Cost floor vs target price: pricing an industrial electrical tender backwards from margin

Steve Parker
Jul 4
8 min read

Updated: Jul 9

An electrical subbie tendering an industrial additions-and-alterations package wanted the price built from evidence, not market feel. We established a cost floor of about $180–190k and set the tender target backwards from the margin decision — landing in the $320–340k band, with every soft line flagged as indicative before signing rather than discovered as a loss after.

By Steve Parker · Trueworks · NZ construction estimation · 7 min

What you'll learn in this case study

What a cost floor is — materials plus labour at known rates, zero margin — and why it is the only number worth defending in a tender
How to set a target price backwards from a gross-margin decision instead of guessing downwards from what the market might pay
Why firm and indicative lines must be visibly separated for whoever signs the tender — and how a silent indicative line eats margin

Quick answer: An electrical subcontractor was tendering the electrical package for additions and alterations to an industrial building in an East Auckland industrial estate — a project-managed tender for a commercial landlord's tenant works. Rather than checking a finished price, we built it with them. The bill of materials came off the drawings; supplier pricing was locked with a sole supplier chosen after a multi-supplier comparison; labour was priced at known crew rates. That produced a cost floor of about $180–190k — materials plus labour, no margin. The tender target was then set backwards from the subbie's gross-margin target, in the low-to-mid 40s percent: target price = cost floor ÷ (1 − GM), landing in the $320–340k band. About $10–15k of work could not be firmly priced from the documents — distribution-board modifications, fire-alarm battery backup, a roller-door power feed — so those lines were flagged as indicative in the tender note rather than silently treated as firm.

The tender

The job was additions and alterations to an industrial building in an East Auckland industrial estate: a commercial landlord upgrading a tenancy, with the works run as a project-managed tender rather than a traditional head-contract package. The electrical scope covered new distribution, lighting, power, and the interface work that alterations always drag in — tying new circuits into existing boards, extending fire-alarm coverage, and powering the tenant's incoming plant.

The subcontractor's question was not "check my price." It was earlier and better: help me build the price so I know what it is made of. Plenty of trades price the other way — start from what the job feels like it should go for and work backwards to convince themselves the costs fit. The discovery that they do not usually happens on site.

We agreed a structure before any numbers moved: first a cost floor, then an explicit margin decision, then a target price — three separate steps, each visible to the person signing the tender.

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What we found

The cost floor came out at about $180–190k. We took the bill of materials off the drawings line by line — distribution, cable and containment, luminaires, accessories, fire-alarm interface, plant connections. Supplier pricing was locked with a sole supplier chosen after a multi-supplier comparison — one supply document, one revision chain. Labour was built from known crew day rates against measured installation quantities, not from a percentage of materials. The result is the floor: what the job costs to deliver with zero margin. Below that number, the subbie is paying to do the work.

The margin decision was made separately and explicitly. The subbie's gross-margin target for tendered work sat in the low-to-mid 40s percent. The target price followed by arithmetic: target price = cost floor ÷ (1 − GM). On a floor of about $180–190k, that lands the tender in the $320–340k band. Note the direction — divide by (1 − GM), never multiply cost by the margin percentage; the markup-versus-margin confusion silently costs a third of the intended margin.

A handful of lines could not be firmly priced — and we said so. About $10–15k of scope was not resolvable from the tender documents: modifications to an existing distribution board of unverified internal condition, battery backup for the extended fire-alarm coverage, and a power feed to a roller door whose specification was still with the supplier. Those lines were priced as best they could be and flagged INDICATIVE in the tender note, with the assumption behind each stated in one line. The alternative — folding them into the total as if firm — is how margin evaporates: an indicative line silently treated as firm becomes a fixed price for undefined work.

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How to price backwards from margin on your own tenders

Build the floor first, and keep margin out of it. Materials at locked supplier pricing, labour at real crew rates against measured quantities. Resist padding individual lines "to be safe" — hidden padding makes the floor unreadable, and an unreadable floor cannot be defended.

Make the margin decision on one line. Gross margin reflects overhead recovery and risk appetite — a business decision that deserves its own line, separate from the estimate. When margin hides inside rates, nobody can say afterwards what the job was priced to earn.

Divide, don't multiply. Target price = cost floor ÷ (1 − GM). At a floor of about $185k and a GM target in the low 40s percent, that is roughly $325k. Multiplying the floor by the same percentage instead gives about $265k — a price that looks profitable and quietly is not, to the tune of about $60k of intended margin.

Separate firm from indicative, visibly. Any line priced from an assumption rather than a document gets flagged, valued, and listed in the tender note. Whoever signs should be able to see in ten seconds how much of the total is firm and how much is conditional.

Sanity-check against the market last, not first. Once the target exists, ask whether it wins work. If the market number sits below the floor, the answer is not a keener spreadsheet — it is a decision about whether to buy the job, made with open eyes.

What it costs when it's caught late

| Stage caught | Cost range | Why | |---|---|---| | At tender | ~$1–3k | Estimation effort to build the floor and structure the margin decision properly | | Post-award | ~$10–20k | Indicative lines are now inside a fixed price; renegotiation happens from a signed position | | On site | ~$20–40k | Distribution-board and fire-alarm scope resolves itself under programme pressure, priced by whoever turns up | | At final account | ~$30–50k | Markup-versus-margin confusion and absorbed indicative work surface as a gross margin far below target | | In dispute | ~$50k+ | Arguing entitlement on lines that were never firm, with professional fees on top of the absorbed cost |

Five checks before you sign a tender price

State the cost floor as its own number — materials plus labour at known rates, zero margin — and file how it was built.
Set the target with the division formula: cost floor ÷ (1 − GM), never cost multiplied by the margin percentage.
List every indicative line with a value and an assumption, and confirm the signatory has read the list.
Lock supplier pricing before the tender goes in, and note the validity period against the expected award date.
Compare target to market last, and record the decision if you deliberately price below target to win the work.

FAQ — cost-floor tender pricing

Q1: What exactly counts as the cost floor? Materials at locked supplier pricing plus labour at real crew rates against measured quantities, with no margin and no hidden padding. Site overheads that scale with the job — access equipment, consumables, supervision time — belong in the floor too. Anything below this number means delivering the job at a loss.

Q2: Why set margin as a separate step instead of building it into the rates? Because a margin hidden inside rates cannot be managed. When the main contractor pushes for a discount, a subbie with a visible floor knows exactly how much room exists; a subbie with padded rates is guessing. The margin line is also where the business decision — overhead recovery, risk appetite — lives, and it belongs to the owner, not the estimator.

Q3: What is the difference between margin and markup again? Margin is measured against the price; markup is measured against the cost. A gross margin in the low 40s percent requires dividing cost by something near 0.57 — equivalent to roughly a 75 percent markup on cost. Applying the same percentage as a markup instead produces a margin of only about 30 percent of price.

Q4: How should indicative lines be presented in the tender? Priced, flagged, and listed: each line with its approximate value and the assumption it rests on, gathered in a short tender note. On this job that was about $10–15k across distribution-board modifications, fire-alarm battery backup, and a roller-door feed. The flag keeps the conversation open when scope firms up; silence converts assumption into fixed-price risk.

Q5: What if the market clearly won't pay the target price? Then the decision is explicit: hold the target and accept a lower strike rate, or price below target knowingly and record why — a strategic client or a quiet forward workload. What the method prevents is the third option: drifting below the floor without noticing and finding out at final account.

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About Trueworks

Trueworks is built by Steve Parker — 20 years on the analytical side of NZ construction. Variation reviews, contract advisory, programme review, and document-heavy estimation work. Trueworks is the productisation of that practice for NZ trades and builders: the same defensible analysis, at a price and pace a working contractor can actually use.

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