Contractors often criticize the prices of their competition when those prices are higher or lower than their prices for the same service. When higher, they might say, “That guy is a high-priced crook.” When lower, they might say, “That guy is a low-ball fool whose workmanship is questionable.”
Logic dictates that only one of those critics could be correct, depending on the circumstances on why the statement was brought up. However, they both could be wrong if the claimant made the statement because he disagreed with the pricing of his competitor.
To arrive at the truth, you must remember that numbers are just a barometer you use to measure. Regardless of whether it’s the length of a pipe, how many miles you get to a gallon of fuel or your true cost of your business operation and the prices you charge based on your true operational cost, two plus two can only equal four — no less and no more.
How you apply numbers determines whether you are right or wrong. If you measure the pipe incorrectly, you may not be able to get the job done to the best of your ability. When the consumer does not receive the best service possible, the amount you can charge for your services will not be maximized.
When you don’t properly calculate your fuel mileage, you may run out of gas. Incorrect fuel consumption calculations, as well as any other flawed business expense calculation, will lead you to arrive at selling prices that are not properly profitable. In which case, you put yourself in a position of actually being high-priced or a fool.
The old saying is that, “Sticks and stones may break my bones, but words will never hurt me.” However, when one contractor calls the other a high-priced crook or a low-ball fool of questionable quality, neither looks good in the eyes of the intelligent consumer. And if their prices are too high or low, they are hurting themselves.
Calculating labor costs
The right price is the price calculated by identifying your true cost of operation, applying the proportionate amount of your true total cost to each task and blending your true task cost with a profit margin that can get you where you want to go.
Identifying your true cost requires you to think logically. As a PHC contractor, you sell services requiring capable technicians. Therefore, there is a direct labor cost for each task. The direct labor cost includes salary and salary-related expenses such as FICA matching funds; unemployment and disability insurance; worker’s compensation insurance (if you are a sole proprietor who is the only employee, some type of insurance in case you become hurt and not able to work for a period of time); health insurance; liability insurance related to payroll; vacation and holiday pay; and retirement funds.
Regardless of whether you use a time-and-material pricing method or a contract pricing protocol, the tasks you perform are calculated on time and material spent after the task is performed, or the estimated time and material that will be spent based on averages if using contract pricing correctly.
Contract pricing gives consumers the amount they must pay before the job is done. Time-and-material pricing shocks the consumer after the job is done and could lead to arguments over the price.
Figure 1 shows in $5 increments the cost of direct labor for every hour paid (2,080 annual hours) and how that cost is affected when you only sell 75 percent of your available time. The available time ends up as 1,708 annual hours after two weeks for personal time (vacation, six holidays and one lost hour of productivity per workday). Calculating 75 percent of 1,708 potentially revenue-producing hours results in 1,281 hours.
Since politicians are trying to get a $15 minimum wage, and qualified techs are worth more than minimum wage, I have started the chart at $15 per hour. I’ve also added 25 percent to cover the aforementioned salary-related expenses. Note that your salary-related expenses may be more or less.
As you can see, a paid hourly tech wage of $15 rises to $30.44 if only 75 percent of available tech time is sold ($18.75 paid for 2,080 annual hours equals $39,000). By dividing $39,000 by 1,281 hours sold, your cost per hour sold is $30.44.
And since no PHC service contractor knows ahead of time how many hours the company will sell in a year, it is imperative to consider the unapplied labor factor when calculating your true operational cost and the prices you charge for your services.
After 47 years in the contracting industry, I believe no PHC service contractor sells all available tech hours all the time. Under normal economic conditions, since most consumers don’t call for service until something breaks down, I would think an average 70 percent to 75 percent of the available time is sold. Some contractors may sell more while others sell less.
What about overhead?
Then, in arriving at selling prices, there is the cost of overhead. Every contractor, including those who work from their kitchen table or truck dashboard, has overhead. Tools, trucks, fuel, insurances, administrative expenses, etc., cost contractors money. How you run your business determines the amount of overhead expense you incur.
I have calculated the overhead costs of PHC service contractors to range between $75 and $150 per tech hour paid if all tech hours are sold. I have spoken to so many contractors over the years, I know some readers will disagree with that range. However, I am here to tell them I’m correct. Figure 2 shows the cost of overhead to the contractor when all tech hours are sold, as well as 75 percent of hours sold in $10 increments starting at $45/tech hour to $150/tech hour.
The $45, $55 and $65 overhead cost levels with a yellow background in Figure 2 are for the benefit of nonbelievers to show them they do have cost even if less than their true cost.
I believe the cost U.S. contractors incur for one qualified tech and one properly equipped service vehicle ranges between $100 and $250/tech hour if all tech hours are sold all the time. If you add my low overhead cost of $75 to the low technician salary expense of $18.75, you get $93.75. But remember, it’s based on paying a qualified tech $15/hour. How many qualified techs can you attract to your employ paying $31,200 a year? Probably not many, if any at all.
At $20 per tech hour, added to the 25-percent salary expense factor, you arrive at a $25 total tech salary expense. When added to the $75/tech hour, it gives you a $100 labor/overhead expense per tech hour if you sell all your tech hours all the time. If you only sell 70 percent of your available tech hours, your cost per tech hour sold is $142.86 ($100 by 1,708 hours equals $170,800; $170,800 divided by 1,195.6 hours sold equals $142.86).
Using the low end of the true cost range ($100/hour cost to the contractor) as an example, let’s look at three scenarios of contractors in the same area.
Tom sells his services at $100/tech hour (his true cost if he sells all his tech hours all the time). He calculates a job at 1 1/2 hours, inclusive of travel time, to sell for $150. He breaks even if he sells all his tech time, all the time. But since no contractor sells all their tech hours all the time, he loses money. That is the definition of foolishness.
Dick has the same cost as Tom. He knows he doesn’t sell all his hours all the time. So, he sells his services at $142.86 per tech hour and hopes to sell more than 70 percent. He sells the same job for $214.29. If he sells more than 70 percent of available tech hours, he can cover his costs and, he hopes, earn a profit above cost, but probably not maximize his profit potential.
Harry, who has the same $100/tech-hour cost if he sells all his hours all the time, sells his services for $200/per hour and gets $300 for that job. Tom and Dick think Harry is a crook while Harry ponders their foolishness. Who’s right? You only have three choices regarding your prices: sell at your cost, sell below your cost or sell above your cost.
If you are like Tom or Dick, make your New Year’s resolution not to criticize Harry and to find out how to price your services correctly. If you are like Harry, your resolution should be not to denigrate Tom and Dick’s foolishness, but to point them in the direction of someone who can show them how to price their services properly. If I can be of assistance, I’m as close as the phone. Happy New Year!