Building More: Going Rate Or Going Out Of Business Rate?

Corey Adams

If I had a nickel for every time I have seen a question about the going rate in peer groups, well, as the old saying goes, I would have a crap load of nickels. I understand the reason. Many contractors are scared that they are not charging enough or think they lost a couple of jobs because they are too far over “market.” They are just searching for a quick answer to put their minds at ease. The real answer is that there is no “going rate,” and you shouldn’t base your pricing on general information. 

Construction companies have one of the highest fail rates in the world. Depending on the source, you can get stats that range from 66% to 90% fail rate within ten years of the doors opening. Also, almost 33% fail within the first couple of years. It is not a pretty picture. We could argue for days about the main cause for these stats, but the broader overlying cause for failure in any business is cash flow/profit.

To put this into perspective, if you are a small construction company and you constantly bid against other small construction companies, somewhere between 66% and 90% of the current bidders will fail. With the understanding that cash flow/profit is the main cause, we can state with a fairly confident tone that over 50% of the market is underbidding their work. And that number may be closer to 75%.

When discussing projects that small construction companies can handle, the proverbial “going rate” is determined by an above-average number of companies that will fail. This is why I affectionately call the “going rate” the going out of business rate. 

A builder called and offered us a chance to bid on pouring 100 basement floors in a subdivision. This was a well-known builder, and the work was ready to go. After he asked us what we would charge, I replied with this: Well, tell me what you pay. If you tell me what you think it should be, I will tell you if I think it is worth us looking into. He quickly rattled off a square foot price that was not only low but downright offensive. I responded with, “How does anyone make money at that rate? The materials alone are almost that much.” He gave me the old generic answer about making it up in volume, and then I interrupted him. One question stopped the conversation and led to a quite hilarious awkward silence. “If there is profit in there, why did the last guy quit, and why are you having such a hard time finding someone?” Well, the answer was on the table. His “going rate” had bankrupted every company that had tried to make it up in volume. 

Sometimes in our obsession to get projects and stay busy, we think we have to compete with every guy in a truck out there. Our basic instincts make us believe that price is the only reason why the customer would hire a contractor. That has been proven false time and time again. Yes, there are some price-only clients, but let’s allow the companies that are doomed to fail handle those. 

Construction companies cannot compare themselves on price alone. We all have different expenses, overhead, labor rates, and desires. To reduce yourself to a “going rate” is cutting yourself short. There are no shortcuts in learning what to estimate. 

If you bid on a project and the client says that you are too high, don’t automatically assume that you are. The right price for a job is when a client’s willingness to pay matches your company’s willingness to do. It is nothing more than that. I have had a ton of clients tell me I was high on my pricing just to see if they could negotiate, which they find out quickly they can’t. 

The moral here is never to compare yourself to an average rate of existing competition. More than likely, over half of that competition won’t be there in 5 years. Develop your rates, and avoid the going out-of-business ones.