For beginners: how to determine a selling price ?

This is one for estimators at the beginning of their carreer and for those who are struggling with the calculations of their estimation software. Or, when you put it the other way around, how should your estimation software calculate ?

For the clients and architects who want to peep inside the kitchen of a general contractor: a warm welcome as well :o)

Here we go.


In a classic tender you have a list of articles where you have to put a price on.
Read carrefully the specifications and estimate the according costs for labor, material, equipment and subcontractors, article per article.
When finished the software will totalise this. These are the DIRECT COSTS.


As stated in my previous articles on this blog (and elsewhere), there are things you need in order to realise the building but which are not specifically mentioned in the tender.
Not estimating them will certainly result in a furious boss !
Some contractors estimate these costs in a seperate Excel file, some do this in the estimation software. It doesn't matter where you estimate it, as long as the job is done. 

The total sum of these costs are the INDIRECT COSTS.

Usually your boss wants to know how big these costs are related to the direct costs, preferably expressed in a percentage. How much this should be, really depends on what is specifically asked for in the tender: it can go from less than 1% when the architect wants to get a feeling with how a project is actually realised and mount up to 15% when it doesn't interest him at all.

STEP 1 and STEP 2 together is the PROJECT RELATED COST for the contractor.

In a formula:
                        project related cost = direct costs + indirect costs


A contractor has an office, an accountant and all other kinds of costs. 
And these costs remain whether he has a full order book or not. 
These are the GENERAL COSTS (in Dutch: algemene kosten or AK). Usually, these costs are taken into account bij adding a percentage on top of the production cost. 

In a formula:
                        total cost = project related cost x (1 + % general costs)

Some considerations:

  • Each contractor has a slightly different view on what is project related and what not. 
    E.g. some contractors have a standard all risk insurance which is part of the general cost percentage; others look at the insurance project by project and add its cost to the project related cost.
  • Another thing: how big is the contractor you work for ? Does your company has his own engineering department ? In that case the general cost will be higher than the small contractor who only executes what is written down in the tender.

So, for you, as a beginning estimator, it is important to know what your boss exactly means by "general costs". Usually, the percentage is somewhere between 4% tot 8% of the project related cost.

STEP 1, 2 and 3 together is the TOTAL COST for the contractor.


A contractor wants / needs to make a profit. And your boss is not always so sure of the quality of your work. He will therefore add a percentage on the selling price for profit & risk. 

In a formula: 
                         selling price = total cost / (1 - percentage for profit & risk)

When you want to know how many euros or dollars this "dream" percentage for profit & risk is, the formula becomes:

                        profit & risk = selling price - total cost


Now we know what the total selling price will be, but how do we divide it over the articles of the tender ? Again, there are several considerations


  • Sometimes, clients indicate a fixed sum for certain articles.
    E.g. kitchens in apartment blocks. The final, individual owner of the apartment gets a fixed sum to buy the kitchen of his dreams (what happens when he wants to buy a more expensive or less expensive kitchen, I'll tell you in one of my next contributions to this blog). In these cases you're selling price is known and needs to be fixed .
    In the direct cost of that particular article you put 80% to 90% of the fixed sum depending on the general cost percentage you agree on with your client ànd the discount you expect to get from the subcontractor who actually will build the kitchen.

    When you make your estimation in Excel, add a column where you can add e.g. an asterix (*) to mark these prices. 
  • Sometimes, the client already consulted subcontractors for e.g. windows.
    In other words, your client knows the price of the external joinery.

    Two remarks:

    1. When the client intends to work with a general contractor, he knows that the coördination of all the subcontractors come with a cost. In my experience clients are willing to pay from 3% up to 15% for it.

    2. As a general contractor you will get a better price of the subcontractor than your client because he is a one time client and you are a regular one.

    1. and 2. together means that you can put a selling price for these kind of items between 90% up to 110% of the direct cost of that particular article.

    Again, when you make your estimation in Excel, add e.g. an asterix (*) in the additional column to mark these prices.


Thus, the first thing you do after you have determined the total selling price, is to deal with the kind of articles mentioned above.

The total of these FIXED SELLING PRICES can be called SP1 (in Dutch VP1, verkoopprijs 1). 
The RELATED DIRECT COSTS need to be totalised as well and can be called DC1 
(in Dutch KP1, kostprijs 1).

Secondly, you have to deal with the remaining articles.

The total sum of the REMAINING SELLING PRICES  can be called SP2. 
The total of the RELATED DIRECT COSTS can be called DC2.

The MULTIPLIER (in Dutch "overslag") of the direct costs in order to determine the individual selling prices of the remaining articles can be obtained by dividing the total of the remaining selling prices by the remaining direct costs.

In formulas: 
                         SP2 = selling price - SP1
                         DC2 = direct costs - DC1
                         multiplier = SP2 / DC2

As you can tell from above, the multiplier can have a wide range. When do you need to start worrying ? When the multiplier drops below 1,05 or exceeds 1,35. In those cases you better go and look for mistakes in your estimation :o)

Good news: for the time being, your job as an estimator is done.


It would be nice if the initial bid automatically results in a final contract. Perhaps this is the case in Utopia but certainly not in our daily construction world. Several times you will need to adjust you bid because of new quantities, new items, etc.

Before you make you're first adjustment, freeze all individual selling prices ! If you don't the formulas will start running their own life and you'll end up with different selling prices for articles where nothing changed. And trying to explain this to the client is an annoying thing to do and therefore is to be avoided at all times !
This also means that, in this phase of the selling process, you really need to keep your head cool.

There are several possibilities:

  • Only the quantity changes.
    In this case, you only need to adjust the related the direct cost but be aware. 
    E.g. a pump to pour concrete will have no different cost if you pour that day a couple of m³ more or less. In other words, the selling price remains the same but the percentage of profit & risk might drop or increase. 
    You could keep the same multiplier but all this small changes in individual selling prices of the tender will unnecessary complicate the sales process.
  • A new but similar article is added.
    In this case you need to apply the same multiplier as the one used with the existing simular articles. The selling price needs to be logical for the client !
  • A really new article is added.
    Here you have a choice in which multiplier you will use: the same as in the first bid or a different one. To make the choice you have to consider whether this new article has an influence on the indirect costs. It is also an opportunity to correct the dropping percentage of profit & risk due to only changing quantities or to correct a mistake you find in your estimation after handing over the bid to the client
What is important for your boss ? That is simple: how much money is left for profit & risk when the contract is signed ! And he will certainly compare this to the initial "dream" percentage which was set out in the first edition. So it is really important to keep a record of the changes you made throughout the sale process.
Not all that simple, but it surely is the most fun part of estimating !
Kind regards and keep warm this weekend !