staff by the number of workable weeks in a year (e.g., 40 weeks in Colorado due to seasonal weather).
- Multiply that by the average number of hours worked per week.
For instance, 34,200 man-hours represents the maximum hours available for selling to customers.
Divide your total overhead by the total sellable man-hours to find how much overhead cost you must cover per man-hour. In the example, this value is $45.35 per man-hour.
This figure means that for every hour a worker spends on a job, an additional $45.35 of overhead cost must be recaptured through pricing.
Photo by Step 3: Calculate Direct Labor Costs Including Labor Burden
Direct costs are what you pay your employees for their work, including their wages plus payroll taxes and other associated costs (known as labor burden). Labor burden includes:
- Federal and state taxes
- Unemployment insurance
- Other payroll-related expenses
If your employee's wage is $28/hour and labor burden is 20%, then the actual cost per hour for the employee is $33.60 ($28 × 1.2).
Adjust these numbers to reflect your local labor burden rates because they vary by jurisdiction.
Step 4: Add Overhead and Direct Costs for Total Cost per Hour
Add your calculated overhead per man-hour to your direct labor cost per hour. For example:
- Overhead cost per hour: $45.35
- Direct cost per hour: $33.60
Total cost per hour = $78.95
This is your true cost to have one field employee working for an hour.
Step 5: Include Your Profit Margin to Set Customer Pricing
On top of your total costs, add your desired profit margin. For example, applying a 20% profit margin means multiplying your total cost by 1.2:
$78.95 × 1.2 = $94.74 ~ $95 per man-hour charged to the customer.
This pricing ensures all costs are covered while securing profit. Many contractors underestimate overhead and labor burden, leading to pricing too low to be profitable.
Sample Bid Using the GPP System
Here is an example of how to apply the GPP system to price a project:
- Project: 1,000 sq ft patio installation
- Field staff: 3 workers
- Hours per day per man: 10 hours
- Number of days: 3
Calculate man-hours:
- 3 workers × 10 hours/day × 3 days = 90 man-hours
Calculate labor cost:
- 90 man-hours × $95/man-hour = $8,550
Calculate materials cost:
- Material cost = $3,400
- Multiply by 1.2 to include markup = $4,080
Total customer charge = Labor ($8,550) + Materials ($4,080) = $12,630
If the project takes less time, adjust the man-hours accordingly, ensuring no guesswork in your pricing. This approach replaces estimates based on square footage or linear feet with precise, cost-driven pricing.
Why the GPP System Works
Before adopting this approach, many contractors struggle to make money by guessing prices or following competitor pricing without accounting for their unique expenses. The GPP system removes guesswork by basing bids on actual costs plus overhead and profit.
Using it helps you:
- Avoid underpricing jobs
- Understand exact costs
- Adjust bids quickly and confidently
- Scale your business profitably
If you want to implement this system, consider seeking mentoring or using customized spreadsheets tailored to your business needs.
Conclusion
Contractor pricing doesn't have to be a difficult guessing game. By comprehensively understanding overhead, labor burden, and calculating costs per man-hour, the GPP system empowers contractors and handymen to price jobs that guarantee profitability. Applying this method creates transparency, confidence, and consistency in bidding, allowing your business to thrive even in competitive markets.
Start tracking your overhead today, convert it to man-hours, factor direct labor costs, add profit margins, and transform how you estimate projects for long-term success.
