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A plumbing contractor named Jason wanted to know what to charge for additional service call tasks. He performed for them during the same service call visit after completing the initial task he was there to address.
He had read my book, “Solutions: Management Theories & Methods for the Contracting Business.” Jason was pleased with the information he gleaned from it and was implementing the theories and methods which I wrote.
The book deals with truths about the industry; pricing properly and profitably; addressing consumer questions intelligently, correctly, rapidly and, above all, honestly; logical, everyday administrative procedures; and hiring, retaining and compensating great techs.
In Chapter 2, I itemize the issues that must be considered in calculating properly profitable selling prices for any tasks.
Those seven issues regarding labor/overhead time, in order of appearance, are listed as: travel time to worksite; time to speak with the consumer, explain procedures, diagnose the problem and quote price; remove existing material or install/replace new material; pick up material for job; test work done; paperwork; and any other legitimate issue pertinent to the task.
To properly calculate your selling prices for any task, you need to place an amount of time that you estimate you will expend regarding each of those particular issues.
Then, after doing this, add the individual times up to arrive at your total estimated time. Multiply it by your true per tech/truck hourly labor/overhead operational cost to arrive at the total estimated labor/overhead cost you believe you will incur in the performance of the task.
Travel time and additional tasks
The first item on this list is travel time to the worksite. Jason understood the part about calculating a selling price. However, he missed the fact that regarding travel to the consumer as a factor in the calculation does not pertain to additional tasks performed at the same service call visit since he was already at the consumer’s location. He had no travel costs with regards to the additional tasks at the same call visit.
Regarding any additional services performed at the same service call visit, Jason placed a zero to indicate the amount of time he estimated he would expend on this travel time expense. His price for any additional services at the same service call visit would be less than his costs for the initial task of that very visit.
In the book, there is the issue regarding materials that must be considered in calculating the estimated cost a contractor will incur for any task. Contractors list the identification of each estimated material item as well as the quantity, individual cost per item, and total estimated material cost that the contractor expects to incur while performing the task.
The next step is to add the total estimated labor/overhead costs to the total estimated material costs to arrive at the total estimated costs the contractor expects to incur to complete the task.
Obviously, if the contractor underestimated his costs, the responsibility as it pertains to the cost the contractor would need to pay will actually be higher. And if the contractor used the wrong numbers in the calculation, the flawed calculation could only lead to wrong results.
Profit margin vs. cost markup
After summing up the total estimated costs, a properly profitable margin should be applied so contractors can earn the reward they deserve for the delivery of excellence to the consumer and the risks they take in the delivery.
It should be noted that a profit margin is mathematically different from a markup of cost to the contractor.
A markup of cost is an add-on to the cost. For example, a 10 percent markup of $100 of cost is $10. When you add the $10 markup to the $100 cost to the contractor, the selling price is $110.
A profit margin is the relationship of the profit to the total selling price. Using a 10 percent profit margin would make the selling price $111.11 ($100 ÷ 90% = $111.11). And $11.11 of profit divided by the selling price of $111.11 is 10 percent.
Which you decide to use is your choice; keep in mind that the profit margin method gives you 10 percent of the selling price while the markup method gives you 10 percent of the cost.
It should be noted that if you discount services to certain consumers — such as senior citizens, volunteers, military etc. — you should use the profit margin method.
To understand this, look at the math. A 10 percent discount of the $110 selling price makes the discounted selling price $99. In which case, you lose a dollar.
A 10 percent discount of the $111.11 selling price makes the discounted selling price $100.
In this example, you broke even while recovering the costs you incurred to perform the task.
Obviously, your discount should not put you in the position of losing money; you should be able to recover your cost and make some money above it. After all, the purpose of for-profit businesses is to make a profit.
In the example of the $111.11 selling price, the profit margin should be higher than 10 percent.
For example, if you used a 15 percent profit margin, the selling price would be $117.65 ($100 ÷ 85% = $117.65). The 10 percent discount would then be $11.76, making the discounted selling price $105.89. In this instance, the consumer receives the discount while you not only recover your estimated cost but also earn $5.89 above it (5 percent of the $117.65 selling price).
Jason only has to remember the logical part of developing selling prices. It means if he doesn’t incur the travel time expense when the task to be performed is at that service call visit, then he shouldn’t include this factor with a number other than zero.
And he must remember he still incurs all the other expenses as those expenses pertain to the task.
If his hourly per tech/truck labor/overhead cost was $100 and his average travel time to the consumer was 30 minutes, he could calculate his task cost to be $50 less than the price included in his initial travel time to the job.
If his profit margin was 40 percent, his selling price for the task at the same visit would be $83.33 less than if the task were performed during a separate service call visit.
Obviously, if his costs and profit margin were higher, the subsequent numbers would be higher.
Removing the travel time cost from the additional tasks of the same service call visit would first ease his mind as to feeling guilty about charging for his services.
Additionally, he would have a selling tool to help him increase his sales by informing the consumer of the price based on the first task of a service call visit. He can then offer to perform the additional task at the same visit at the lower selling price since he does not incur the expense of the additional travel costs.
It’s a win-win-win situation. The consumer saves money, Jason gets to ease his conscience and brings more money into his business.
I informed Jason that having a well-thought-out and formulated price guide could help to further assist in his ability to sell jobs as well as ease his conscience in pitching sales.
I described the format I use in my “Readily Available Pricing Information Digest” that offers a minimum of four selling prices for every task performed during regular business hours.
One for the first call of the visit when all materials are on the service vehicle; another for the first call of a service call visit when the task calls for materials that are not part of the truck’s standard inventory and must be picked up; and two prices under the same circumstances for each additional task performed at the same service call visit.
A correctly formulated price guide is a necessary tool that can help contractors perform their duties and quote their prices in an expeditious manner.
But before Jason can make his own price guide or purchase one, he must know what his true cost is for labor and overhead, the profit margin he wants to attain and the average travel expense he incurs.
Assuming Jason is a well-educated contractor regarding the services he offers and that he wants to deliver excellence to his clientele, knowing the true costs he incurs in his contracting business is the most important issue that he should have addressed before opening it.
This fact does not lose any importance to your company if you have already opened your business because operational costs are always in a state of flux. Look at the ever-changing cost of fuel for your service vehicles.
You must know the true operational business costs you incur at the time you are incurring those ever-changing costs. It means constantly monitoring operational costs, remembering that today is the first day of the rest of your business life, and changes require adjustment to selling prices as necessary.
Problematic hurdles will occur.
Problems with game plans, budgets, customer relations, vehicular breakdowns, material supply, etc., do happen. As the owner of your business, it is your responsibility to address those problems at the time of occurrence.
But before you can come up with a solution, you must be able to recognize the fact that you have a problem.
Jason recognized he had a problem and called me for the solution.
As of this writing, Jason is in the process of identifying and calculating the true operational business costs he incurs. He should have the information he can use to address his problem with confidence in the prices he quotes for every task.
And he should have the ability to sell his services at prices to recover his true cost while earning the reward he deserves for the risks he takes delivering excellence to consumers. l
Richard P. DiToma has been involved in the PHC industry since 1970. His Contractor Profit Advantage podcasts, Solutionars and programs show contractors how to improve their business results. DiToma has authored books on contracting business management as well as customized contractor price guides. Contact him at 845-639-5050, firstname.lastname@example.org; or R & G Profit-Ability, P.O. Box 282, West Nyack, NY 10994, www.contractorprofitadvantage.com. For podcasts, check iTunes or other major distributors.