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The reasons contractors say they decided to go into the PHC contracting business vary. Some say they entered the business arena to continue the business started by a relative. Others, who graduated from a technical school and worked in the trade for a PHC contractor, claim they didn’t want to have their employer earning money from their labors. Several have told me they had been laid off by their employer and believed they had no other choice but to sell their skills on their own. And then, there are the entrepreneurs who have an energetic need to lead a business. Those are the reasons I’ve heard. Yours may be one or any combination of those.
Regardless of which you claim as yours, the common denominator, which equalizes all of us in the den of inequity known as the PHC contracting business arena, is the operational costs incurred to manage a business. The inequity arises from the procedures improperly utilized by each individual contractor.
Since two plus two only equals four — never less and never more — you might wonder if we are truly equalized in cost why the prices charged by contractors are so varied. The cause of widely varied prices for the same task stems from the fact that most contractors do not know how to properly identify their true cost and develop properly profitable selling prices. For example, some contractors actually advertise they will clear any drain for $99. How is that possible? The truth is they can clear drains for $99, but they cannot cover their cost to perform that task let alone earn a profit doing it.
Analyzing the $99 drain cleaning
Let’s analyze that $99 price for clearing any drain. There are states in the USA who are implementing a minimum wage of $15 per hour for people, with no formal training, to serve hamburgers in fast food restaurants. You can’t hire qualified PHC service techs for $15 per hour. Let’s say you pay $25 an hour for a qualified tech. By the time you add salary expenses such as FICA matching funds - liability, worker’s compensation, unemployment, disability and health insurances - and, take into consideration the fact that although you pay your tech for 2080 hours per year, you only have 1708 maximum potentially productive hours per tech annually (2080 minus 128 hours for vacation/holiday and 244 hours for non-revenue producing responsibilities) to sell. That tech really costs you minimally $43 per hour. If you sell only 70 percent of your available hours per tech annually that cost becomes $61.43/tech hour.
The $43/tech hour cost does not include overhead expenses for vehicles; administrative labor, rent, utilities, office supplies and equipment; communications; advertising; professional services of accountants, lawyers, consultants etc.; and a myriad of miscellaneous expenses. Overhead minimally costs $75 per tech hour. But, by scrimping, cheating yourself and not taking everything into consideration, you might arrive at an overhead cost of $57/tech hour. Therefore, the minimum cost per tech hour in the USA for one qualified tech/truck is $100 if all available tech hours are sold all the time. It probably is higher. At only 70 percent of time sold, that minimum cost for labor and overhead per tech hour would jump to $142.86.
Utilizing contract pricing (flat rate) properly, average times to perform tasks must be considered in order to price jobs correctly. That means neither the shortest nor longest time, but, the average time. To arrive at this time factor, you must add all the times to perform a specific task and divide that amount of time by the number of times the task was performed for that accumulated time. Example: If your accumulated time to perform a specific task was 1000 hours and you performed the task 500 times, your average time to perform that task would be two hours even though some of the jobs were done in less than two hours and some in over two hours.
Since I produce the Readily Available Pricing Information Digest price guides for contractors, I have tracked specific tasks times for decades. Taking into consideration all task times for clearing a kitchen drain line of maximum 20" from knocking on the consumer’s door to walking out of their home upon completion, including the longest and shortest times, the average time, inclusive of speaking with the consumer; writing up the invoice and having the consumer sign the authorization of the specific service at the agreed price; bringing in the tools; preparing the work area; performing the service; testing the results of the performance; cleaning up the work area; and, getting paid, is 1½ hours. To that, the average travel time must be added.
The $99 drain cleaning contractor was obviously advertising a contract price. If his/her average travel time was only 15 minutes, his/her cost, using the aforementioned minimum $100 labor/overhead cost per tech hour, would minimally be $175 ($100 x 1¾ hours). That’s a minimum average loss of $76. If his/her hourly labor/overhead cost was higher, his/her loss would be higher.
But, for argument’s sake, let’s say the average task time was only 1 hour and the travel time still only 15 minutes. The cost to that contractor would be $125 and still be higher than the $99 he/she advertised, in which case, the minimum average loss would be $26.
You might wonder how these types of contractors can continue in business while pricing in this ridiculous manner. The answer is simple since they must recover their costs somehow. One method they might implement is to practice bait and switch techniques once they arrive at the consumer’s home or business. Tell the consumer a tale which negates the $99 advertised price and replace it with a higher price. But, that’s dishonest and illegal.
Another way is to price other jobs higher than they should be in order to cover losses accumulated by the $99 drain cleaning price. That’s not fair to other consumers who have other services performed. Therefore, the $99 drain cleaning price is too good to be true for consumers, harmful to the image of the industry and absurd since it is not based on the fundamentals of mathematics and common sense.
The “not so free” estimate
And then, we have the not so brilliant low self-esteem free estimate contractor who makes the $99 drain cleaning contractor look like a brain surgeon in comparison. At least the $99 drain cleaning contractor received $99. When consumers are only window shopping, the low self-esteem free estimate contractor receives no money for his/her time and expertise because he/she engages in poor business practices.
If your average time to drive to a consumer’s home or business is 15 minutes, and, you spend just 30 minutes discussing their requests, at a cost to you of $100/tech hour, you would have spent $75 to bring in nothing.
The real reason you went into business
These practices fly in the face of the real reason intelligent and honest contractors go into the PHC contracting business.
As a contractor, you should always perform in an exemplary manner which requires honesty, legality and equity. To be honest you must first be honest with yourself as to your true operational costs and the real reason you entered the business arena — to bring into your business more money than you spend operating your business. To be legal, you must not practice in a fraudulent manner. Since fair is a two-way street, good business management requires you to be fair to yourself as well as your client.
If you need help fulfilling your quest for a contractor profit advantage so you can bring in more money than it costs you to operate your business, call me.
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.
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