How to tell whether
you are underpricing.
You will not find it in the jobs that went wrong, but in the ones that went fine and returned less than they should. A test you can run in an afternoon.
Published ·Updated ·5 min read·Written by Darshan Parmar, Founder
Underpricing does not appear in the jobs that went wrong. It appears in the ones that went exactly as planned and returned less than they should have, which generate no incident and no conversation. The test is to compare tendered against actual on jobs that ran cleanly, and to check whether your overhead recovery was ever in the price.
Why it stays invisible for years
A job that overruns is an event. There is a reason, somebody is annoyed, it gets discussed at the next meeting, and the business learns something even if the lesson is wrong.
A job priced four per cent too thin does none of that. It runs to programme, the client is content, nobody rings anybody, and it returns a bit less than expected. The bit less is attributed to the weather, or a slow month, or that particular client being difficult, and the pricing is never suspected because nothing went wrong.
Repeat that across a year and the pattern is a business that is busy, well regarded, apparently competent, and not making money. Which is precisely the shape most struggling contractors are in, and why the diagnosis so often lands on cost control when the problem was upstream of the job entirely.
Nothing goes wrong on an underpriced job. That is the whole difficulty: the failure mode produces no symptoms, only a smaller number at the end of the year.
Four signs that show up before the accounts do
- You win most of what you price. A high conversion rate feels like strength and is usually the first symptom. If you are winning well over half of competitive tenders, you are the cheapest more often than is likely to be accidental.
- The jobs that make money are the small ones. A classic signature of prelims priced as a percentage rather than by time: the bigger the job, the more time-related cost it carries and the less of it you priced.
- Variations are where the margin comes from. If the base scope reliably returns nothing and the job is rescued by extras, the base scope is priced below cost and you are relying on the client changing their mind to get paid.
- Everyone is busy and nothing is accumulating. Turnover healthy, work booked, cash never quite there. Worth separating from the timing problem in the construction cash gap, because they feel identical and have different fixes.
The test, which takes an afternoon
Against your own numbers rather than any benchmark, because there is no credible published figure for what a contractor of your trade and size should be making, and anchoring to an invented one is worse than not testing at all.
- Pick six jobs from last year that ran cleanly. No disputes, no major variations, nothing memorable. Those are the honest sample, because a job with a story attached tells you about the story rather than about the price.
- For each, put the tendered cost next to the actual cost. Labour, plant, materials and subcontract, as they turned out. If assembling that takes more than a few minutes a job, note how long it took, because that is a separate and equally important finding.
- Work out the recovery on each: actual revenue less actual cost. Not the tendered margin. What the job really returned.
- Compare that against your overhead recovery percentage. Last year's fixed overhead divided by last year's turnover, from how to price a construction job. If the average recovery across the six is below that percentage, the business is losing money on work that is going well.
- Then look at the spread rather than the average. Six jobs all returning a similar thin figure is a pricing problem. Five good and one terrible is a job problem, and a different conversation.
Where the money actually leaked
When the test shows a gap, it is almost always in one of four places, and they are worth checking in this order because that is roughly how often each is the answer.
Labour output. The rate assumed a gang would achieve something they do not achieve on a real site with real access. This is the commonest single cause and the easiest to correct, because you now have actual hours against actual quantities from step two.
Preliminaries. Priced as a percentage, and therefore under-priced on anything long. Covered in preliminaries, the cost most firms forget to price.
Overhead never in the number. The most consequential and the least visible, because it makes every job look fine individually while the company does not work.
Materials bought at a different price from the one quoted. Particularly where the quote sat for weeks before it was accepted, which is the subject of materials went up after you quoted.
Putting the price up
The part everybody dreads, so worth being practical rather than encouraging.
You will lose some work, and that is the mechanism working rather than failing. Work you lose at a correct price is work that would have lost money. A firm at ninety per cent utilisation on underpriced work is worse off than the same firm at seventy per cent on properly priced work, and the second one has time to tender better.
Two things make it easier. Move on the next tender rather than announcing anything, because a price is a price and nobody is owed an explanation. And move on the segment where the test showed the biggest gap rather than across the board, since the evidence is specific and so should the correction be.
Step two is the whole test and it is the step that defeats most firms, because tendered against actual means reconciling a priced schedule with hours, invoices, plant and subcontract that live in four places. In Unibuild the priced sections of a quotation carry through to the works schedule with their tendered values, hours arrive against the job from clock-ins at dated cost rates, orders become committed cost when issued rather than when invoiced, and the subcontract exposure report totals orders, invoices and payments across the ledger. That turns an afternoon of assembly into a comparison. The margin itself stays your decision.
Where to start, on Monday
Two jobs, not six, to begin with. Pick the two that went most smoothly last year and put tendered cost next to actual cost. If you cannot produce that in an hour, that is the first finding and it is about your records rather than your prices.
If you can, and the recovery on both is below your overhead percentage, you have your answer and you did not need the other four.
How do I know if I am underpricing my building work?
What is the first sign of underpricing?
Is a high tender win rate a good sign?
Is winning most of the jobs you price a bad sign?
Why does underpricing go unnoticed for years?
Where does the money usually leak on an underpriced job?
How do I check whether a finished job made money?
What margin should a contractor be making?
Will I lose work if I put my prices up?
How do I put my prices up without losing customers?
Compare tendered against actual in minutes.
You cannot tell whether a rate is wrong until what you priced sits next to what the job actually cost, on the same page.
- Thirty minutes, weekdays, from tomorrow.
- Nothing to prepare. Bring a job number and we mock that job up.
- You drive it. There is no slide deck.
- You keep what you saw as a 14-day trial. No card.
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