• Duane C. Barney

Cost-Driven Pricing


Customers do not see it as their job to ensure that manufacturers make a profit.


Most American and European companies set their prices by adding up costs and then putting a profit margin on top. And then, as soon as they have introduced the product or service, they have to start cutting the price, have to redesign the product at enormous expense, have to take losses—and, often, have to drop a perfectly good product or service because it is priced incorrectly. Their argument? “We have to recover our costs and make a profit.” But the only sound way to price is to start out with what the market is willing to pay and design to that price specification. To start out with price and then whittle down costs is certainly more work initially. But in the end, it is much less work than to start out wrong and then spend loss-making years bringing costs into line."

from The Daily Drucker: 366 Days of Insight and Motivation for Getting the Right Things Done by Peter F. Drucker


I read this the other day, emphasis added, and it struck a chord, the concept is speaking to manufacturing, but it can be rethought in terms of construction.


Most construction projects start out Design- to- pricing; logical since how can something be priced if there is no design to price. However, there is ALWAYS a budget, there is a number at which the project will not go forward, clients typically hold this number close to the vest, so they do not “get ripped off”. Obviously, the contractor making a profit is not the objective of the client the completion of the project is, and human nature tells us that if we share the budget then the project will somehow reach or exceed that number, so it is not honestly shared. Let’s re think this from Peter Drucker’s point of view; does it not make more sense to start with price and design to the budget? What are you really willing to spend on this project, there is a number, if I told you your new kitchen would cost $500,000 you would have a reaction; if you told me you have $5,000 and wanted a new kitchen, I would have a reaction. There is a price, there always is, it is a matter of priorities.


Best way to start, be honest with yourself, how much, period no contingencies no fudging the number, how much! For large, complex projects, retain an Owner’s Representative who can provide unbiased advice on score, schedule, pricing and other administrative matters. For smaller projects find a contractor you are willing to work with and insist on paying them for budgeting during design. By doing this you have set yourself up as a valuable client, someone who understands the value of their time and alleviates any guilt for not hiring them for the project if you elect to do so, they have been paid for their help. This expense can be offset with a clause crediting you for all or part if they are selected as the contractor, Win-win.


Now that you have settled on what you are willing to spend, design to that budget, you can ask that the construction budget be 10% below your budget for contingencies but put the number on the table. Now design, price; design price; rinse and repeat until the design and budget meet your needs. Still want to bid it out to make sure your getting the best value, go ahead or better yet let the contractor doing the pricing know this is your plan, they will keep a tighter eye on the number.


From your point of view, you are buying a commodity, however it is not a commodity until it is designed. Looking at it from the other side the architect and contractor are providing services to build a commodity for you. You are buying a product and they are selling services, let’s get on the same page, buy the services to get the commodity, this is custom construction not a new car.

Questions about how to start your project? We recommend this book as an essential first step.

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