Pricing your customer solutions properly is one of the most important aspects of operating a profitable contracting business. SolarNexus provides two basic approaches for pricing your solutions:

1. Gross Price Input
2. Cost Items

This article covers the Cost Item approach. See Solution Pricing - Gross Price Input Method for details on that approach.

 

About Pricing with Cost Items

While the Gross Price Input method is a great way to start with SolarNexus, SolarNexus strongly recommends pricing using the cost item method for pricing your customer solutions. Why?

• Easier to centrally maintain over time
• Limit sales person discounting
• Give sales persons clear view of commissions and effect of discounts on commissions
• Can ensure pricing is responsive to customer and site specific variations that affect price
• Enforces pricing consistency across staff
• Provides structure for job costing to feed back into pricing to improve price accuracy

SolarNexus provides very powerful features for centrally defining detailed customer pricing models. This article outlines how to create and manage solution pricing templates using cost items. The required activities include:

1. Understand how customer prices are built in SolarNexus prior to building your own (that's what you learn here in this article).

2. Create Custom Products - You define products to represent your labor and material cost items that make up your direct project costs.

3. Define Global Indirect Project Costs - Your indirect costs include overhead, profit, and sales commissions. These are added to the project's direct costs.

4. Create Service Offerings - Your service offerings include the products that list the direct costs for implementing your projects. Each cost item group provides an opportunity to over ride the globally defined default indirect project costs defined in Project Settings.

Note that we also provide SolarNexus Defined Service Offerings that you can copy and use. A small number of them, particularly the "Roof Mount PV System" also has a corresponding cost-item model. Most accounts already have this service offering and its corresponding cost items copied. To reflect your own company's costs for the cost items, use this Google Worksheet to input your own labor and material rates into the input cells. The spreadsheet then incorporates your own labor and material rates into the respective unit costs for all the cost items used in our pre-defined service offerings. You can then copy the unit costs from the spreadsheet to the corresponding items in your catalog. You can use the CSV export/import to facilitate the bulk update.

5. Create Solution Template(s) - Create solution template(s) that enforce your cost item pricing model.

5. Maintain Cost Items using Job Costing - COMING SOON

Cost Item Method

SolarNexus strongly suggests building your customer price model(s) into SolarNexus using the Cost Item method. This is a typical best practice approach to determining your customer's sale price for the project's scope of work you are offering.  

• Benefits: Excellent price modeling framework to implement a scientific approach to pricing jobs to ensure profitability. Centralizes control over pricing model - ensuring all employees price customer solutions consistently, system instantly distributes pricing updates to sales team (no activities needed to see that sales people get changes), more granular data on pricing available in reports.
• Drawbacks: Time consuming to initially create.

The cost item approach provides a much richer stack of price components than the gross price method. The graphic below shows the breakdown of price components for a sample project using the cost item method (dollar amounts and percentages are just representative).

What are Direct and Indirect Costs?

Direct costs are what the project costs your company for the labor and material items that are directly attributable to a single project. These are the "cost items" that give this pricing method its name.

Indirect Costs include Profit, Overhead, and Sales Commissions. Overhead is the portion of the cost stack that is shared across all your solutions, this includes rent, general and administration, marketing, etc.

Indirect Costs are attributed to a solution's price at the Cost Item Group level. That is, each cost item group has its own indirect cost markups associated. SolarNexus provides a default set of values for indirect costs that are assigned to all cost item groups, defined by an administrator under Administration > Project Settings > Indirect Costs. When defining the cost item groups for your Service Offerings, you can input different indirect cost markups on each group that override the default values. These features allow you to account for differences in profit and overhead markups for various parts of the scope of work.

For information about how to define your indirect costs, see Indirect Costs and Standard Discounts.

 

How Amounts are calculated

Conceptually, a Solution's Sub-Total = Direct Costs + Indirect Costs, where:

A) Direct costs = company cost item 1 + company cost item 2 + company cost item 3 + etc
B) Indirect costs = sum of overhead + profit + sales commission (if any)

Note that the percentage rate given for overhead, profit, and commissions are percentages of the solution's sub-total, NOT percentages of the direct costs.  This means that a 20% overhead rate on a $10,000 retail price is $2000 (0.20 * 10,000).

Sales commissions are set administratively as a percentage of profit.  

To find these amounts, SolarNexus first calculates the Sub-Total using only the Direct Costs (known from the cost items) and the given rates of indirect costs:

Solution Sub-Total = Direct Cost / (1-(overhead rate + profit rate + commission rate))

When discounts are applied, the result is an Adjusted Sub-Total. Profit and sales commissions are reduced by discounts. So the individual indirect costs are calculated as follows:

• Overhead = Sub-Total * overhead rate
• Profit = (Sub-Total * default profit rate) - Discounts
• Commission = Profit * commission rate

Subsequently, we find a total retail cash price:

Total retail cash price = Adjusted Sub-Total + Shipping + Permit Fee + Sales Tax

Where:

• Shipping = your input value
• Permit fee = your input value (may be filled in by default by administering default permit fees for Authorities Having Jurisdiction, under Administration)
• Sales tax = sales tax rate * total company cost of all the taxable items (cost items are either taxable or not)

Sales Tax

SolarNexus only calculates sales tax when using the cost items pricing approach. The price of a system is made up of two distinct pieces - taxable items (usually materials) and non-taxable items (usually labor). Sales tax is only applied to cost items marked as taxable. To get the sales tax amount, SolarNexus sums the "company cost" value for all taxable items (the company cost is supposed to be what your company pays for this item). SolarNexus applies the input sales tax rate ONLY to the company cost portion.

This means in practice that you are charging the customer your wholesale cost for the taxable items. This is the lowest possible sales tax you can charge customers (its as if you paid sales tax when acquiring your taxable items). This means that the overhead, profit, and sales commission amounts are excluded from sales tax.

If your company has inputs customer retail pricing into the "company cost" field for cost items in the Company Catalog, then sales tax will be charged on the marked up customer price, rather than your company's cost. If your company wishes to input customer price into the company cost field of cost items, then you should ensure that your Project Settings have 0% markup rates for overhead and profit, otherwise there will be double markups. While you can choose to use the SolarNexus pricing functionality this way, SolarNexus STRONGLY recommends against it because it causes you to charge more sales tax than is absolutely necessary and it makes pricing components difficult to manage and to make accurate.

Discounts

A user may apply a predefined standard discount (for example, $250 discount for yard sign), or manually enter discounts to cost item defined prices. However, the model can be defined to automatically limit the amount that can be discounted on any solution. The limit is defined by the Minimum Profit % defined in the Indirect Costs. When initially created, SolarNexus adds the default profit amount defined in its Indirect Cost Rates. The difference between the Default Profit and the Minimum Profit is the allowable discount amount for that solution. There is no maximum profit.

Why does SolarNexus limit the amount of discounts? We feel that contracting is fundamentally different type of business than others. A retail store may occasionally discount products to sell at a loss because its the cheapest cost for them to clear shelves needed for new inventory. Contractors generally don't sell products directly, but instead sell building projects where their time and personnel must be spent on profitable projects, rather than unprofitable ones. Opportunity cost must be factored in.

 

Loan Fees (and "Cash Discounts")

Loan / dealer fees charged by finance companies are separate elements. See About Loan / Dealer Fees for more information. The notion of "cash discounts" is also discussed.