I often write about the importance of knowing the true operational costs you incur when running your plumbing, heating and cooling business. If you are not certain of your true operational business costs, your prices will more than likely be improperly calculated. Thus, you will not have the opportunity to attain the profit reward you want and deserve for the excellent workmanship you deliver to the consumer.

Contractor PHC prices are often based on the amount their local competitors charge rather than the true costs they incur in their individual businesses. The problem with this method of setting selling prices for PHC services is that it is, at best, extremely foolish. 

That’s because the overwhelming majority of PHC contractors don’t know their own true operational business costs. It stands to reason that if they don’t know their true operational business costs, they certainly don’t know yours.

Following their lead can likely lead you down the Road to Failure: a pathway filled with long hours, increased stress and utter frustration. You will bypass Profitability Lane where stress is low, frustration nonexistent — and the reward you deserve for the delivery of excellence and the risks you take in the delivery are within your grasp.

It is imperative to recognize that there are many factors to consider in managing your business. Failure comes into play when you use the wrong numbers or omit real numbers. 

Ignorance is not bliss

You have only three choices regarding your selling prices: at, below or above your true costs.

Obviously, selling at or below your true operational business costs isn’t only foolish, it’s downright stupid. Neither allows you to attain the reason your business exists: to bring in more money than it costs you to perform any service.

Stupidity is defined as “behavior that shows a lack of good sense or judgment.” Stupidity is very different from ignorance.

Ignorance is defined as “lacking knowledge, information or awareness about a particular thing.” Everyone is ignorant, including me, because no one knows everything about everything. 

I know the PHC service contracting business. I started in the industry as many contractors started: green, ignorant and innocent. However, I knew how to observe and rationalize procedures and issues important to success. 

I learned how to perform the services associated with the PHC industry from the bottom up until eventually attaining the status of master in the PHC trades. My business knowledge came from my academic studies in high school and college, and further grew through my abilities to observe and rationalize in the actual business arena.

My many years as a PHC apprentice, journeyman and contractor, blended with my aforementioned educational knowledge, allowed me to see the biggest problem in the PHC service contracting business. That is, ignorance of the proper way to manage a business and set prices that are proper, logical and profitable is detrimental to the delivery of excellence to consumers and profit to the business. 

Recognizing this problem and having common sense — blended with what I observed, learned and rationalized — gave me the know-how to become a PHC industry business consultant. So, here I am, trying to help you realize the importance of knowing your true operational business costs so that your prices will reflect the third of the three pricing choices.

You remember that one: selling your services above your true business operational costs. That’s the only choice that provides you with the opportunity to travel on Profitability Lane.

In order to have an opportunity to sell your services above your true operational business costs, you must first correctly calculate the total of all your costs — not just some of the costs.

Then, to find out your hourly tech cost, you divide your true total costs by all your maximum available amount of sellable tech hours. 

You may be thinking that you don’t always sell all your tech hours all the time — and you would be correct. No contractor sells all available tech hours all the time. However, you need a benchmark, and the only true consistent benchmark is all your available sellable tech hours. The number of tech hours you actually do sell is always in a state of flux and isn’t known until after you sell them.

One of the risks you take in business is addressing unapplied labor hours. To address this, you must consider applying a profit margin that will, as close as possible, reflect the risk associated with the unapplied labor issue.

When choosing the factors pertaining to your true business operational costs and selling prices, it is necessary to be all-inclusive and not fool yourself with erroneous numbers and formulas.

The going broke rate

Wrong numbers and fooling yourself only leads to wrong selling prices. That statement reminds me of a conversation I had many years ago with a contractor who was referred to me by another contractor who had availed himself of my consulting services and was reaping his just rewards.

The referred contractor seemed like a bright person who wanted to succeed in his business. Don’t we all? However, he wasn’t earning a profit for his hard work. So, I asked him how he was calculating his prices. 

He said that he knew what his maximum amount of available sellable tech hours were. When he calculated his selling prices, he multiplied the number of hours he estimated any task would take to perform by $100 to arrive at his selling price for the labor/overhead portion of his selling price. He added that to the marked-up price he chose to charge for the material used in providing the service.

He couldn’t see how this method was failing him. And that was his problem; he couldn’t see the forest because of all the trees in his way.

The first thing I asked him when he told me of his system was, “How did you arrive at the $100 per hour?” As soon as I asked him that question, it was like I turned the light on in his brain to allow him to realize that the trees he saw were the forest.

He had no idea whether that $100 he was charging for labor, overhead and profit was the number he should use. He insisted that it was the going rate in his area. I said that the going rate is usually the going broke rate because contractors following the practices of other contractors who don’t arrive at their prices by way of correct calculation and mathematical accuracy are traveling along the Road to Failure.

To that, I added a question about how he came up with the markup for his material. He didn’t know. It was another number that existed in, and changed with, the wind. 

Therein lies the turning of ignorance into stupidity.

In my very experienced and calculating mind, it should be noted that in the United States today, one qualified technician and one properly equipped service vehicle come with a labor/overhead cost to contractors of somewhere between $100 and $300 per available sellable tech hour, dependent upon the geographical service area.

That does not include any profit dollars.

So, if you want to travel on Profitability Lane, it is imperative for you to know your true operational business costs before your prices can be correct, proper and profitable — and you must deliver excellence to consumers.