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Dustin, a contractor, sent me the following email: “It’s amazing how naive a person can be. We all likely start as decent to excellent technicians or installers, tired of being a pawn or having a boss who has no clue. So, you take all your equity in either life savings, cash out retirements, or borrow against your home to venture out on your own.
“You then plunge headfirst into contracting. It’s frustrating, but that feeling of being in control while charting the course makes it worth it. Then quickly, the stress and monetary issues arise: waiting to get paid, not enough work coming for various reasons — and on and on and on. But eventually, you realize how great your technical skills are and how horrible your management and ownership skills are.
“After a little bit of suffering by not making enough money to pay myself for a few years while putting in double the hours of any employee, and a little bit of reading your articles over the years, I finally decided I am worth more than what I ‘should’ charge. I’ll always look back on believing that I could do it for ‘less’ than the big guys. Customers also believe this and make you feel guilty for charging what the competitors charge.
“After six years of self-employment, we are finally a very reputable company with five great field techs. We were one of the first to go $100/hr. two years ago in town. In line with your latest column, we charge a service call fee of $70 just for a knock on the door, then the clock starts. As an example of watching and adjusting to costs, we already burned up last year’s entire gasoline expense this year to date — and the year is only half over.
“To keep this short, I wish other contractors would realize what it truly costs to operate this type of service business as I had to learn the hard way. Even searching for a CPA who actually cares about your profit is surprisingly difficult.
“Anyway, thanks for your skills and willingness to share your knowledge with our trade.”
It’s always a treat to hear from readers and fantastic to be acknowledged as someone who has helped them in their business lives. Thanks, Dustin.
After reading his email, I gave Dustin a call to thank him, find out how his business was doing, ask him some questions I had, and offer him some advice.
Dustin’s email expressed the feeling many contractors have regarding their business’ situation and financial prowess. I told him that his openness regarding those feelings hit the nail square on the head as it pertains to so many contractors.
His thoughts were coming from his heart. I told him I was going to use his email in my next column. As our conversation went on, I asked him what he meant about his reputation. He told me his team was taking care of their clientele. His customers appreciated the service his contracting business delivered to them, and they recommended new consumers to use his services. Great job, Dustin.
I did notice some potentially problematic issues in his email that could affect his profitability. Dustin was charging by the hour at a $100 rate, raising a red flag for me.
Issue No.1: I truly believe that labor and overhead costs to any U.S. PHC service contractor for one qualified tech and one properly equipped service vehicle ranges between $100 and $250/tech/truck hour if all tech/truck hours are sold all the time.
If I am correct, and I am most definitely correct, then Dustin is hurting his business potential since wrong numbers can only produce wrong results. A $100 selling price per tech/truck hour can only afford him the recovery of his cost if $100 is, in fact, his true cost.
Dustin thought he was doing well because he brought in more money than he did with his lower rate. But logic dictates that, of course, he would bring in more money. After all, he’s charging more money.
The question becomes is he bringing in the right amount of money that will allow him to recover his operational costs? Will it earn him the reward he deserves for the delivery of excellence to consumers? Is he taking into consideration the risks associated with the delivery so he can maximize his profits?
As the conversation continued, I asked him if he had considered the intangible costs affecting the true cost to his contracting business. Then, I steered him to my website, where he could learn about pricing and profitably. He could see line-by-line expenses, both tangible and intangible, to properly identify and calculate his true cost so that he could develop properly profitable selling prices.
Issue No. 2: Dustin was using a time-and-material pricing protocol. T&M pricing hinders contractors from maximizing their profits and consumers from receiving excellence blended with peace of mind. That peace of mind comes from properly formatted contract pricing contractors who can offer extended labor warranties because they intelligently calculated all their business factors.
Before you T&M pricing contractors go off on me regarding my thoughts that contract pricing (aka flat rate or upfront pricing) is better for everyone concerned, allow me to explain. I don’t believe any contractor should take advantage of any consumer.
I believe all contractors who deliver excellence to consumers should recover the costs they incur in delivering that excellence while having the opportunity to earn the reward they deserve for the delivery and the risks they take in that delivery.
I also believe consumers should receive excellence and value for their hard-earned dollars.
With T&M pricing, once an hour is not sold, it is gone forever — while the cost of that hour remains a burden the contractor must bear. This means each subsequent hour’s cost to the contractor will increase. Since the T&M pricing arena is as competitive as it is, raising rates becomes problematic. If a T&M contractor doesn’t raise rates, the money associated with the unsold hours is lost; the contractor can never get that money back.
With properly calculated and formatted contract pricing, contractors should base their costs on the average time an average tech would perform the task and the average material that could be used for the task.
To evaluate tech performance, contractors should objectively implement a scale of 1 to 10 to evaluate a tech’s ability — somewhere between 5 and 5.1 is average.
If a tech’s performance ability is 4.9 or less, T&M pricing contractors could be doing what those who are critical of contract pricing claim makes it dishonest and fraudulent.
The tech would more than likely take longer to perform the task than an average tech would. If the tech took the same time as an average tech, the odds are that the quality of the task performed would be subpar since he only has a 4.9 performance rating — ergo, no excellence to the consumer.
In this instance, the T&M contractor would be bringing in more money than he/she should have, while the consumer could very well be dissatisfied.
If the T&M pricing contractor’s tech’s performance ability exceeds 5.5, the task would probably take less than the average. In this instance, the contractor’s business would bring in less money than it should have. In turn, profits, if any, would be lower.
But at least the consumer probably would have received a better-performed job. However, if this result is chronic to the business and profits diminish to the point of nonexistence, the business is destined to fail. And the consumer’s peace of mind would be dramatically affected since there would be no business to warrant performance.
Causing further stress and frustration for T&M contractors is the potential for arguments about prices given to consumers after the task is completed. Although any consumer on any given day might question prices after the work is done, the propensity of price-related arguments after the job is done greatly diminishes with contract pricing since the consumer knew the price before authorizing the contractor to perform the task.
I thank Dustin for sharing his thoughts and his wishes that other contractors would give more thought to the costs they actually incur in running their service businesses. As for me, I love helping contractors attain their well-deserved objective of success. If Dustin or any other contractor needs to speak with me, I’m as close as the phone.