Construction businesses rarely fail because the work was poor. They fail because the work was priced in a way that could not carry the business, and the problem compounds because a badly priced job keeps you busy while it loses money.
The three components of a price
Every price contains direct cost, overhead recovery and margin, and confusion between the last two is the most common structural error.
Direct costs — labour, materials, plant and subcontractors attributable to the job. Most estimators get these approximately right.
Overhead recovery — your share of the costs that exist whether or not you win this job: vehicles, insurance, office, administration, tools, unbilled time, ACC, the owner’s own wage for time not on the tools.
Margin — profit, which is what compensates for risk and funds growth.
The failure is adding a percentage on top of direct cost and calling it margin when it is actually paying for overhead. A business adding 15 percent and carrying 15 percent overhead is working for nothing.
Working out your real overhead rate
Take last year’s total overhead from the accounts. Divide it by the total direct cost of work done in the year. That percentage is what must go on every job before any margin.
Most small construction businesses find this number is considerably higher than they assumed — frequently 20 to 35 percent of direct cost once vehicles, insurance, unbilled time and the owner’s administration hours are counted properly.
Then add margin on top of that, not instead of it.
Charge-out rates that recover reality
An hourly rate must recover the cost of employing someone, not their wage. Add ACC levies, KiwiSaver employer contributions — now 3.5 percent and rising to 4 percent in 2028 — holiday pay, sick leave, public holidays, training, tool allowance and non-productive time.
The gap between wage cost and true employment cost is typically substantial. A business charging a rate based on wages plus a small uplift is subsidising its customers.
Productive hours matter as much as the rate. Nobody bills eight hours from an eight-hour day — travel, setting up, packing down and waiting all consume time. If you assume 100 percent productivity in your rate, you recover less than you planned every single day.
Pricing risk rather than hoping
Fixed-price work transfers risk to you. That is legitimate and it should be priced.
- Unknown existing conditions — renovation work on an old building carries more risk than a new build on a clear site. Price it, or price the investigation separately and quote after.
- Material price movement on a long programme. Either fix supply, include a rise-and-fall provision, or limit quote validity.
- Client-caused delay and variation risk, which is higher with an indecisive or inexperienced client.
- Payment risk, which should affect both price and whether you take the work at all.
Contingency is not padding. It is the price of accepting a risk the client did not want to carry.
The jobs worth declining
Saying no is a pricing decision, and businesses that never decline work are usually the ones in trouble. Reasonable grounds to walk away:
- The client will not sign a written contract, or wants to vary the standard terms in ways that shift risk to you.
- Payment terms that do not work. A long payment term on a labour-heavy job means funding wages for months.
- The client has a history of disputes or slow payment. Ask around; the industry is small.
- Scope you cannot define. If you cannot describe what you are building, you cannot price it, and charge-up is not a solution if the client expects a fixed outcome.
- Work outside your competence or your licence class.
- A price that only works if nothing goes wrong.
Turnover taken at a loss is worse than no turnover, because it consumes the capacity you would have used on profitable work.
Measure whether the price was right
Price is a hypothesis until you compare it to actual cost. Businesses that do not compare cannot improve, and repeat the same estimating errors indefinitely.
Record actual labour hours and materials by job, compare against estimate, and look at the pattern. Most estimating errors are systematic — a particular task consistently underestimated, or a client type that always generates unpriced extras.
Getting paid once priced correctly
Pricing only helps if you collect. Issue compliant payment claims under the Construction Contracts Act, invoice on time, and chase early. The statutory payment regime is a significant advantage that casual invoicing gives away.
MBIE publishes guidance on building contracts and the Construction Contracts Act free at building.govt.nz, and business.govt.nz publishes pricing and cashflow material for small business.
