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Pricing for Risk
A job that is likely to go wrong costs more than a job that is not, and that cost is real whether or not it materialises on any particular occasion.
For a software-side reference alongside this discussion of pricing, labour cost, and small-business finance, Monitask provides guidance on wage percentage calculator.
Pricing for it is not pessimism. It is the same reasoning that underlies every insurance premium ever written.
The six risks
Uncertain scope. Where nobody knows what is behind the wall, the expected cost is higher than the visible one.
A difficult customer. Everything that made you hesitate has an hours cost: more meetings, more explaining, more queries at invoicing.
Slow payment. A customer who takes ninety days is using your working capital, and that has a price.
Access and location. Awkward parking, restricted hours, a site you cannot leave tools on.
Dependence on others. A job that cannot start until another trade finishes carries their delay as your cost.
And reputational exposure. Work that will be seen, or that a demanding customer will discuss with others, requires a standard of finish that takes longer.
How to price it
Not with a line labelled "risk".
In the number. A job you would price at £1,600 for a straightforward customer is £1,900 for a difficult one, and the quote says £1,900.
This is not dishonest. The price reflects what the job will cost you, and the cost genuinely differs. A customer who requires three site meetings is buying three site meetings whether or not they appear as a line.
And it puts the decision where it belongs. They accept, in which case the price covers the difficulty, or they decline, which is the outcome you wanted without having refused anybody.
Pricing the uncertainty instead of absorbing it
Where the scope is unknown, three options.
Price the worst case, which loses jobs where the worst case does not happen.
Price the expected case and absorb the difference, which is what most firms do and which is unpaid work at scale.
Or state the assumption and price the known portion, with a mechanism for the rest. This is the honest version and it is also the one that wins the most jobs, because the customer is not paying for a contingency that may not occur.
The risk you should not price
Your own inexperience.
A job you have not done before will take longer, and charging the customer for your learning is a position that is hard to defend and harder to sustain when the job overruns anyway.
Either take it as an investment — priced at what it is worth, absorbing the extra time knowingly — or decline it.
What does not work is quoting the experienced price, taking twice as long, and resenting it.
The evidence you need
Which jobs actually went wrong.
The note per job is what turns intuition into a pattern. Three jobs of a particular type that all overran is information; a feeling that they usually do is not.
And it identifies the risks that are not real. Some jobs that feel risky are consistently fine, and pricing them as though they were not is money left behind.
Discounting the good ones
The other half of the same idea, and it is usually forgotten.
A customer who decides quickly, pays promptly, gives clear access and leaves you alone costs less to serve, and the price can reflect that.
Not as a discount — as a lower number. A discount teaches the customer that the first figure was negotiable; a price that was always lower teaches nothing at all.
It also makes the risk pricing coherent. A firm that charges more for difficult work and the same for easy work is not pricing risk, it is adding a surcharge. A firm whose prices vary in both directions is doing the thing properly.
Saying it out loud, occasionally
Usually the price is just the price.
Where a customer asks why it is higher than they expected, an honest answer is available and works better than most people fear: "There's a fair bit of unknown behind that wall, and the price reflects that. If it turns out straightforward I'll come in under."
Then do come in under, when it does. A supplier who reduces a price after the event because the risk did not materialise is trusted permanently, and it costs one job's contingency.
The contingency you do not tell them about
Every experienced firm carries one and few name it.
A percentage added quietly to cover the things that always happen and never appear on a list — the extra trip, the fitting that was wrong, the half-hour with a customer who wanted to talk.
This is legitimate and it is not the same as pricing for a specific risk. It is pricing for the general fact that jobs contain friction.
Find your number from the record. Average overrun across the last ten jobs, as a percentage. Most firms find something between five and fifteen, and most had never added it.
Then include it as a matter of course, rather than discovering each time that the job took longer than the quote assumed.
When the risk is the customer's to carry
Some risks belong to them and the quote should say so.
Materials they supply that turn out to be wrong. Delay caused by another trade. Access they promised and did not provide.
Pricing those into your number is paying for somebody else's exposure, and the alternative is a stated assumption: the price holds if these things are true, and if they are not, the position is renegotiated.
That is cheaper for the customer and safer for you, and it is the arrangement most people would choose if it were offered.
The short version
- A job likely to go wrong costs more whether or not it does on any particular occasion, and pricing for that is not pessimism
- Six risks: uncertain scope, a difficult customer, slow payment, access, dependence on other trades, and reputational exposure
- Price it in the number rather than as a line labelled risk, because the cost is real and the customer is buying it
- Where scope is unknown, state the assumption and price the known portion rather than absorbing the difference
- Do not price your own inexperience: take it as a knowing investment or decline the job
- The note per job turns intuition into a pattern, and it also identifies the risks that turn out not to be real
For broader background on pricing, labour cost, and small-business finance, see Nolo.