Of all the installation issues and questions I see posted on social media, the one that perplexes me the most is, “What should the cost be for a tier 3 system?” or, “What should I charge for a tier 3 system?”
If a person is asking this question, they are not set up to succeed.
Luckily, I’ve been in this industry long enough that I’ve seen firsthand — and listened to — the wisdom of those who came before us and warned us, “You might be a great installer, but you’re a lousy businessperson and I can prove it…”
The wise old sage would then continue, “Each of you has exactly $100 in total costs on an invoice and you want to make a 20% profit. So what do you charge?”
Of course, everyone in the room (including me way back then) said $120, of course! Which proved none of us had a clue.
If you take $20 and divide by $120, you’ll see the profit was less than 17%.
To accurately add 20% profit to $100, you would divide the total cost ($100) by 0.8 (change the 20% to a decimal and subtract from one: 1 - 0.2 = 0.8).
The correct answer is to charge $125 to have a 20% profit.
So that was just proof we all need help…
The question about what to charge for a specific type of system is so far off the mark because what you charge for your work has nothing in common with how somebody else would price a system.
To accurately price a system you have to know your costs — both fixed costs and variable costs.
If you are using someone else’s pricing (and if they know how to price their work), you are working on covering their costs, not yours.
I sat in a meeting with an installer company owner and a very intelligent, very successful accountant who told the owner, “I want you to do fewer systems for a higher price. Charge more, and do fewer systems.” The owner nodded.
After the accountant left the owner said, “I can’t do that; Joe Blow down the street prices ‘x’ amount, so I have to be below that price.”
There’s an unfortunate saying that applies to thinking like that, and I have no idea who to attribute it to, but it goes like this: “We lose a little on every sale, but we’ll make it up in volume.” That’s scary stuff.
You have to know your costs, both fixed and variable. You have to know how to divide your costs by your billable hours to come up with your hourly rate — not someone else’s hourly rate. Now add your material cost and correctly add your profit to the material. I typically add an hourly rate for the heavy equipment as well. If done right you cover all your costs and add a profit.
When bidding a job line items could include (but is certainly not limited to):
- Labor* (I use an hourly rate based on crew size)
- Equipment (excavator, skid-steer, etc.)
- Trucking
- Fuel
- Materials (pipe, fittings, pump, tanks, etc.)
- Aggregate (stone, sand, etc.)
- Trench box/shoring
- Rental equipment
- Subcontractor, if any (electrician, hydro, directional)
- Dewatering, if needed
- Pumping (If the job is a replacement and we have to pump the existing tanks)
- Permit fees unless the customer is responsible for this
- Any required restoration costs
- Dump site costs
*When determining labor rate, please don’t think it’s just what you pay the employee plus a markup. Labor is one of the few places you have to charge your customer in a manner that not only covers your costs, but makes you a profit. When you hear of guys having a high hourly rate, $150, $200 or $250 per hour, this isn’t a price gouge. That’s a business owner knowing all of their costs and dividing it by their billable hours to determine their hourly rate. How else are you going to cover your costs? The other option you have is the markup on material. I’ll also mark up any subcontractors or rental equipment.
While compiling your proposal, list out everything that your company will have to pay for to install this system. Make certain that each one is covered in one of the line items of your proposal. I recommend a great narrative proposal that lists the entire scope in detail of what your company will and will not provide. But then I recommend one lump sum, not a break-out of line items prices or costs. Those are for you to build your price, not for someone to dicker with you on each line item. You can show whatever you want. I like the complete narrative with defined scope followed by one lump sum. I typically include alternates to the proposal as Add-On or Deduct categories. These are nonrequired items like a second effluent filter in the pump tank or additional square footage of the system, or a downsized but more expensive system — options they can choose to accept or not.
If you aren’t covering your specific costs, there’s a problem there.
Asking someone else what to charge for a system (which I see online all the time) tells me the person does not know how to cover their costs — and will wind up pricing based on someone else’s.
This article isn’t enough to teach a person how to price in detail, but good resources are out there. Do yourself a favor and get trained how to properly price your work, or you’ll be out of business in no time. I was lucky enough to be in classes put on by Frank Blau. His Business of Contracting book may still be available online in e-format. Another company who excels at teaching the business end of what you do (specific to service companies) is Grandy & Associates. There might be more out there, but these are two I know of firsthand.
About the author
Todd Stair is vice president of Herr Construction, Inc., with 34 years’ experience designing, installing, repairing, replacing and evaluating septic and mound systems in southeast Wisconsin. He is the author of The Book on Septics and Mounds and a former president of the Wisconsin Onsite Water Recycling Association.
