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Rick C., a plumbing contractor in California, writes: “Wanted to drop you a line to say thanks for all the helpful articles over the years in PHC News; I go straight to them when I open the magazine. I got my contractor’s license in 2009 and have implemented your contract pricing throughout that time and couldn’t agree with you more. Thanks again for the wisdom.”
Thank-you, Rick, for your kind words. Allow me to impart some of what I like to think of as sagacious theories and methods regarding the calculation of contract prices.
Great chefs want to deliver delicious, memorable culinary repasts and excellent ambiance to patrons of their eating establishments. To accomplish this, the premises in which they serve their epicurean feasts must be clean, organized and bedecked with elegance. And their culinary delights must be properly prepared with top quality and specifically measured ingredients. It’s the reason they are great chefs and that customers keep coming back.
PHC service contractors also are in the business of serving. And to be a great PHC service contractor, you must deliver excellence in your workmanship. You must provide top quality in the material you use to serve the public while maintaining a professional flair in the minds of consumers so they think of you first whenever they require plumbing, heating or cooling services.
Before arriving at each dish's price, great chefs need to measure the ingredients and incorporate the proportionate labor/overhead and food cost as it pertains to the dish to charge more for it than it costs them to create it. That’s only logical.
Since PHC industry fundamentals are steeped in logic, great PHC service contractors are compelled to measure their true costs before quoting the price of any task. To do so, they must calculate their operational costs and measure the proportionate cost as it pertains to each task.
Calculating per-task costs
Let’s enumerate the steps you need to follow to properly measure the cost you incur for any task.
The first step is to correctly calculate your true labor/overhead cost of operation in totality and the proportionate amount as it pertains to each hour. The contract price of any PHC task should be calculated in the estimated average time spent on labor and overhead, blended with the average material used and the desired profit margin.
When performing this step, it is imperative not to leave any legitimate operational costs out — both tangible and intangible. This means what you pay actual dollars for as well as what costs you in some other fashion. It is best described by the adage, “Time is money.” After all, callbacks are an example of an intangible business cost.
Once you’ve added up your total cost of labor and overhead, you must divide it by the number of hours you have available to sell, which will be your hourly labor/overhead cost. I suggest you use the maximum hours you have available since that is the only constant. In any given period, you don’t know how many hours you will actually sell until after the fact.
Considering a 40-hour week and 52 weeks in a year, there are 2,080 potential revenue-producing hours. However, two weeks for personal time and six holidays a year use up 128 hours or 16 days. That leaves you with only 244 potential revenue-producing workdays per tech each year.
Add the fact that at least 1 hour/tech/day is lost to nonrevenue-producing duties such as checking out vehicle systems, replenishing vehicle inventory, interaction with the office, etc., you wind up with another 244 hours of non-revenue producing time.
The result? You pay for 2,080 hours of expenses but only have 1,708 maximum revenue-producing hours per tech (2,080 hours less 372 nonrevenue-producing hours) to recover your operational costs and make a profit.
The next step is to choose a profit margin that can get you where you want to go. Consider the profit you would like to attain after you recover your cost and the unapplied labor that affects your bottom line. And if you plan on offering discounts, your profit margin must be adjusted to accommodate the discount.
With time and accumulated data, you will be able to estimate the average number of hours you sell annually. This will help in choosing your profit margin. If you only sell 70 percent of your maximum available hours, you will need a 30 percent profit margin to recover your labor and overhead costs. And since you are in business to bring in more money than it costs you, you will have to use a profit margin higher than 30 percent if you only sell 70 percent of your available time.
I know there are contractors who believe that if they don’t sell all their tech hours all the time, it must be their fault. But it’s not true. All businesses experience busy times as well as thumb-twiddling times. And no contractor sells all their available tech hours for all their techs all the time.
Estimating average per-task time
Once you know your true hourly operational cost, you must calculate the estimated average time to perform the task from start to finish. It is wise to calculate this time in steps not to miscalculate your true average task time.
To make this easier to calculate, I suggest looking at time in decimals rather than hours and minutes. For example, .08 is 5 minutes of an hour. When a task is estimated to take 1 hour and 5 minutes, you would use 1.08 hours. Similarly, .17 is 10 minutes of an hour; a task of 1 hour and 10 minutes would be 1.17 hours.
Then, break down the estimated time for each of the following allocations:
1. Traveling to the jobsite.
2. Surveying the situation:
• Speaking with the consumer about his request and explaining your business procedures;
• Taking a quick look at the circumstances regarding the request;
• Calculating your cost of the task to develop a price using the aforementioned hourly tech cost;
• Performing any paperwork;
• Applying your chosen profit margin to the estimated cost you incur;
• Quoting a properly profitable selling price to the consumer;
• Getting the consumer’s authorization to perform the work at the agreed price.
3. Performing the actual task of removing existing material or installing new material.
4. Picking up material for the task, if applicable.
5. Testing the work performed.
6. Cleaning up and leaving the jobsite in better condition than you found it.
7. Any other issue pertaining to the consumer’s request as it pertains to the task.
8. Getting paid.
Next, add up the times and multiply the total time by your hourly labor/overhead cost for the task to arrive at the estimated labor/overhead cost to perform the service.
Itemize the material needed to perform the task and total the material cost to perform the task.
Add your total task labor/overhead cost to your total material task to arrive at the total estimated cost to you to do the job.
Once you know your total estimated task cost, apply your chosen profit margin to arrive at your selling price. If you properly calculated your numbers, you will bring in more money than you spent to do the job. But if you didn’t put in the right numbers, you will not get the results you want.
Since wrong numbers produce wrong results, you can always call me if you need help arriving at your numbers; it’s what I do. As a further way of getting information to and helping you, I recently launched a podcast with each episode lasting between eight and 15 minutes. That means you can listen at your leisure. You can easily listen to an episode while in your truck; it may help you better run your business.