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Mike, a plumbing, heating and cooling contractor from New Jersey, called me in disbelief about the article I wrote in the October 2017 issue. He wondered how the cost to the contractor in the article, for labor and overhead, was only $103 per tech hour. Mike liked the article and wanted to bring it up at an association meeting. But, in his area, the cost to the contractor for labor and overhead was much higher. And, he was afraid that using an article that said a contractor’s labor/overhead cost was only $103 would give contractors in his association the misperception that the amount also pertained to them.
Mike had a point. People often do not look at the details surrounding circumstances. So, I’ll try to clear up any confusion. I have often written that at present, the range of cost contractors in the U.S. incur to have one qualified service technician in a properly equipped service vehicle is minimally $100 to $250 per tech hour, when all available tech hours are sold all the time. To that statement, at present, I stand firm. In the future, it will probably rise.
Now, let’s dissect the statement. The word “qualified” means a technician that can:
1) intelligently discuss the circumstances revolving around consumer requests and the available remedies;
2) explain the business protocols used by the contracting business;
3) diagnose specific problems pertaining to the consumer’s need for service;
4) present a remedy and price quote to the consumer that will allow the contracting business to recover the costs it incurs, and earn a profit above those costs;
5) properly do the paperwork; and,
6) last, but definitely not least, deliver excellence in the performance of the service to the consumer.
I can hear the groans from contractors while I’m writing this article. Where and how can you find that kind of tech? To that question, I say contractors must know what to look for in candidates for employment before hiring techs. And then, contractors must evaluate technician performance to assure excellence is being delivered to consumers.
Once a star tech is hired, retaining their employment requires contractors to properly compensate them. Properly compensating star techs requires selling prices that allow contractors to be able to pay them. Do you see the circular problem? If you don’t charge properly profitable selling prices, you can’t afford to retain star techs who can deliver excellence to the consumers who pay for your services.
My book “Striving for Star Techs” presents insight needed to hire and evaluate good technicians. If you’re interested in this book, call me.
Next, what is a properly equipped service vehicle? That’s a service truck or van that has the tools and materials needed to perform tasks that you encounter on a regular basis. It would be wise to create an inventory list of items you use regularly during the year, and, a list of tools regularly used. Don’t keep material on your truck that doesn’t get turned over regularly. Your inventory list is also a tool for replenishing the truck each day. The same barometer relates to the tool list.
What does “minimally $100 to $250 per tech hour, when all available tech hours are sold all the time” mean? Well, minimally means it could be more, but, it is never less. Why the range is so vast brings us back to Mike’s problem with the $103 hourly tech labor/overhead cost.
Factors that make up the operational costs contractors incur differ across the U.S. Large urban centers and surrounding areas have higher costs than other areas. The cost of employee compensation, real estate, insurance rates etc. vary. Since I am writing for contractors across our great nation, I must use a large range to cover everyone. The contractor whose labor/overhead cost is $103 per tech hour if they sold all their tech hours all the time, operates in a more rural locale with lower cost factors.
The next part of the phrase “when all available tech hours are sold all the time” is where the concept of properly and profitably setting prices becomes a bit more complex. No PHC service contractor sells all their available tech hours all the time. Since you never know how many tech hours you will sell, the only constant factor is all available hours. By using a higher profit margin, you can take into consideration the risks associated with unapplied labor.
Using the $103 per tech hour as an example, let’s see what that contractor’s cost is when they don’t sell all their hours all the time. At 90 percent of time sold, their cost per tech hour is $114.46; at 80 percent, it is $128.79; at 70 percent, it is $147.09; at 60 percent, it becomes $171.63; and, at 50 percent, it is $206.
The percentage of hours sold varies dependent upon the number of techs employed. Having lots of work and not enough techs to do the work is frustrating. But, having more techs than you really need is foolish and costly.
If you have short spurts of increased workload, paying overtime to existing employees is less expensive than hiring more employees and laying them off when the workload is satisfied. Overtime pay gives existing employees more money. Laying off employees brings down the morale of your remaining employees.
If you keep the techs you added for the short workload spurts after the workload recedes, you will be tempted to lower prices (often to levels which do not allow you to recover your true cost let alone make a profit) to find work for those techs. Deficiencies in employee morale and prices lead to stress, frustration, and eventual failure.
The basis of available tech hours depends on the amount of holiday, vacation, and personal time a business allows. Because the contractor estimates selling about 70 percent on average, the contractor with the $103 cost has chosen a 50 percent margin giving them a selling price of $206 per hour ($103 ÷ 50 percent). If they sell an average 70% percent, they earn a gross profit of $58.91. If their workload drops to 50 percent, they can still recover their operational costs.
That beats selling services for less than the cost to provide services. In Colorado, a contractor recently told me he sells for $90 per tech hour. If his cost was $100 per tech hour, he is minimally shortchanging his business by $10 an hour. At a true cost of $250, the hourly deficit would be $160.
A New Jersey contractor (not Mike) just told me he sells for $120 per tech hour. But, he didn’t know how much that hour cost him. His selling price of $120 per tech hour cannot possibly allow him to recover his true cost and earn a profit above that cost.
He charges a $29 service fee; the $120 hourly rate upon arrival at the consumer’s locale; and material with a variable markup of material cost.
I asked him to tell me what he charges for a task he does often. He chose a ballcock and flapper replacement. He said his average travel time to the consumer is 30 minutes and the job would take one hour at the consumer’s home. His upfront price for this job is quoted to the consumer as $216.50. He told me his material cost is about $27. Subtracting the $29 and $120 fees means he charges $67.50 for the material.
Subtracting the $27 from the $216.50 selling price leaves him with $189.50. If his true cost is only $120 per hour if he sells all his hours all the time, the labor and overhead cost he incurs to travel to and perform this task is $180 (1½ hours x $120). That leaves him with $9.50 profit.
However, if he only sells 90 percent of his available tech time his true cost per hour becomes $133.35 making his labor/overhead cost $200.03 ($133.35 x 1½ hours). Add the $27 for material and he incurs a $227.03 cost to bring in $216.50. That’s a loss of $10.53. If he sells less than 90 percent of his available hours his loss would be greater.
I looked up factors I use in my Readily Available Pricing Information Digest. This price guide allots 1 hour and 10 minutes to perform the task at the consumer’s location inclusive of everything from knocking on the door, doing the job with ancillary discussions and paperwork, and leaving the premises.
This price guide is customized to an individual contractor’s labor/overhead cost factor as well as average travel time to consumer. The average time to perform this task inclusive of 30 minutes for travel time is 1 hour and 40 minutes. At a $120 cost factor, his labor/overhead cost would be $200.40. To that add the price guide material allowance of $35.45. That means his true cost if he sells all tech hours all the time is $235.85. Every time he charges $216.50 for that task he minimally shortchanges his business $19.35.
On my desk, I had a copy of a pricing guide I had made for another contractor located about 50 miles from the New Jersey contractor. I looked up what this contractor is now charging for the same task. The customized factors in that guide are $160 labor/overhead tech cost per hour; 30 minutes travel time; and 50 percent profit margin.
When I told the New Jersey contractor the other contractor charges $605.95 before any discounts, he responded in a fashion I have heard from other contractors who are in denial of the true costs they incur operating their PHC service contracting businesses, and, the prices they must charge to succeed. “They’ll never pay that in this area,” he quipped.
To that, I asked him if consumers in his area drove luxury cars. He said yes. I told him if there was any truth to his statement no one would buy luxury cars because all a car does is move people from point A to point B. But, the fact that they do buy luxury cars proves they will pay higher prices for that which they consider to be better.
Not giving up he said that consumers would pay for cars, but, not for plumbers. I say plumbers who charge like he does don’t really know if that statement is true because they don’t how to, or, ask for the right price.
Asking for the right price requires contractors to be certain of their true cost; have personnel trained in the proper way to present themselves and their prices; and, deliver excellence.
He ordered my book “Solutions Management Theories & Methods for the Contracting Business.” And, he is contemplating joining one of my Contractor Profit Advantage programs.
Mike could use the aforementioned explanation when speaking with his association colleagues. He might even bring up an often-used parental warning to their children, “If your friends jumped off a bridge, would you?”
Then Mike could offer what I say, “Don’t follow contractors who are jumping off the bridge by selling their services at flawed prices. Deliver excellence. Properly calculate your true costs. Choose proper pricing protocols and profit margins. Quote properly profitable selling prices.”
If you would like any of my books, price guides, coaching assistance, or just have questions, give me a call. I look forward to speaking with you.