The nature of contract work begs a lot of questions.
What does it take for a contractor to actually land a job? How do they differentiate themselves from their competition? How do their customers know what they’re getting into financially? How do you know if you love someone? Do dogs know their own names?
A lot goes into answering those questions, but there’s a consistent factor involved in most of them. That factor is called a price proposal. It often plays a massive role in addressing three of those five concerns — I’ll let you guess which ones.
Let’s explore what price proposals are, how to determine a fair price point for them, and how to write them effectively.
What is a price proposal?
A price proposal is a contractor’s preliminary bid for the price for a potential customer’s job. It’s a document that identifies a single price the contractor will charge after calculating the potential costs they will incur as a result of completing the customer's project.
It’s important to bear in mind that a price proposal is not an estimate. An estimate is a rough, educated guess about how much a project would potentially cost a prospect. A price proposal is a detailed document containing accurate quotes for the price of raw materials, labor, taxes, and other general overhead.
It also features a contractor’s proposed markup and is often submitted in competition with other contractors vying for the same job.
Ideally, a price proposal is thorough and comprehensive in covering any potential costs that may arise throughout the course of completing the project. It should also strike a balance between value for the customer and financial feasibility for the contractor.
As a contractor, you want to be able to demonstrate every cost you detail in the proposal is valuable and relevant to your prospect’s needs. In some cases, you might have to offer a competitive deal or rely on an exceptional reputation to differentiate yourself from the competition.
At the same time, your price proposal still needs to be worth it for you. Don’t drastically undersell yourself for a contract that ultimately won’t be worth your time financially. Understand your customers’ budget and see if a potential contract is viable for you or your company.
The best way to gauge your potential price point is through value-based pricing. It’s a pricing strategy used by businesses to price products and services at a rate that they believe consumers will be willing to pay. A value-based pricing model doesn’t just consider production costs with a fixed markup tacked on.
For instance, say you represent a civil engineering firm vying for a contract to install a new septic system at a city park. You estimate the system will take ten days to install at a cost of $2,000 per day. How do you go about determining a price for your proposal? And how do you decide whether to take the job or not?
Based on prior outreach to previous customers to see how much they would pay for similar services, market research that speaks to how much new customers might pay for the same job, and competitive analysis to see what your competitors are charging, you determine your competitive value for this project is $25,000.
If a $5,000 profit is worth it to you, and you can demonstrate your services are worth $25,000 to your prospect, that’s the price you should lead with. Don’t be quick to rashly undercut that price in order to try to win business. That could come off as cheap and undermine your prospect's faith in or respect for what you have to offer.
Value-based selling may be a complicated process, but it’s the best way to determine a reasonable, effective price for your services. To learn more about it, check out this article.
Price Proposal Template
You can download this template to help guide you through the price proposal writing process here.
Though writing price proposals can be tedious, it's an essential part of being a contractor. Hopefully, with a better understanding of what these documents are and how to approach them, you can make the process of writing them smooth, efficient, and painless.
And who knows, maybe you’ll have enough extra time to figure out what love really is or if your dog has some concept of their identity.
Editor's note: This post was originally published in January, 2020 and has been updated for comprehensiveness.
Originally published Aug 7, 2020 8:30:00 AM, updated August 07 2020