When your customer hears the tech quickly state the minimum cost your business incurs, he will be reminded there is a cost to your business in addressing his requests.
Techs often have the misperception that all the money they bring into the business that employs them goes into the owner’s pocket.
I realized this mindset was a problem for contractors years ago. A tech who worked for my PHC service contracting business came into my office at the end of the work day, placed his daily invoices and receipts on my desk, and said with a smirk of indignance, “Here’s the money I made for you today!”
With this statement, I knew I had the beginnings of a morale problem that required me to respond to his ignorant, obtuse statement.
Believing that you must sometimes fight fire with fire, I responded with a barrage of rhetorical questions and statements: “Do you really think that the receipts you just turned in go into my pocket? Because if you do, you don’t have the slightest concept of business management.”
I immediately looked at the light fixture above my head and pointed to it: “Do you think that light is needed for us to perform our daily duties here in the office so that we know where to send you each day? Do you think the light fixture installed itself or that an electrician performed the service? Whoever installed it didn’t do it without compensation for their services. And the utility company didn’t provide the electrical power for free.
“Did you ever think about the costs related to the service vehicle you use every day? The vehicle certainly isn’t free. The fuel and maintenance, as well as insurance, registration, inspection, etc., to keep it on the road so you can earn your paycheck, doesn’t come without cost to the business. And what about the inventory and tools on the truck that you use every day that also allow you to receive your paycheck?
“Your paycheck suggests that you expect to be paid for the time you contribute to this business, even when standing around doing nothing during slow times after you have organized and cleaned your service vehicle for the umpteenth time.
“What about the salary-related expenses associated with your paycheck? There is liability insurance based on your salary; workers’ compensation insurance as well as insurance for unemployment, disability and health; matching FICA funds; vacation and holiday pay, etc. Seems to me that you made some of that money for yourself.”
He walked out of my office feeling dejected because he, like so many techs, didn’t know the reality of running a business. Unfortunately for him, his warped attitude eventually helped to result in the termination of his employment.
Profit is not Guaranteed
As a contractor, you don’t want to lose good employees. I never wanted to lose a good employee — and never did. However, you must be able to define the definition of a “good” employee.
A good employee, in my opinion, has integrity, loyalty, aptitude for the position for which they are employed, a good mental attitude, self-motivation, the intent to deliver excellence and the ability to follow orders.
Mediocrity does not make for a good employee.
As a matter of fact, mediocrity is detrimental to the morale of all employees of any business as well as the owners. It’s harmful to the potential of the business to succeed.
It also affects the bad employee since it leads to dismissal, especially if employees generate bad morale.
After that incident, it became obvious to me that techs must realize that all the revenue they bring into the business doesn’t go into the owner’s pocket.
As the owner of my contracting business and its chief problem-solver, it is my responsibility to show my techs the truth regarding the cost of performing any task.
To remedy the problem, I needed to add that cost information in some manner to the pricing protocols.
So, I designed and created my “Readily Available Pricing Information Digest for the Plumbing Heating and Cooling Contractor.” I made it customizable to reflect any contractor’s labor and overhead costs, as well as the average travel time to the consumers in their area and their desired profit margin.
In addition to task descriptions and prices, the guide includes the main item associated with any task as well as any potential additional material that may be needed, a material cost allowance, the typical time to perform any task, prices for the first task of any visit when all material is in the service vehicle, and prices when the materials are not a part of the everyday truck inventory used to fulfill consumer requests.
It also includes selling prices for the additional tasks performed at the same visit in which the first task of the visit is performed. After all, the second task can be done for less than the first task since the tech is already at the site. And that can allow the consumer to pay less for those additional tasks while giving your techs the ability to increase sales.
To address the problem of techs’ misperception of where the money they bring in goes, I included three columns on any task line to show the cost the business incurs dependent upon the number of available tech hours that are actually sold in a fiscal period.
One column shows the cost to the contracting business when 100% of the available revenue-producing time is sold.
The other two columns show that no contractor sells all their available revenue-producing tech time all the time. For those two columns, contractors can choose the projected percentage they will actually sell. The purpose is to show the tech that the profit the business earns varies dependent upon business activity levels — and that profit is not guaranteed.
As a matter of fact, slow business activity levels can result in a loss to the business. It’s the reason managers have the responsibility of making decisions that will allow them to properly manage the business.
I used 70% and 50% of available revenue-producing hours sold for those two columns in the price guide that I used for my contracting business. It seems 70% to 75% is a good number for service work during normal economic times, while 50% would give managers and techs the reality of possible business downturns.
Having the information in the price guide allows the tech to realize that when work is not plentiful, the cost of any task increases for the business while the tech still gets paid.
It is my belief that the U.S. range of labor/overhead cost to the contractor per hour for each service unit consisting of one qualified service tech and one properly equipped service vehicle is between $100 and $250. That’s not the selling price — it’s the cost to the contractor.
Using the lower number of that range: If the labor/overhead cost to the service contractor is $100/hour for each tech/truck if all tech revenue-producing hours are sold all the time, but you only sell 70% of all available tech revenue-producing hours, that $100 hourly labor/overhead cost to contractor per tech/truck rises to $142.86.
Let’s do the math:
If you have 1,708 maximum available revenue-producing hours per tech annually, your labor/overhead cost per tech/truck calculated on selling all available revenue-producing hours would be $170,800.
However, if you only sell 70% of your available revenue-producing tech hours, you would have sold only 1,195.6 hours per tech/truck annually.
It still costs you $170,800 per tech/truck annually, whether you sell the hours or not.
When you divide $170,800 by 1,195.6 hours sold, your cost rises from $100 per tech/truck hour to $142.86.
If you only sell 50% of available revenue-producing hours, that $100 of labor/overhead cost to you rises to $200.
Knowing the reality of numbers and being upfront with your techs can get the smart techs to realize running a contracting business is not all peaches and cream and that all the money doesn’t go into your pocket.
Educating Techs and Customers
As an extra bonus, using a price guide can give your techs the confidence they need to sell more tasks. It demonstrates the cost to contractors under varied percentages of hours sold.
This information allows technicians, with a quick glance at their price book, to explain to consumers that the performance of the task they are requesting minimally costs the business between the 70% and 50% cost levels.
Techs can respond to any consumer price resistance: “For us to perform what you request, we would incur a minimal cost to our business of somewhere between $142.86 and $200. It could cost us more, but once we quote a price to you, you will only pay the price we quote for the described task.”
If your selling price were based on a 30% profit margin, your selling price for one hour of service would be $142.86 ($42.86 of profit ÷ $142.86 selling price = 30%). In that case, if you only sold 70% of your available revenue-producing time, you would make no money.
This knowledge at your techs’ fingertips can now alert the consumer as well as the tech that all the money you are charging does not go into your pocket.
It should be noted that if the hourly labor/overhead cost to the contractor is higher, the numbers will be higher.
Since you went into business to recover your true operational business costs and make a profit above that cost, if you think your business will only sell 70% of its available revenue-producing time, you will have to apply a higher profit margin than 30 percent.
A 40% profit margin would have you selling that one hour of service for $166.67. When your tech sees this and knows he is only bringing money into your business 70% of the time, he will realize that all the money does not go into your pocket.
In this instance, your business will only profit $23.81 — about 14.25% of the selling price. Since that would be the most your business could receive above the cost it incurs, it is wise to realize that it could be less, nonexistent or even a loss. If you only sell 60% of your available revenue-producing hours, your cost would be $166.80 — a loss of 13 cents.
When your customer hears the tech quickly state the minimum cost your business incurs, he will be reminded that there is a cost to your business in addressing his requests.
The proper perspective on numbers can be confusing. Educate yourself, your techs, other employees and clients so you can refute their misperceptions regarding your prices.