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Tom owns a plumbing, heating and cooling service contracting business in a town of about 50,000 people. Dick and Harry are his techs. All three were able PHC techs who could take care of Tom’s clientele’s service requests for their PHC systems.
Tom has two competitors: a plumbing and heating contractor, and a heating and cooling contractor. Tom figured since he could address the plumbing, heating and cooling needs of the townspeople and not just two systems, he had a leg up on his competition.
Tom charged his customers $100/tech hour for his services on a time-and-material method of pricing. He assumed that with about 50,000 people in his service area, his share of the market would minimally be about 17,000. If each household consisted of 2.5 people, his market share would be 6,800 potential household customers for his business.
He assumed that even if 800 of those households performed DIY services, he would still have 6,000 potential customers. And if each of those households availed themselves of one hour of his services annually, he would be able to bring $600,000 per year to his business in labor charges.
He further speculated that even if each of his competitors could entice 1,000 of those potential customers to their businesses, he would still have 4,000 potential customers who could spend $400,000 with him annually for labor.
Up to this point, I have no problem with his math. But the word “if” is the smallest word in the English language that possesses the potential for the biggest disappointment.
Like so many other contractors, Tom didn’t really know what his true cost of operation was.
Now, it’s my turn to use the word if. There was no guarantee Tom would only lose 2,800 customers to the DIY public and his competition. What if the number was higher?
The public only calls for service when they want or need something done. What if people didn’t call as often as Tom thought they would?
If his overhead cost to him is $75/tech hour whether an hour is sold or not, and Tom is a full-time tech, his total annual overhead burden for three techs and three trucks would minimally be about $384,300 ($75 x 1,708 revenue-producing hours/tech/truck x 3). I know what you’re thinking; there’s no way the overhead cost is $75/tech/truck hour.
Think again. I can prove it to you within reason with your numbers. If you want the proof, call me. In the interest of expediency regarding the saga of Tom, Dick and Harry, I’ll defer at present and cut that $384,300 in half, which makes the annual overhead burden $192,150.
If Tom brought in $400,000 in labor sales, he would have $207,850 to apply toward annual tech salaries and a profit for himself to take the risks he takes in business.
If Tom didn’t take a profit and equally divided that amount by three techs, he would have $69,283.33 for each of their salaries and salary-related expenses such as FICA matching funds, retirement and insurances (unemployment, disability, workers’ compensation, health and liability insurance as related to payroll).
If those salary-related expenses were 25 percent of the gross salary of each tech, each tech would get $55,426.66 before taxes. After taxes, they would receive less. This is the beginning of Tom’s problems, which were about to come to the surface.
If Tom wanted to enjoy a profit for the risks he took being in business, he would need to lower the salaries for Dick and Harry, which would further exacerbate Tom’s problems.
And Tom didn’t know about the home lives of Dick and Harry. Were they just surviving? Or were they comfortable with their lifestyles? He never even considered if Dick and Harry were content working for his business.
One day, Dick told Tom he was barely making ends meet and he needed a raise desperately. Tom told Dick he could give a dollar more an hour. Dick told him he needed to do better than that.
After a lengthy and awkward conversation about the limits of available money when only $100/hour is charged, Tom, who never considered raising his rate, reluctantly offered Dick another dollar an hour. Dick was disgusted but accepted the small raise and walked away depressed.
Then Dick, a licensed master plumber in his own right, visited Tom’s competitor who only performed heating and cooling services. Dick asked if they were interested in going into the plumbing business.
Meanwhile, Harry found out that Dick received a $2/hour raise. Since they were comparable in their technical abilities and Harry was also just making ends meet with the salary he was being paid, he approached Tom for a raise.
Tom realized he had to give Harry a $2/hour raise, too; less than that would not satisfy Harry. More than $2 would see Dick knocking on his door for another raise.
Unfortunately for Tom, while he and Harry were going through the same uncomfortable conversation he and Dick had, Dick was negotiating with Tom’s competitor. The heating and cooling contractor offered Dick a partnership regarding the plumbing services he would perform for their new plumbing, heating and cooling enterprise.
Dick left Tom’s employ for greener pastures.
In turn, Tom’s ability to service his clientele became greatly diminished and many customers followed Dick to the other company.
Tom and Harry needed to make up the slack. Neither was happy with their new workload. Then Harry had an epiphany; if Dick made a deal with the heating and cooling competitor by bringing his talents to the business and giving them another service component, maybe Harry could do the same with the other competitor that only did plumbing and heating.
Harry approached the plumbing and heating competitor with the prospect of adding cooling to its repertoire of services. In turn, the competitor offered Harry a substantially higher salary than Tom was paying him and a percentage of each task he performed for the business.
When Harry left Tom’s employ, Tom was now alone to perform all the tasks his clientele would request. As his business declined, his competitors’ businesses flourished. Tom was condemned to spewing a common misperception I’ve heard from many contractors — “You can’t find good help.
Tom had great help. He just didn’t know how to be a great employer who keeps his staff content. And now he, too, wasn’t content.
Know your numbers
Tom couldn’t keep Dick and Harry content because Tom was just a person in business rather than a businessperson. He neither knew how to properly identify and calculate his true costs nor price his services properly and profitably.
Although this saga is fictitious, the inability of contractors to retain good help by keeping their techs content is pervasive in the industry.
If Tom had acted like a businessperson rather than just a person in business, he would have properly identified and calculated his operational budget. And it would have included compensation that offered techs an opportunity to be content — and Dick and Harry probably would have remained in his employ.
When putting your budget together, you might want to consider an hourly wage to help your techs survive, combined with an incentive program that rewards them for the revenue they bring into your business — additional money that allows them to be content. After all, employees are your partners who do not have the obligations of ownership.
Tom could have prevented that which eventually occurred with his techs. He could have evaluated and rewarded Dick and Harry’s performance and contributions, while discussing the myriad good traits they had and how to eliminate bad traits (a high callback ratio, etc.). And he could have changed his pricing protocols to a contract pricing method rather than time and material
Performance evaluation is an objective and measured balance that could bring out the best in your techs while rewarding their efforts, dependent upon each individual performance evaluation.
Properly maintained incentive programs could be the carrot needed to boost revenue, morale and the ability to retain good help. Need assistance in figuring it out? Call me.