Understanding the business side of being a tradie

Starting your own business can be a daunting task and often we learn on the job. You’re confident on the tools and know you can do a great job on-site, but ensuring your business practices are up to scratch is just as important for building a successful business.

Codewords 118: April 2024

Article is relevant to LBP licence classes: All

To help you on your journey, business.govt.nz has a series of ‘Tips for Tradies’ videos and resource templates so you can save time and money and run the admin side of your business as accurately as your tools.

Tips for tradies(external link) — business.govt.nz/tradies

How to price a job

Getting your pricing right is key for your business to be successful. Too high and you can scare clients away. Too low and you could be losing money on every job.

It’s important to make sure you’re quoting accurate prices to potential clients as best as you can.

There are different ways to set your prices, but the three most popular strategies are:

Cost-based pricing

This is where you work out all the costs involved in providing a service and add a bit extra to make a profit. It works best if your costs are low, and your clients are focused on keeping the price low.

Competitor-based pricing

This is when you look at what other businesses are charging for similar work and set your price around that. You may charge less to beat their price, match them, or charge more and use a different benefit like better customer service, or getting the work done quickest to win the job.

Customer-based pricing

This is where you work within the budget your clients have available. Usually this works best if your clients have bigger budgets and value quality over a lower price.

It’s also important you have a markup because it helps you meet your profit goals. To learn how to set your markup, watch the ‘How to price a job’ video in the series. There’s also a handy pricing workbook you can use to help calculate your markup.

Watch now: Learn how to price a job(external link) — business.govt.nz

How to prepare a quote

Once you know what you’re charging, prepare a quote that gives you the best chance of landing the job, is realistically priced and covers your costs. One of the key principles of the Licensed Building Practitioner (LBP) code of ethics is to behave professionally – and that means pricing work fairly and reasonably.

Quotes are a great opportunity to build trust, put your best foot forward, and show your client you understand their needs and will do the job well.

Business.govt.nz shows you how to create a strong construction proposal for your potential clients in the ‘How to prepare a quote’ video. They also give you a free template to use that covers your legal requirements and contract must haves.

Remember – it’s a legal requirement to have a contract for all building work valued over $30,000, and best practice to have one even when it’s less than that. As an LBP, you’re also bound by our code of ethics.

Watch now: How to prepare a quote(external link) — business.govt.nz

Variations to contracts

Sometimes when working on a job, the scope can change unexpectedly. You find yourself with more work than you initially planned for which is taking more time and effort on the job. This is where variations to contracts can help.

Variations can be any proposed change to the original job, but common variations include:

changes to the terms agreed, such as timeframes and when payments are due.
changes to the level of quality and finish for the agreed project price
changes to the size or complexity of the job, or the products to be used,
unforeseen circumstances that lead to additional work or delays.

Another key part of the LBP code of ethics applies here – take responsibility for your actions. This means informing and educating your client, advising them of delays as they become apparent and always acting in their best interest.

Variations in contracts must:

Clearly state the specific terms of the contract that are being changed and what the new terms will be.
Consider any changes required to other parts of the contract as a result. This may include changing the amount charged if more work is required.
Be specific on when the variation will come into effect.
Confirm that nothing else in the contract is being amended, other than your proposed changes.

Watch now: Variations to contracts(external link) — business.govt.nz

Understand your cashflow

Good cashflow management helps you to stay on top of your business finances and handle unexpected situations like natural disasters or a sudden change in the market. Managing your cashflow means setting time aside to record all your income and expenses on a regular basis, and comparing months, quarters, or years to see how much money came in, when it came in and what it was spent on.

You can also create a cash flow forecast. This will give you a future view of your business’s earnings and expenses, to help you budget.

A good cash flow forecast should show you:

your current cash in the bank
expected cash income from sales or loans and assets,
expected cash flow - which is a fancy way of showing the highs and dips of your cash reserves over time
your closing balance.

Business.govt.nz has a cashflow forecaster tool which can help visualise all your incomings and outgoings.

Watch now: Understanding your cash flow(external link) — business.govt.nz

Use the free business.govt.nz tool: Cash Flow Forecaster(external link) — business.govt.nz

How to prepare an invoice – and what to do if you don’t get paid on time.

Invoicing can be a struggle for many small businesses. This can lead to not being paid on time, and not having enough cash for really important things - like paying yourself and your employees. Be up front from the beginning, so there are no surprises when it comes to invoice time. For bigger jobs, you may wish a phased approach where invoices are split across the work – don’t be afraid to talk to your customer about a payment plan that works for you both - before the job starts.

Use the free business.govt.nz invoice template to make sure all the details you need to provide are given to the client in a way that makes it easy to follow, understand and most importantly – action.

If you’ve done everything right and your customer still hasn’t paid, you might need to make a valid payment claim. These have to be in writing, and include details about the work you’ve done, how much is owed and a due date.

Watch now: How to prepare an invoice(external link) — business.govt.nz

Quiz

1. When using competitor-based pricing, what strategies could improve your chances of getting the job?

Charge less than your competitor
Charge the same as your competitor
Charge more, but add benefits such as better customer service, or an earlier completion date than your competitors
All the above

2. When is the right time to talk to your clients about a payment plan?

When you give them your first invoice
After you have made a valid payment claim
Before the job starts
After the project is finished

3. What would be a reason to make a variation to a contract?

Changes to the terms agreed, such as timeframes and when payments are due
Changes to the level of quality and finish for the agreed project price.
Changes to the size or complexity of the job or the products to be used
Unforeseen circumstances that lead to additional work or delays
All the above

4. Can elective skills maintenance points be claimed for watching all 5 of these “Tips for Tradies” videos?

Yes, but you need to collect evidence that you have seen them in case you are audited – for instance “what’s the best thing I learned from each of them?”

Check answers