Cost Plus – Why You Shoudn’t Do It, Tradies
Recently, I’ve been chatting about quoting and the difference between Fixed Price and Cost Plus quotes. And lots of people have been sharing their opinions about how they price jobs. So I thought I’d weigh in with my perspective to solidify why I believe one is better than the other and why you should be using said method.
My position is crystal clear and if you’ve been following me for a while you’d know where I stand;
Cost Plus isn’t a safe option – it’s risky for both you and your customer and your relationship.
Fixed Price is a more measured, safer approach. It is better for both you and your customer and the relationship. You should be doing it.
That’s my view.
My next video will be on the How of doing Fixed Price Quoting properly to protect yourself.
But if you want a look now – check out my webinar. It runs monthly.
Now Cost Plus also coined hourly rate, daily rate or time and materials feels like a fair way of doing things, doesn’t it? And to some extent this is true. You do get paid for the hours you work – all the hours your people work plus an agreed margin on the materials that you buy and any other costs you incur.
And to both parties, it seems like a fair way of conducting business.
Hours are recorded, supplies are tracked, subcontractors are looked after, and you produce invoices accordingly. Everything is equitable and transparent.
I do still come across businesses operating this way as it’s been a common approach to conducting a trades business for years.
However, it is not the best option. Or the safest. Or the least risk oriented.
And the problem with Cost Plus sits with risk and trust – two scary words.
Pricing a job using Cost Plus relocates the risk, plucking it from your shoulders and placing it on those of your customers. These are the risks of incorrect quoting, bad weather, increases in material costs, mistakes and a slow or lazy team – everything that can go wrong becomes the problem, in terms of cost, of your customer.
On a surface level, this sounds great, no blame can be taken by you; you’re protected from all potential issues in a job. What could go wrong?
No, I’m not alluding that trades business owners should carry all the risks – as you shouldn’t. That’s not fair.
But the Cost Plus method of transferring risk is not reliable.
This method will fall apart as soon as something goes amiss – a problem arises, trust is damaged, or someone becomes unhappy.
All Cost Plus does is brush difficulties under the rug. You’ll be walking around on an uneven rug and sooner or later someone will trip up and those difficulties will be revealed. You’ve pushed the risks down the line timewise, so these jobs are more likely to go wrong in terms of customer expectations and cost blowouts which are both variables that can’t be controlled. Now let’s say something’s gone awry. In most circumstances when this happens you end up wearing a lot of that cost yourself as the customer gets upset and to appease the customer you shoulder the problem which can look like getting a late project completed without charging more or cutting your margins to help keep the customer in the budget on the final leg of a job. These are often done to aid in saving your reputation or the relationship with customers. However, they perpetually get damaged anyway.
How did you get saturated in this mess?
Cost Plus instils an indifferent attitude in you. One where you feel you can’t be touched. It begins with the displacement of potential problems – under the rug – and ends with a disaster.
Here’s a quick case study for you – some proof if I haven’t already swayed you:
Chris is a builder in Byron Bay and he was doing a Cost Plus Renovation. The customers were nice people, and Chris is a nice person. The budget was $400k or so and his estimate was $400k so everyone was happy. They had $400k to spend and they’d get their renovation with it.
Soon after they began the renovation they encountered a termite infestation. Which Chris had not estimated for… so there was now an extra $50k of work to be done. He asked the customers if they were happy with him doing it.
They nodded rapidly – with only a complete renovation free of termites in mind. Chris told them of the extra costs and they agreed – verbally.
With a verbal agreement in place, Chris fixed the issue and continued the renovation stopping once he reached their $400k budget.
The renovation obviously wasn’t finished and the customers didn’t have any more money to continue. Chris reminded them of the conversation about the extra costs incurred due to the termite problem and they understood this but it fixed nothing as they still had no more funds. Maybe they hadn’t really been listening… Maybe – not maybe but definitely – Chris should have gotten a written and signed agreement…
The nature of Cost Plus left Chris in a murky tangle. He should have made it clearer that more money needed to be found but Cost Plus doesn’t really allow for that. This ended with an unhappy Chris, an unhappy customer, an unfinished renovation and a damaged reputation – no references and no referrals.
It’s obvious now, of course, but it was disastrous at the time, and Chris ended up making no money, trying to make things right though the customers remained upset. And he was pissed off.
I’m sure you all have similar stories involving Cost Plus, so please feel free to share them, I’d love to hear some as well as why you’re still doing Cost Plus if you have a story like this…
So are you convinced?
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See you later.