0344: Quotes Vs. Estimates And Insights To Contract Negotiations

This Podcast Is Episode Number 0344, And It Will Be About Quotes Vs. Estimates And Insights To Contract Negotiations

 

The nature of some types of businesses makes it challenging to come up with a standard price list. For tradespeople and construction company owners like you, what's required in terms of time, skill, labor, and materials frequently vary from job to job.
Offering an estimate or quote provides potential clients with a customized figure for what they can expect to pay based on what will be required to complete a specific project.

Quotes

A quote is a legally binding fixed price a company prepares for a client; as such, they should always be in writing. A quote should summarize the work to be performed and include a detailed breakdown of all the costs and the final total, including taxes. 

Once a business offers a quote and a client signs off on it, the price cannot change even if the job ends up costing more than initially anticipated. For this reason, it's crucial to always quote as accurately as possible, allowing ample time to complete the job and carefully pricing out costs for materials and labor (e.g., subcontractors). 

To protect your business from "scope creep," a quote should also stipulate that additional charges for extra work beyond what the original quote covers will apply.

Estimates

Unlike a quote, an estimate isn't legally binding, and it isn't a guarantee of what the actual work will cost. Still, it's recommended that estimates also be provided in writing. An estimate is offered as a ballpark figure, based on the information available about a project at that moment in time. As such, it's understood that the estimate is subject to an increase or decrease once the work begins. 

Construction companies should take just as much care when providing an estimate as they would when drafting a quote. Ideally, an estimate should provide a number within roughly 20 percent of the final price. It's good practice for businesses to provide more than one estimate, to offer a range of options at different price points.

Tips For Costing Out Jobs

For small construction businesses, it's vital to appear as professional as your larger competitors whenever you communicate with clients, but especially when negotiating the details of a potential project.

 Be sure when you're preparing your quote or estimate that you include the following information:

Your business number  Business contact info (phone, email, address) A detailed summary of the work to be performed A breakdown of costs (subcontractors, materials, time and hourly cost for labor) The total cost A timeline for the work and completion date Contract terms, including deposit and payment schedule

Another essential bit of information is to provide your clients when the quote or estimate expires. Many companies choose an expiry date of 30 days, to protect themselves from the possibility of rising costs for materials or other factors that may influence the cost of the job.

Insights To Contract Negotiation

There are several aspects of the construction business that can only be learned through experience. One of them is negotiating contracts. 

Several people fear the negotiation process because it is an intrinsically uncomfortable process. Asking for more money or making personal demands doesn't come naturally to everyone. But with the right toolkit, you can breeze through contract negotiations. And you'd better get used to it because you'll have to handle many contracts whether you're a construction company owner or employee.

Having the right mindset is critical to contract negotiations. You have to believe that you are going to get your way. Bring a positive attitude and a smile to the table. You're not signing contracts with the enemy. The people you're negotiating with are going to be your business partners in one capacity or another.

Let's take a look at some things you need to remember when you're in the process of negotiating contracts:

Be patient

Don't rush to get a contract signed. Rushed contracts usually leave one or both parties dissatisfied. It's understandable if you want to get the negotiation done with, but taking the extra time to examine your contract will benefit you tremendously in the long run.

Involve an expert

You might know what you need from a contract in terms of overall business output, but you could get trapped by the legalese. Get a lawyer you trust on board to frame the wording in a way that protects your overall interests. Even if you're good at negotiation, involving an expert is always a good idea.

Don't forget term sheets

Term sheets are a broad overview of the terms of your contract. Before you get into the specifics, it's a good idea to make sure all parties involved agree on the big picture.

Take it one step at a time

Negotiating a complex and lengthy contract is an inherently tedious process. In the beginning, make sure you've got the necessary details agreed upon. Making some headway is crucial to the overall success of the negotiations. After you've established a rapport with the other party, you can dive into the deeper, more complicated issues.

Think about the specifics

The flowery language on a contract might make for good reading if you're of a particular leaning, but you need to understand what it translates to in the real world. How much will you be making?

Use the phone

Emails are notoriously difficult to decipher at times. You aren't aware of the body language of the sender, and sometimes people can confusingly word things because they don't have the best command over the language. If you're unsure about some issues in your contract, pick up the phone, and have a conversation. It will help sort things out.

Don't fret too much about the first draft

The first draft of your contract is just a starting point. Don't be alarmed if there are certain things in there which aren't to your liking. It's called a 'negotiation' because you will be changing certain aspects of the contract.

If you can't make the tough calls, get someone who will

If you're not a naturally assertive person or find it challenging to be demanding when the situation calls for it, ask for help from someone capable. It could be your business partner or even a spouse.

Do your research

You don't want to make outlandish demands that the party you are negotiating with can't afford. Take some time and do your research. See what similar services or products cost in the industry. Ask some construction experts for advice.

In conclusion

It's worth repeating that you should always take care to state clearly in writing the terms of your quote or estimate, and offer a client the opportunity to ask questions before approving the work. That way, both parties can avoid any misunderstandings about expectations and project costs before the work begins. 

Negotiating a contract is like a prolonged game of chess, except both parties need to come away from the table victorious. Before you begin the process, figure out what your short and long-term goals are. If you have a clear vision, it will help you navigate the tricky waters of contract negotiation better.

About The Author:

Sharie DeHart, QPAis the co-founder of Business Consulting And Accounting in Lynnwood, Washington. She is the leading expert in managing outsourced construction bookkeeping and accounting services companies and cash management accounting for small construction companies across the USA. She encourages Contractors and Construction Company Owners to stay current on their tax obligations and offers insights on how to manage the remaining cash flow to operate and grow their construction company sales and profits so they can put more money in the bank. Call 1-800-361-1770 or sharie@fasteasyaccounting.com