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When contractors call me for information about my Contractor Profit Advantage programs, the situation is typicallythe same. Their American dream of success, through ownership of their PHC contracting business, is turning into a nightmare because their business management protocols are bad, in part or in totality. Being a master of a trade does not make anyone a good business person. Good business people know how to manage businesses properly. Mismanagement causes stress and frustration.
When you entered the business arena, you invested your cash for startup expenses; your existing tools, truck etc.; your technical expertise; and sweat equity from the labor you supplied for your business without compensation. At the birth of your business, those investments are commonplace. However, you certainly wouldn’t work for another contractor who did not pay you for your labor. And, you would never consciously invest in a business that did not have the potential of delivering dividends on your investment. There comes a point (it should be no more than a year from startup of your business) when you must receive the proper salary you deserve for your labor, and begin to enjoy a return on your investment.
To do so requires you to price your services in a fashion which will cover your true cost and give you an opportunity to earn a profit above your true cost. Selling services at or below your true cost is the problem which will prevent you from attaining a return on your investment. This means you must make yet another investment — the investment of proper business protocols. The most important being knowledge of your true cost of operation.
Observing the industry, I have noticed that many contractors do not know their true operational costs and sell their services for minimally $30 less per tech hour than it truly costs them. Annually, that $30 shortchange minimally escalates to over $50,000 per tech. If you are in that category, you must change your ways.
Invest in your prices
Invest the time needed to properly identify all your tangible and intangible expenses. A tangible expense can be best described as an item or service you receive for a specific upfront amount of money. Example: you pay for a truck at a predetermined price. However, an intangible expense is more difficult to calculate due to a lack of specificity as to each intangible expense and its actual cost to your business. Callbacks and customer relations are examples of intangible expenses all PHC contracting businesses incur. Next, you must calculate your true operational cost in totality, and, per tech hour.
Note: The labor/overhead cost to place one qualified tech in a service vehicle in the U.S. ranges between $100 and $250 per tech hour (based on selling all your potentially available tech hours per year) at present dependent on your geographic location. If you thought your cost was less than $100/tech hour, you must correctly check your numbers.
Then, choose and apply a proper profit margin (one that will get you where you want to go) to your true cost to perform any task to arrive at a properly profitable selling price. What is a proper profit margin? Example – using the lower $100/tech hour of the aforementioned cost range and a 10 percent profit margin, your selling price for that hour should be $111.11 ($11.11 ÷ $111.11 = 10%). If you thought the selling price at a 10 percent profit margin should be $110.00, you would be using a markup on cost rather than applying a profit margin. The markup on cost method shortchanges your business by $1.11 per tech hour. In turn, you would annually shortchange your business by over $1,800 per tech.
In choosing your proper profit margin there are other things to consider. If you only sell 70 percent of your potentially available tech hours, that lower range cost of $100 per tech hour would really be $142.86 due to unapplied labor. Then, at a $110 or $111.11 selling price, there is a loss – no profit. If you only sell 70 percent of all your available tech time, you must have at least a 30 percent profit margin on your labor/overhead cost of $100/tech hour and sell that hour for $142.86 to just break even ($42.86 ÷ $142.86 = 30%). At 30 percent, the markup on cost method would give you a $12.86 loss per tech hour since your selling price would be only $130. In turn, your business loses over $21,000 per tech annually.
Invest in your sales ability
After establishing properly profitable selling prices, you must hone your selling skills and address consumer questions with integrity and intelligence in an effort to close more deals with consumers. Honestly and correctly presenting information to consumers will earn their trust, and make the closing of the deal much easier and faster.
Once you enter into a contract with the consumer, you should deliver excellence to that consumer.
Invest in your administrative duties
Next, you should focus on developing administrative protocols which will allow your business to tackle everyday responsibilities in a logical, organized and uniform manner which actually makes your job easier. When you get to the point where you have to hire employees, you must learn which assets you must look for in candidates for employment. Good employees represent your business well. Mediocre employees will bring that which you built up tumbling down.
Once you hire employees, you must know how to evaluate their performance in order to properly compensate them, or in the instance of poor performance, speak to them in an effort to rehabilitate them, or when all else fails, discontinue their employment. It sounds simple, but, you have to do all those things correctly. If you don’t, you will have difficulty paying yourself properly, and attaining a proper return on your investment will be impossible.
Invest in assistance
If you think you need assistance in getting these things done, call me to discuss your situation. The initial call doesn’t cost anything but your time. I created my Contractor Profit Advantage (CPA) programs as a cost-effective way to show contractors how to improve their business results. My CPA programs include my book “Solutions Management Theories & Methods for The Contracting Business”; two copies of my “Readily Available Pricing Information Digest” (a price guide customized to your labor/overhead costs, profit margin and average travel time); a telephonic workshop (or workshops dependent on which program) to enhance your business skills; and a 25 percent discount on any of my other consulting products and services rendered during the term of the program.
Contractors, who have availed themselves of my consulting/coaching assistance and understood and properly implemented the theories and methods I showed them, have increased their revenue by minimally 30 to 70 percent. The cost is a minimal investment in your business future and best explained by an old adage which claims, “You must spend money to make money.” Your cost is dependent upon which areas you need help. When you call I’ll be able to answer the cost question as per your needs.
To give you an idea of your monetary investment on an hourly basis, I have created the following chart based on the $1,200 fee for my Contractor Profit Advantage (CPA) Program #1. The chart shows the number of techs employed, annual available tech hours and the investment amount per tech hour. The last column shows the potential minimum annual return on investment using the aforementioned $30 shortchange per tech hour.
Investing in, understanding, and properly implementing the theories and methods of the program could present you with the opportunity to potentially increase your annual revenue per tech by $51,240. With two techs that same $1,200 investment could return over $100,000 annually. Those are great returns on investment.
CPA program packages offer the best deals. However, if you are interested in individual components of my programs or any coaching services, that too is available. For further information, just give me a call. Remember that initial call doesn’t cost you anything but your time. Regardless of whether or not you use me as your coach, make sure you invest the time into your business to enhance your future by managing your business properly.
Richard P. DiToma has been involved in the PHC industry since 1970. He is a contracting business coach/consultant and an active PHC contractor. For information about the Contractor Profit Advantage or to contact Richard: call 845-639-5050; e-mail firstname.lastname@example.org; mail to R & G Profit-Ability, Inc. P.O. Box 282, West Nyack. NY 10994.