During a conversation with a plumbing contractor (I’ll refer to as Tip) who called me about my customized price guides for plumbing, heating and cooling service contractors, he told me about a fellow plumbing contractor who is a friend of his. This friend, who works in the same service area, called Tip a thief for charging $2,100 to replace a 50-gallon natural gas-fired water heater.
Tip was offended, as he should have been, by the moronic name-calling of his so-called, and obviously inconsiderate and ignorant, friend (I’ll refer to this friend as Zero).
Tip told me that Zero charges $1,600 for the same job. Instead of Zero wondering how he could charge that amount, this brain surgeon would rather criticize his friend’s ability to maximize his profits — the goal of all smart business people. But that goal often eludes contractors who are just people in business rather than business people.
A childhood memory came to mind when ignorant children would make derogatory remarks about each other. Back then, we used to respond, “Sticks and stones may break my bones, but words will never hurt me.”
Today, when one contractor makes remarks about another contractor, I would say the name-caller is only making a fool of himself/herself.
Cost to the contractor
With regards to Tip being called a thief for charging $2,100 to replace a water heater, I would like to take a look at the cost a plumbing contractor in that service area incurs to perform the service.
I don’t know Tip’s or Zero’s actual cost per tech hour, but I have consulted with many contractors in their service area. My example will be based on a minimum hourly labor/overhead cost to contractors of $180/tech.
It should be noted that the cost to contractor amount is about average if all tech hours are sold all the time. That means some contractors’ costs may be less than $180 and some may be higher than $180 if all tech hours are sold all the time.
However, no contractor sells all their tech hours all the time, which only serves to increase a contractor’s hourly tech cost for labor and overhead.
The water heater cost to a contractor can range between $500 and $700. Tip’s cost was $600. As is with labor/overhead operational costs, material costs have different ranges. Those costs could be a bit less or a little more. For the example, I’ll use all three.
The area in which Tip operates does not require homeowners to pay sales and use tax for the replacement of water heaters. This fact increases the cost of the heater to the contractor. In Tip’s area, the tax is 8.625 percent.
Using the 8.625 percent sales and use tax, the cost to the contractor of the $500 heater is really $543.13; the $700 heater cost becomes $760.38.
To that $543.13 to $760.38 cost-to-contractor range, you must add $75 minimum for the immediate material needed to install the new heater to the existing plumbing. In this instance, minimum means it could cost more. After all, fittings, tubing, nipples, vent piping, sealant, solder, flux, acetylene and press fittings cost contractors money.
It means the minimum material cost range to the contractor in that area is between $618.13 and $835.38.
When I asked Tip about the cost to him for the material, he told me $801.75, inclusive of material sales and use tax. It’s certainly within the range I stated.
The next expense to consider is the average cost of labor and overhead needed to perform the task. To calculate that cost, we must multiply the aforementioned average $180/tech labor/overhead cost to a contractor by the average number of hours needed to perform the task.
My pricing information digest for plumbing contractors allows three hours if all material is in the service vehicle, including the water heater; four hours if the heater must be picked up at your shop or local supplier.
Those average times were statistically calculated by me in my PHC service contracting business for more than 40 years using a variety of techs to perform tasks. Sometimes the times were less, but other times the times were longer. On average, the times were as quoted in the price guide if the job was done correctly, inclusive of testing for operation and safety of the installation.
In addition to that time, we must add the initial average travel time to the consumer. In this contractor’s service area, the average time is 30 minutes.
That means three hours is really 3 1/2 hours and 4 hours is actually 4 1/2 hours when all average time is calculated based on: travel to consumer, introduction, discussion with consumer about their request and the circumstances at the location, quoting prices and doing paperwork, setting up the work area, draining and removing the existing water heater, installing the new heater, testing heater operations and safeties, cleaning up the work area, getting paid and thanking the consumer.
Therefore, the average labor/overhead cost to contractor for this task in this service area is between $630 and $810.
When you add the cost of material to the labor/overhead cost, the minimum average cost range to a contractor in this service area is between $1,236.26 to $1,645.38 if all tech hours are sold all the time, dependent upon the material cost to the contractor.
The average cost Tip incurs to perform this service using his cost of materials is $1,611.75. Once again, within the range I mentioned.
The water heater material cost to Zero is probably the same as, or close to, Tip’s material cost since they serve the same area. Assuming it is the same, Zero, who charges $1,600, loses $11.75 as per this scenario whenever he performs this service.
However, Tip sold the service for $2,100 and earned a profit of $488.75, reflecting a profit margin of 23.25 percent. That’s not thievery — that’s a business on the road to success. And it sure beats losing money as Zero does with his absurd pricing protocols.
Tech hours sold
Since no contractor sells all its tech hours all the time, the cost of the task to contractors in this area actually increases.
If only 90 percent of Tip’s tech hours are sold, his minimum average cost for the task would be $1,701.75. His profit would be $398.25 — an 18.97 percent profit margin.
At the 90 percent level of hours sold, Zero loses $101.75.
If only 80 percent of Tip’s tech hours are sold, his minimum average cost for the task would be $1,814.25. His profit would be $285.75 — a 13.6 percent profit margin.
At the 80 percent level of hours sold, Zero loses $214.25.
Many, if not the majority, of plumbing service contractors sell, on average, only 70 percent of their available tech hours during normal economic times.
If Tip sells 70 percent of tech hours, his minimum average cost for the task would be $1,958.89. His profit would be $141.11 — a 6.72 percent profit margin.
At the 70 percent level of hours sold, Zero loses $358.89.
I won’t say Zero is a fool, but his method of pricing will let everyone who knows the facts know how foolish his prices are.
Don’t bring a good contractor down
Obviously, Zero doesn’t have a clue as to his own true cost of operation. If he wants to denigrate a contractor because of prices, he should do it to the contractor he sees in the mirror.
Zero should apologize to Tip and then do something to understand the true costs incurred by contractors to manage their businesses in an intelligent and mathematically correct manner. He should attend my Solutionar (an online real-time webinar) called “Pricing Properly and Profitably.” I can show him the error of his ways using his numbers.
Zero should correctly identify and calculate his own true operational costs. He can then set his prices in a manner in which he could recover his true cost and earn the reward he deserves for the delivery of excellence to consumers — instead of selling his services at inane prices.
Since zeroes have no value, Tip’s buddy Zero should stop looking at what Tip does and start looking at his own deficiencies. Then and only then can he rise from a zero to a one and hopefully two, three and so on.
To Tip, I’ll say that when contractors don’t understand those realities, like your buddy Zero, they are often jealous of the fact that you can get the prices you charge. And since they are not able to charge those amounts because they do not understand how to identify and calculate their true business expenses, and they lack confidence in their own business protocols, the only thing they have left is to criticize you and successful contracting business owners.
If Zero doesn’t criticize you, he has to admit to himself that he is wrong.
Those contractors are a blight on the industry as a whole.
Tip, I’m tipping my hat to you. Don’t get down because a misinformed person said something that has zero basis. Ignorance is bliss, and bliss often blinds the ignorant from seeing the realities of life, both personal and businesswise.
And for those readers in service areas with cost factors that are less or more than those I used in this article, just adjust your numbers accordingly. But please, for your sake and the sake of the industry as a whole, calculate and adjust in a mathematically correct manner that will allow your prices to be proper and profitable.