How should you determine the cost to remodel a kitchen? Some contractors will give you a fixed-price estimate, while others use a method called cost-plus pricing. Both have their advantages, and disadvantages and the right option for you will come down to preference regarding your specific needs.
Cost-plus pricing is a method that takes the initial costs of a product or service and marks it up by a percentage for the total price. With a kitchen remodel project, the cost-plus pricing method is advantageous because it covers the product costs, and hourly labor is usually the “plus” in the final cost.
This pricing method is especially useful when the scope of a project hasn’t been fully determined. It’s also suitable for projects that have unknown variables, like remodeling a kitchen in a home that may have plumbing or electrical problems you were unaware of.
Setting prices for any product or service can be difficult. First, you should know the going market rate. Then look at your overhead costs before setting a minimum rate. In retail, this means covering the manufacturing costs and marking up a percentage to gain your desired revenue.
The formula used by retail businesses to determine markup percentage is:
Costs (1+ the Markup)
For example, if the cost for project overhead is $400, and you want to make a 25% profit on the product, then use 0.25 for 25% in the above equation, and the answer is your marked-up price, the final unit cost.
$400 (1.25) = $500
In the contracting field, fixed costs are usually preferred by both the contractor and the business owner. However, sometimes it’s impossible to give a proper estimate before starting a project. If this is the case, cost-plus contracts are usually the better option.
Product cost should always be your starting point when providing an estimate on kitchen remodeling projects. It’s important when setting prices that you consider the cost of materials as well as the time you’ll spend on the project.
Fixed vs cost-plus contracts can be controversial. Some contractors won’t touch a cost-plus contract, while others work with them almost exclusively.
One reason you might want to choose cost-plus pricing is to get higher quality materials. When you have a fixed cost, contractors will frequently use cheaper materials to save on their overhead costs. The cost-plus pricing method gives you the chance to choose the materials being used and make sure that quality never suffers for the sake of costs.
Sure, fixed costs mean that you know what you’re paying upfront. But they also mean your contractor is going to work within that budget. If the scope of the project changes beyond the contract, it can get complicated. Cost-plus pricing clearly shows all that you’re paying for, and depending on the situation, it may ultimately save you money in the long run.