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Rick, a plumbing contractor, recently sent me this email: “Just finished your column in PHC News’ April 2021 issue, ‘The Seven Basic Hurdles of Business.’ That was spot on! Especially No. 7, Thumb-Twiddling Times. Once again, a great read. Thanks for always putting it in words for me.”
Thanks, Rick. I am so grateful my messages hit the mark.
In that column, regarding thumb-twiddling times, I wrote:
“No contractor sells all their available revenue-producing tech time all the time. Consumers only call when they need or want your services. There will be periods when you will be slow. Heating and cooling service businesses, dependent upon the portion of the country you serve, can be spotty. Plumbing service calls can arise at any time during a year, but even those businesses encounter thumb-twiddling times.
“Slow periods can get on your nerves, especially when the trucks have been washed for the umpteenth time, the shop is perfectly clean and organized — and you still need to pay your employees for standing around. By choosing to offer the trio of plumbing, heating and cooling services, you have an opportunity to decrease thumb-twiddling times.”
Upon reading Rick’s email, I immediately thought it would be wise to expound on the effects of factors such as thumb-twiddling times, as well as other factors affecting your potential revenue-producing hours. Some of those factors fall under the dreaded Murphy’s Law experiences that businesses face, while others are everyday occurrences PHC service contractors must consider when setting up their business protocols.
The foundation of any business is the proper and profitable development of selling prices so that operational costs can be recovered and profits maximized. After all, the only reason for-profit companies exist is to make a profit above the cost of the product or service.
Knowing how to identify all legitimate tangible and intangible business expenses is the first step in establishing that foundation.
A tangible cost is one you pay for with actual money. You buy a gallon of gas for your truck; you pay X amount of dollars for the gallon.
An intangible cost is one where you don’t see yourself actually laying out money even though you do pay for it. For example, a callback takes time to address and, as they say, time is money.
Once that cost data is identified, you can add those individual expenses to arrive at your total true operational costs.
Cost of one tech hour
In the PHC industry, contractors sell the time it takes to perform tasks for consumers. As a contractor, that’s your product. Therefore, it is crucial to know how much one tech hour costs in your company to accurately determine your cost to perform a task. You then have a base point from which to add your profit to that cost and earn the reward you deserve for the delivery of excellent service.
To do this, you need to divide total true operational costs by your maximum potential revenue-producing tech hours. The reason you divide by that number, even though you don’t sell all your available revenue-producing hours most of the time, is because it is the only constant you have.
The number of hours you actually sell varies year by year; it’s not constant. It’s one of those intangible business expense factors — as well as Murphy’s Law — that can affect your business results dramatically.
If you don’t know your true hourly tech cost for labor and overhead, you can’t possibly know whether you are selling any service at, below or above your true cost. Not knowing this factor makes it impossible to achieve your goals and intelligently maximize your profits.
In a 40-hour/52-week/5-days a week year, you pay for 2,080 hours/260 days/tech. But you don’t have 2,080 revenue-producing hours or 260 revenue-producing days. Six holidays and two weeks for personal time such as vacation or illness uses up 128 of those 2,080 hours and 16 of those days. Those 128 hours and 16 days do not produce revenue. However, the costs of those hours and days are expenses for your business that must still be paid.
When you subtract 16 days from 260 days paid, you only have 244 potential revenue-producing days. Each of those days includes some lost time for nonrevenue-producing daily duties such as checking out vehicular vital signs (tire pressure, oil level, safeties, etc.). Then, you must consider the time to exchange information regarding service calls with the office and restock the service vehicle inventory. That’s at least one hour/tech/day, or 244 hours/tech/year.
Do the math
You pay for 2,080 hours for each tech annually but only have a maximum of 1,708 revenue-producing hours each year. It’s a constant factor under the described conditions.
Consider the Murphy’s Law time factor regarding hours that are sold. You never know when the consumer will want or need your services. If your PHC service contracting business is properly balanced with the correct number of techs and vehicles, you may normally only sell 70 percent of your potential revenue-producing hours. It gives you 30 percent of available tech time for cleaning trucks, straightening out and organizing the shop, and twiddling thumbs.
At this point, you might wonder if you total your true operational costs and divide that amount by your total maximum revenue-producing tech hours of 1,708 per tech, you still lose because of the 30 percent of time not sold. And you are right. How do you address this fact?
Simple. If you only sell 70 percent of your available revenue-producing time, you need a 30 percent profit margin on labor and overhead costs to break even on those expenses. So, choose your profit margin carefully and intelligently.
Confused? Let’s do the math. For each $100 of labor/overhead cost/ tech/truck hour based on selling 1,708 hours/tech/truck annually, your cost would be $170,800 per tech/truck annually.
Seventy percent of 1,708 hours is 1,195.6 hours sold.
$170,800 divided by 1,195.6 hours makes your $100 cost rise to $142.86 when you only sell 70 percent of available tech hours.
By dividing $100 by 70 percent (a 30 percent profit margin), your selling price would be $142.86.
$142.86 less the $100 you estimated your hourly tech cost to be if you sold all tech hours is $42.86.
It should be noted that a profit margin is a percentage relative to the selling price ($42.86/$142.86 = 30 percent). At a selling price of $142.86 in this example, you would have made no money. You would have just moved money and defeated your reason for being in business. And if you only sold 69 percent of your available revenue-producing tech hours and charged $142.86, you would not have moved enough money to recover your true cost.
Dealing with Murphy’s Law
The Murphy’s Law factor can rear its ugly head at any time.
A truck can break down or a tech becomes ill and the number of hours sold is diminished — as well as the opportunity to recover your true cost and maximize your profits.
Gasoline or diesel fuel prices are in a constant state of flux; if you don’t monitor and adjust your costs and prices, profits go down.
The list of potential problems affecting your revenue flow, or the number of hours available to sell, goes on.
A tech quits or is fired, which means you must find and train a new one. Since time is money, you just lost some more of it.
Health insurance rates go up (the health insurance industry is notorious for raising rates).
Office equipment or tools can malfunction and break before the lifespan you estimated.
You can control callbacks by properly training your personnel. Control over material deficiencies from reputable manufacturers, however, is out of your hands. After all, you bought from a reputable and well-established company and sometimes their materials are defective.
If you could get the manufacturer to pay for your time, the odds are they will never pay what it truly costs you.
Then, there is the consumer who claims that everything worked before your tech came but doesn’t work now. If it were true, an intelligent and logical person would wonder why the consumer called in the first place since everything worked fine before your tech came.
When your tech replaced a thermostat for the heating or air conditioning and the customer’s water closet isn’t working, it’s not your fault. But in the interest of keeping a customer, you must decide how to handle the situation.
Even if you explain that the thermostat has nothing to do with the water closet and the customer accepts the explanation, you still have the time you spent explaining gone forever. And, since time is money, the money spent on the explanation is also gone forever.
Regardless of which reason for the callback, you incur a business expense.
Next is the bad debt factor, when some consumers refuse to pay the amount they agreed to before you started the work. They try to whittle down the price when it’s time to pay up or they don’t pay you at all.
The mystery of materials or tools sprouting legs and walking off your service vehicles is mind-boggling and expensive.
The theft of your clientele by your techs who moonlight is a disease within your business. And, as all diseases must be addressed, you must cure the problem or suffer the results of the condition.
That which I have not mentioned is covered by the very definition of Murphy’s Law — whatever can happen, will happen.
It is imperative to consider all those issues and how your business is affected — and be constantly vigilant.
Thanks for your email and kind words, Rick.
In closing, I quote the words I ended with in the column Rick complimented:
“Entering the business arena means encountering hurdles. You must be prepared and able to jump them and endure the number of hurdles you will face.
“You might want to seek the help of a business coach who can show you how to clear those hurdles. If you do, make sure to choose a consultant who knows what he or she is talking about. Interview consultants before deciding to avail yourself of their services.”