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In providing service, contractors incur the cost of vehicles and ancillary vehicular expenses. Each service tech needs a vehicle for travel to the consumer’s locale. Therefore, it is necessary for service contractors to calculate and assign the cost of that travel to the consumer who is devouring that resource.
The laws of the land allow you to depreciate the vehicle over five years. Simply put, a truck that costs you $30,000 can be depreciated as an annual $6,000 expense for five years. At the end of that term there is no further depreciation. For accounting purposes, the vehicle has no value.
Then, there are annual ancillary vehicular expenses spent for insurance, fuel, registration, inspections, repairs, maintenance and financing.
A truck that is 5 years old or less will obviously have less necessary repairs than older trucks. But, as the truck ages, the repair and maintenance bills will increase — not only in dollars for repairs, but also, in down time, which does not allow the truck to be on the road serving your clientele and bringing revenue into your business. Ironically, the annual vehicular cost of older vehicles could be more than newer trucks, which are purchased and depreciated in cycles of five years.
The cost to contractors for a service van
Chart 1 shows the annual cost contractors incur for a new service van over the first five years: Line 1) the cost of the vehicle in $5,000 increments, from $25,000 to $45,000; Line 2) annual depreciation allowance over 5 years; Line 3) annual vehicular insurance (which could be higher); Line 4) annual fuel usage based on $3/gallon/12,000 annual miles driven/12 miles/gallon; Line 5) annual registration and inspection fees; Line 6) annual repairs and maintenance; Line 7) annual financing costs of vehicle.
Note: *Any of the amounts in the following charts could be higher or lower. The chart is meant to give you an idea of costs a contractor incurs for vehicles that get technicians to consumer locations in order to provide the services consumers request.
In addition to those costs, you must realize that you only have a maximum of 1,708 annual potentially revenue-producing hours per tech to recover business expenses [(52 weeks x 40 hours = 2,080 hours) – (80 hours for 2 weeks for vacation/personnel time / 48 hours for 6 holidays / 244 hours for non-revenue producing tech duties) = 1,708 hours].
Based on the chart, a $25,000 vehicle minimally gives contractors a cost of $6.56 while a $45,000 vehicle cost to contractor is $9.13/hour/tech — just for the vehicle, if all tech hours are sold all the time. It doesn’t stop there; if you sell less hours, the cost per hour increases (see lines 10 and 11 of chart 1). And, to serve its purpose that truck needs a tech in it who can drive it and perform the requests of consumers. That tech adds to the travel expense.
The cost to contractors for techs
Chart 2 shows: Line 1) the average cost to contractor for different tech pay levels starting at $20 (gross pay without benefits or salary related expenses) per tech hour and increasing in $5 increments up to $45/tech hour; Line 2) the average cost to contractor for expenses directly related to salary (e.g. FICA matching funds, insurances etc.) based on 25 percent of pay level.
The cost (to the contractor) of travel to the consumer including the truck expense, hourly pay, and salary related expenses, based on the two charts has now reached a minimum range of $37 ($6.56 + $30.44) to $77.63 ($9.13 + $68.50) per tech hour, if the contractor sells all available tech hours all the time. If not, the cost is higher yet. It doesn’t include the other overhead costs of running the business.
Contractors still have to pay for administrative labor, offices, utilities, office supplies, phones, education and a myriad of other expenses used for the business to have the ability to serve consumer requests. Those costs must be considered in the true cost of employing techs since tech services are the only way money is brought into a PHC contracting business. The additional minimum overhead cost range to the contractor, if all tech hours are sold all the time, is between $65 and $140/tech hour. It could be higher. If yours is lower than $65, you could be cheating yourself by not properly calculating overhead expenses.
Using the aforementioned numbers, the minimum labor/overhead cost to the contractor per tech hour falls between $102 ($6.56 + $30.44 + $65) and $217.63 ($9.13 + $68.50 + $140) — if all tech hours are sold all the time. Most contractors probably sell no more than 75 percent of available tech time. That would make the range of cost for truck and tech jump to between $114.33 ($8.74 + $40.59 + $65) and $243.51 ($12.18 + $91.33 + $140).
The cost to contractors for travel
To calculate the cost to you for the travel time to send a tech to your client’s home or business to address their requests for service, you must also know your average travel time — not just the longest or the shortest. For most contractors, this average time will range between 15 and 45 minutes. Multiply that average time by your cost per tech hour.
Using a $100 to $250 cost to contractor range at $25 levels and 5-minute increments from 15 to 45 minutes for average travel time, Chart 3 shows the cost you incur to travel to each consumer if you sell all tech hours all the time. Sell less, and your costs will be higher.
Recovering the cost to contractors for travel
To recover travel costs you incur sending a tech to your client, you have to include this expense in your pricing policies. It’s as simple as that.
There is no such thing as a free estimate; someone has to pay for the cost of travel. You might wonder how contractors who offer free estimates to consumers can afford to do so. Simply put, they either: 1) pay for it themselves, which is a practice that increases their burden of cost while eroding the profits of other jobs done; 2) include the travel cost in their cost to perform the task; or, 3) cheat.
The first option is foolish. Successful business owners do not absorb the expenses they incur delivering services and/or products to consumers. They pass those costs onto the consumers who are consuming their resources.
The second option is intelligent, legal and moral. When employing this method, you would be wise to charge a minimum service call fee to the client to cover the cost of travel and a bit of time to check out the task so you can recover your cost if the consumer decides not to proceed with the job.
When charging a minimum service call fee, and in order to keep this practice intelligent, legal and moral, you should inform the consumer that there is a minimum service call fee before dispatching a tech. This will abate the chances of any arguments arising if the consumer decides not to have the task performed.
By including the travel time cost in your selling price to the consumer, you can inform the consumer that there is no minimum service call fee charged if the consumer has you perform the task at that visit.
By informing the consumer, and having the consumer accept this term before incurring the cost of travel, you are simply offering a service at a pre-quoted price that the consumer can decide to accept or reject.
The third option, cheating, is morally corrupt and potentially illegal. Cheating people is wrong. The propensity for misrepresentation and fraud arises. Some contractors may tell consumers they need services that they really don’t need. Example: Telling a consumer they need a new water closet when replacing the ballcock is the only service needed.
Giving consumers choices, such as the price to change the ballcock and the price to replace the water closet (with the fact that they don’t need a new water closet), lets the consumer decide the option they prefer.
You also have options; you can choose to recover your true legitimate costs of operation from the consumers who consume your resources or you can choose to pay for those resources yourself. The former choice is intelligent while the latter option is foolish.
Before you decide, realize this: When your techs perform services for three consumers a day with labor/overhead cost at the minimum $100/hour, andthe average travel time is only 15 minutes, your annual travel cost for each tech would be $18,300 ($25 x 3 consumers x 244 workdays = $18,300).
If each day they also visited a fourth consumer who did not give them the job, their sign-up rate would be 75 percent. But that visit would cost you the travel time plus the time spent giving the consumer a price quote. In that case, 15 minutes spent speaking to the consumer added to the 15 minutes for average travel time, would give you 30 minutes spent at $100/hour. That’s $50. Based on the same 244 workdays, you would have spent another $12,200/tech annually. That’s why there is no such thing as a free estimate.
Numbers don’t lie — people do. Don’t lie to yourself. Calculate your costs properly. Recover your costs wisely. Give yourself the opportunity to earn the reward you deserve.
Think about this, when you visit a doctor or a lawyer, you go to their offices. You pay for the privilege of seeing those professionals and having them address your needs. After all, they incur expenses to have offices and personnel ready to serve you and give their opinions of your situation.
When you the professional PHC contractor travel to consumers, you have to bring your mobile office (in the form of a truck) with you so you can give your opinions of consumer needs.
I know I have given you a lot to think about, but, think you must. If you need my assistance, 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, give me a call. The initial call doesn’t cost you anything, and, you just might discover some good ideas.
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. N.Y. 10994.