As the economic storm rages, construction management teams around the world are wondering, Can we ride this out with our business intact? There are no guarantees.

Part one of this series on surviving recessions highlighted the importance of data. Effective leadership over the long term never relies solely on gut instinct. Leaders need data to make decisions critical to business survival. In part two, the focus is on using data to create an effective pricing strategy.

Know What Everything Costs

It seems obvious, but no one can create an effective pricing strategy without having precise cost data. As discussed last month, the key to recession strategies is effective management reporting. These internally facing reports provide the means to dissect business segments and determine what is working, what isn’t, and why. Materials, staff time and regulatory requirements must be included in any job costing, and effective reporting will provide that needed information at any point in the project.

Know Your Customer

Management reporting won’t just reveal how much the different project stages cost; it will also spotlight what clients cost. Calculating a client’s cost is simple: Sum up all of the project costs for a given client.

Every client or agency is different. More expensive clients erode margins if not identified and remediated. Time leakage is often an issue. Job costing helps determine the true costs incurred by any firm on a job-by-job, client-by-client, or service-by-service basis. No effective pricing strategy can be implemented without job costing.

Just Say No to Discounting

 The temptation is always there to trim a price to secure another client. But will that client then expect the lower price forever? Another job pricing consideration is the sales team. For jobs with a 30% margin, a 10% price discount means sales will have to increase by 50% to recoup the decreased profit. This isn’t the way to make the sales team’s day, particularly in a recession. The good news is, with job costing data revealing the true costs per project (as well as per client, per division and per industry segment), it is possible to choose the most effective pricing strategy for a given industry.

Pricing Strategies for the Construction Industry

The bottom line is this: To optimize sales and profits in any environment, companies may need more than one pricing strategy for their client mix. Here are a few of the most prevalent pricing strategies in the construction industry.

Fixed Price: Most clients love a single number they can easily analyze and compare with others, but these are risky because any unexpected costs must simply be absorbed by the company.

• Aggregate Not-to-Exceed: By breaking a job into multiple components where each has a fixed price (but savings in one can roll into others), the risk of budget overruns is reduced.
• Cost-Plus: This takes the actual job cost and adds a profit percentage. Unfortunately, these prices tend to reflect those of competitors, making it difficult to distinguish one brand from another.
• Value Pricing: This strategy ignores costs and asks the question, “What is the most someone will pay for your product?”

Generally speaking, value pricing should be the preferred strategy. Although it’s critical to know what something costs to build, this shouldn’t dictate pricing (but if it can’t be built profitably, don’t build it). Value is the real question. If a firm is known for delivering on time with strict quality standards, customers will pay more without caring about what it actually costs. Price is adjusted for each client based on the value delivered. This strategy also allows companies to become more efficient (increasing margins), and to add quality and robustness to delivered projects (and charge more). Following are three more benefits to value pricing:

• Customers are never unpleasantly surprised by the final bill;
• Communication with clients will improve; and
• Employees will work smarter and more efficiently.

Making Value Pricing Work

The transition to value pricing can take some time. When making major changes to business practices, challenges and temporary setbacks will occur, but don't lose sight of the goal. The flexibility of this strategy will unlock future growth potential, increase brand value and facilitate process improvements, strengthening companies from within.

This is the second in a five-part series on surviving recessions. Click here for part one on management reporting and forecasting.