Contractor pricing is an in-depth subject that could cover a whole book. Some reasons for significant pricing variations are erroneous, while others are not. The reasons may have to do with a lack of contractor experience, size of a given business, the "underground economy," or false expectations on the part of homeowners. This blog post will provide a small overview for contractor and customer alike.

I remember standing in the lumber yard years ago, and a guy came up to me boasting about a big second story remodel he was doing for cash: "Yup, pretty much raking the customer over the coals!" Other contractors and salespeople took notice uncomfortably. So I asked the man: "You realize you're operating illegally, putting yourself and the customer at risk, right? You know you're undercutting the pricing of all of us?" The man turned and walked out, taking with him an unprofessional attitude and cheap cash job. This kind of work creates a serious liability for the customer. It's an example of a large project that could have been done by an honest, licensed contractor. In the end, the true cost of a project will be reflected in the final product.

Here are six reasons why contractor pricing can differ so dramatically. If you're a homeowner, this should help in understanding your liabilities, and expectations vs. cost. For contractors, this will assist you as you think about the true costs of doing business.

1. The Cash Contractor

The cash-based contractor is code for an unlicensed and uninsured worker. Why is this a serious liability for homeowners? Because you are now considered an employer, and responsible for their injury, taxes, and more. Plus, you have no recourse for warranted work or shoddy workmanship. The underground economy can create a false perception of contractor costs for the general public, stealing away viable projects from honest, licensed contractors.

2. The Inexperienced Contractor

For the new contractor, it can be very hard to know and communicate reasonable pricing. You may not have the experience, confidence, or understanding of how to sell yourself, so you may lower rates out of fear of losing the job. This too can create a false perception of costs in the general public. As a result, most new contractors go out of business within a few years. My advice to new contractors is to get a mentor who can show them the business side of contracting.

3. The Experienced Contractor

Most mature contractors—even those who have been around a long time and have solid business systems—do differ slightly in rates. But when comparing two contractors of equal size, experience, and customer expectations, the difference in pricing should be minimal.

4. Labor Costs

Labor is a major part of the cost of doing business. I've seen a huge range in pay given to tradespersons, especially in residential and non-union projects where contractors are looking to save on costs. Again—you get what you pay for, and most reputable contractors know this and pay their key personnel well.

5. Business Infrastructure

Business infrastructure cost is going to vary from the contractor who has 30 employees to the contractor who has only himself, because the smaller company may not need the same kind of office, rentals and equipment, or marketing budget. These differences are often reflected in pricing. It's worth noting that these two contractors are probably not competing against each other very often, because the smaller contractor cannot handle the larger projects, and the larger contractor isn't set up to do the smaller ones. They stay within their niche.

6. Customer Expectations

Pricing can differ depending on the expectation of the project. Contractors play with this a lot through allowance items, so they can provide a budget to the customer before the customer has to choose the type of material or install they want. I've seen low preliminary estimates for time and material contractors used as a technique to get the customer excited. The problem is, the customer soon learns about the items or upgrades not included in the preliminary budget. This can cause a significant disparity in pricing and perception for the general public, as well as leave a bad taste in the customer's mouth.

As always, there is more that could be discussed, but these six steps should provide a solid foundation of understanding for homeowners and contractors.