Pricing Construction Projects: Line Item or Lump Sum

If you sell construction services, then you have had to deal with the following question from a client:

“Can you break out the price of each line item?”

How you respond to this question can determine your customer’s level of trust and affect the project’s margin.

Many types of construction projects require line item pricing such as commercial and governmental projects. If you want to compete for these types of projects, then you will have to show line item pricing on your bids. Line item pricing may not be a requirement but a request for residential projects.

Residential project owners often request line item pricing because they want to ensure that they aren’t overpaying for any particular item. They want to keep the contractor in check, but this is the inherent problem. Owners do not know the cost of construction services in the first place.

LINE ITEM PRICING QUESTIONS

How can customers analyze the price for a particular line item?

Does the line item price include the appropriate overhead and profit?

Should the contractor show the overhead and profit as separate line items?

What’s the appropriate amount for overhead and profit?

LINE ITEM PRICING IS OPEN TO INTERPRETATION

Line item pricing, much like cost-plus contracts, is open for interpretation. (See this post for my take on cost-plus contracts.) The contractor runs the risk of having to translate each of the line items for the customer.

LUMP SUM PRICING CREATES FOCUS

Lump sum pricing leaves little to get lost in translation. Lump sum pricing allows the contractor and the owner to focus on the right things – the overall scope of the work and the price for that specific scope of work.

The total price of a construction project is rarely one or two big line items, but a combination of many smaller items that add up. Contractors that focus on developing a lump sum proposal establish a higher level of trust with customers, eliminate confusion and maintain their margins.

I know it may seem counterintuitive, so check out the blog post for the entire post:

https://shawnvandyke.com/line-item-pricing-vs-lump-sum/

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