Subscribe to our newsletters & stay updated
As a contractor, you face business problems. If you can’t identify your problem, you can’t begin to solve it. Many of those problems are caused by enemies of your business. Most contractors who call me are open and attentive to the information I give them. But then there are those who not.
As Franklin Delano Roosevelt once said, “Only thing we have to fear is fear itself.” Many contractors sell their services below their true cost of operation because they don’t know their true cost and are fearful of losing work. And, that’s their problem.
I say be more fearful of losing money than losing customers. Consumers who consume your resources without replenishing them weaken your business and defeat the purpose for which you entered the business arena.
The remedy is simple: identify and calculate your true cost and charge prices above your true cost in order to remain in business and deliver excellence to your clientele.
As to the cynical contractors who do not believe they can charge prices, which in their own minds are high in comparison to the below costs prices they are charging, I say wake up and smell the coffee.
In a recent conversation with the wife of a contractor who was concerned as to why their business wasn’t profitable, I learned they charge $75 an hour for the services her husband provides to consumers. The answer to her quandary was right there. Since the minimum labor/overhead cost to contractors in the U.S. to place a qualified service technician in a service vehicle ranges between $100 to $250 per hour if all available tech hours are sold all the time, they cannot possibly be profitable charging $75 per tech hour.
As we spoke, she also revealed the fact that some of their clientele make statements like, “Is that all?” when presented with the bill. If that doesn’t remove the fear factor revolving around the question of charging more money, I don’t know what will.
When I asked what an hour of her husband’s time and expertise cost them to produce, she didn’t know. Although that answer is honest, it is not the way to run a business. Selling prices must be based on the cost to produce any item or service. Without that data, prices are only guessed.
To make matters worse, she told me her husband starts at 4:30 a.m. and works until evening, and that when he comes home, “he is toasted.” Who wouldn’t be?
I asked if she knew what other contractors in her area charged on a time and material basis. She said $120 an hour, and added that they send out helpers to do the work; she emphasized that her husband is a master plumber and better than a helper.
I then asked her where her husband’s technical skills ranked on a scale of one to 10 with one being the worst. She said nine. This led to my next question. If her husband’s abilities are truly as high as nine, then why were they charging $45 an hour less than a company that sends helpers to perform services. We left off that she would speak with her husband and get back to me.
In another conversation, a contractor tried to tell me his business only takes a total of 30 minutes to install a 4-inch lavatory center set once the tech arrived at the consumer’s home. And, no matter how I tried to explain that that couldn’t be true, his stubbornness would not allow him to listen to reason.
Over the years, I have tracked the average time spent for many PHC replacement tasks. Since the correct use of contract (upfront or flat-rate) pricing is based on the average time to perform tasks, knowing averages is paramount.
Let’s take a realistic look at the average time to replace a 4-inch lavatory center set. Any of these times are estimated and could be a bit more or less as per each description. But, the total time described comes to one hour and 20 minutes. However, after tracking statistics for years, I’ve found that the average time for this task is one hour and 30 minutes. You still have to add the travel time to the client.
Your tech knocks on the door; introduces her/himself to the consumer; discusses their request; looks at the existing center set installation; quotes a price to the consumer; writes up a contract/invoice so the consumer has the price in writing and you have a contract which was agreed to by the consumer. Before you know it, 20 minutes have gone by.
Then, s/he goes out to the truck; gathers the new center set, additional hookup materials and tools, and 10 more minutes are gone. Next, s/he prepares the work area by carefully removing the homeowner’s paraphernalia in the vanity cabinet. After s/he finishes the installation, s/he must put that paraphernalia back in the cabinet, five more minutes gone. S/he then removes the existing faucet and pop-up assembly; cleans the lavatory deck and drain opening of the gunk left under those items; installs the new lavatory faucet and pop-up assembly; and tests the work done for leaks and functionality. There goes another 30 minutes.
Then, s/he cleans up the area; puts her/his tools back on the truck; gets paid; offers her/his thanks to the client for their patronage; and leaves. Another 15 minutes is expended.
The cost contractors incur for the task
Figure 1 shows you the minimum cost (in red) contractors incur to perform the indicated task based on: 1) Hourly labor/overhead tech cost range to contractors in $25 increments from $100 to $250 per tech hour for 1½ hours to perform the task as previously described in this article plus initial travel time; 2) Selling all your available tech hours (1,708 annually per tech) all the time; 3) Average initial travel time to the client in two increments — 15-minute and 30-minute; and, 4) Material cost allowance of $100 (you may pay a bit more or less). And, obviously more expensive center sets will cost you more.
NOTE: If you base your cost on selling all available tech hours, but sell less, your cost is actually higher. Example: Based on selling all your tech hours all the time and an hourly tech cost to you of $100, line 1 shows your cost for the task to be between $275 and $300 dependent on travel time. That is the cost to you the contractor, you have made no profit. However, if you sell only 70 percent of 1,708 available tech hours, the $100 per tech hour increment really costs you $142.86. Therefore, if you only sell 70 percent of your available time, your cost is closer to the range shown on line 5, which is $362.50 to $400.
No contractor sells all available tech hours all the time. Therefore, at a $100 per tech hour cost (based on selling all your tech hours all the time) for labor/overhead, when you only sell 70 percent of your available tech time, that job with a 15-minute travel time would cost you $350 ($142.86 x 1¾ hours + $100 material cost). If you only sold 50 percent of your total available tech time, your hourly tech cost would be $200. In turn, the cost to do the job would become $450.
The numbers in figure 1 reflect the minimum cost to you the contractor. You must earn a profit above those costs for your business. The profit margin you choose should take into consideration not only the work you did and its immediate costs to you, but also, the risk you take warranting the job so your client receives both the excellence of your workmanship and the peace of mind which comes because you stand behind the job.
To those contractors who are frightened, cynical or too thick-headed to listen to reason, I say you meet your business’ enemy every time you look in the mirror. Change your thinking, or, complain to the person in the mirror.
Give me a call if you have an opinion on this article; want an opportunity to attain your contractor profit advantage; would like information on the ways I can help you; or would like to order a copy of my Readily Available Pricing Information Digest pricing guide, which is customized to your true cost of labor and overhead, and, puts prices at your fingertips for rapid and profitable price quoting.
Richard P. DiToma has been involved in the PHC industry since 1970. He is a contracting business coach/consultant and an active PHC contractor. For information about the Contractor Profit Advantage, or to contact DiToma: call 845-639-5050; email firstname.lastname@example.org; mail to R & G Profit-Ability, Inc. P.O. Box 282, West Nyack. NY 10994.