How to Price Work That Will Be Paid in Sixty Days

Why this matters

Two jobs, identical scope, identical hours, identical parts. One is paid at the door. The other is paid seventy-odd days after your last cost went out. Priced the same, they do not earn the same, and the difference is not small enough to ignore or large enough to notice job by job, which is exactly the shape of a leak that runs for years.

There is also a wrong way to fix it that a lot of shops try first: a late fee, or an interest clause in the terms. A public institution will not pay contract interest. Where interest is owed on a late public payment, it is owed under a prompt payment statute rather than under your terms, and it is owed only when the payment is late by that statute's definition - a payment that arrives on day seventy exactly as agreed is not late and carries no interest at all. The carry on agreed-to slow terms has to be inside the price. This is how you calculate what to put there.

Build the worksheet below once per account, not once per job. The output is a single percentage you apply to that account's pricing.

Row 1: measured collection lag, in days

Not the stated terms. The number of days from the day your last cost was incurred on a job to the day the cash cleared your bank. Pull twelve months of that account's invoices and take the median rather than the mean, because two disputed invoices will drag an average badly. Keep every value in this worksheet in days.

If you have not measured it, you cannot do the rest of this, and the guess people make is always low. See related: Net Terms and What They Do to a Small Shop's Cash Position.

Row 2: funding days per cost component

Lag measures cash in. What you are financing is the gap between each cost going out and that cash coming in, and the components do not go out together.

• Labor leaves on your payroll cycle, so on average a few days after it is worked. Funding days are close to the full lag.
• Material leaves when you pay your supplier. On supplier net-30 you are financing it for meaningfully fewer days than labor, and if you buy it before the job starts, that shortens further.
• Subcontract and other direct cost varies with each party's terms; use their actual terms, not an average.

Splitting these matters because material and labor are usually a large share each, and treating both as fully financed for the whole lag overstates the carry by roughly a third on a material-heavy job. Overstating it is not safe, it just makes you uncompetitive on the account you were trying to keep.

Row 3: your cost of capital, as an annual percentage

Use the rate on the facility you would actually draw. If you fund the gap on an operating line, that is the line rate. If you fund it out of cash you would otherwise leave in an interest-bearing account, the correct rate is what that cash was earning, which is lower and makes the adder smaller. If you fund it by paying suppliers late and losing early-payment discounts, the effective rate is much higher than a line rate and you should compute it before assuming it is cheap.

Row 4: carry percentage per component

Funding days divided by 365, times the annual rate. That gives the carry as a percentage of that component's cost.

Row 5: weight each component by its share of the sell price

Multiply each component's carry percentage by that component's share of the sell price. Sum them. The result is the carry as a percentage of the sell price, which is the form you can actually add to a rate.

Row 6: add the administrative cost of the terms

This is the row shops leave out, and on most institutional accounts it is a larger number than the interest. A residential ticket takes minutes of office time. An institutional invoice takes purchase order verification, portal entry, receipt chasing, and a share of the rejections. Measure the office hours the account consumes in a year, subtract what the same revenue would have consumed at your ordinary mix, and express the difference as a percentage of that account's field hours. Then convert to cost using what an office hour costs relative to a field hour in your shop.

Row 7: convert to a price uplift, then sanity-check against margin

The carry is expressed as a percentage of the sell price, so raising the price by exactly that percentage does not fully cover it - the uplift raises the base the percentage applies to. Divide the carry percentage by one minus the carry as a fraction to get the uplift. Then divide the carry by your gross margin percentage to see what fraction of margin the terms consume. If that fraction is uncomfortable, the answer may not be a price change at all; it may be a cadence change.

Worked example: the filled worksheet

A shop's institutional account, priced from a sell price broken down as 30 percent material, 45 percent direct labor with burden, 5 percent other direct cost, 20 percent gross margin.

Row 4, carry per component: labor, 74 divided by 365 times 12 percent equals 2.43 percent of labor cost. Material, 53 divided by 365 times 12 percent equals 1.74 percent of material cost. Other direct, 78 divided by 365 times 12 percent equals 2.56 percent.

Row 5, weighted to the sell price: labor 2.43 percent times a 45 percent share equals 1.10 percent. Material 1.74 percent times 30 percent equals 0.52 percent. Other direct 2.56 percent times 5 percent equals 0.13 percent. Total interest carry, 1.75 percent of the sell price.

Row 6, administration. The account produced 40 invoices last year at about 0.6 office hours each, against about 0.15 office hours for a comparable residential ticket, so 24 office hours where the ordinary mix would have used 6. The extra is 18 office hours. The account consumed 900 field hours, so that is 2.0 office hours per 100 field hours. At an office hour costing about 60 percent of a field hour in this shop, that is 1.2 field-hour-equivalents per 100 field hours, or 1.2 percent added to labor cost. Labor is 45 percent of the sell price, so 0.54 percent of the sell price.

Total carry, 1.75 plus 0.54, equals 2.29 percent of the sell price. Row 7: the uplift needed is 2.29 divided by 0.9771, which is 2.34 percent, so raise this account's pricing by about 2.3 percent. Against a 20 percent gross margin, the untreated carry was consuming 2.29 divided by 20, which is 11.5 percent of gross margin - a little under an eighth.

Where the number came from matters more than the number. Notice that administration was almost a quarter of the total carry here (0.54 of 2.29) despite feeling like nothing. Notice too that if this shop had treated material as financed for the full 78 days rather than 53, the material line would have read 0.77 percent instead of 0.52, and the total would have come out about 11 percent high. Both errors point the same way: the components that feel negligible individually are where the accuracy lives.

What would flip this. If the same institution pays small work orders by purchasing card on receipt rather than through the invoice cycle, lag collapses toward a handful of days and both the interest carry and most of the administration disappear - the correct adder on that slice of work is near zero, and applying the 2.3 percent to it would price you out of exactly the easy work you want. Run the worksheet per payment channel, not per customer name. In the other direction, if you fund the gap by factoring the receivable rather than on a line, the factoring discount replaces Row 3 entirely and is typically several times a line rate, which usually means the right response is to fix the cadence rather than to price the factoring in.

The mistake this replaces

The common alternative is a flat commercial multiplier applied to everything institutional. It is directionally right and it fails in both directions: it overprices the fast-paying card work and underprices the account whose lag is 110 days because its receipt step is broken. A shop that applies one blended uplift never learns which account is expensive, because the blend hides it.

The second mistake is pricing the carry and then not defending the cadence. The adder assumes 78 days. If invoicing slips to monthly batching, lag grows by roughly two weeks and the adder you calculated no longer covers it, which means the price is now wrong in a way nobody will notice for a year.

How to verify you got this right

Re-measure Row 1 every twelve months, and re-measure it immediately after any change to how you invoice the account or how they receive. Those two events move it more than anything else.

Then run one back-check: take the account's total delivered field hours for the year and its total gross margin percentage, and confirm that the margin you actually realized on that account is within about a point of your shop average after the uplift. If it is still trailing, the gap is not carry and you should stop tuning this worksheet. It is more likely scope creep on a standing agreement, or unbilled work, and those are different problems with different fixes.

References

• Prompt Payment Act, 31 U.S.C. chapter 39, and 5 CFR Part 1315, which govern interest on late federal agency payments to prime contractors; state prompt payment statutes vary in scope, trigger and rate
• U.S. Small Business Administration, working capital and cost of capital guidance for small business
• See related: Net Terms and What They Do to a Small Shop's Cash Position, What a Vendor Portal Wants and Why Invoices Come Back, Unbilled Work: The Hidden Cash Trap