Life is a journey. And like all journeys, reaching your destination requires directions and choices such as the route to take, whether to turn left or right at intersections or just go straight. Your business life also is a journey requiring wise decisions to arrive at your intended destination of business success.
The first decision
First you must choose the vehicle you will use on your journey. You can choose to go into sales, manufacturing, hospitality, etc. In the PHC business, you must decide whether you are going to use new construction, service work or both as your vehicle. Whatever you choose, the delivery of excellence should always be the paramount goal.
If you decide to sell both new construction and service work, don’t do it with the same personnel. Have new construction crews and a service team. Why? When you use the same personnel and are involved in a new construction project, you are obligated to perform in a timely manner. You can’t respond promptly to the consumer who needs a leak repaired, a water heater replaced, or a heating/air conditioning system serviced.
And when you are servicing general public consumers, you can’t fulfill your new construction contractual obligations. Therefore, excellence cannot be delivered because one of the ingredients of excellence is giving your undivided attention to your clients when they need your talents.
The second decision
Whether builders, general contractors or general public consumers, your clientele want excellent performance at the lowest price. However, excellence costs more to produce than mediocrity. Ergo, properly profitable prices are another ingredient in the delivery of excellence.
To be fair, your prices should recover for you the costs you incur to perform the task. To be profitable, your price should allow you to make a profit above those costs. To be properly profitable, your price should be commensurate with the quality you deliver. In turn, consumers receive the excellence they crave while you keep the price as low as you can under the circumstances attached to the delivery of excellence.
As a contractor, you have only three choices regarding the prices you charge. Thus, you must make another decision.
Option 1: Sell your new construction jobs or service work at the true cost you incur to fulfill the obligations of those tasks. But since the only reason “for-profit” businesses exist is to make a profit above the cost the business incurs, this choice will not make your price properly profitable — since you made no profit. You just loaned your money to the task. You will defeat your purpose using this option.
If you make this choice and you get your loan money back, you get all the stress and frustration of the job and break even financially. But since bad debt is an intangible business expense that all businesses encounter, you don’t breakeven. You spend more running your business than you bring into your business.
If banks operated in this fashion, they would all close. Just look at the banking disaster of 2007-2009 when banks faced the calamity they caused by granting mortgages to people who couldn’t afford to fulfill their obligations. The government had to ride to the rescue with your taxpayer money bailing out the banks because the banks were “too big to fail.”
If you follow this choice, there will be no one to bail you out.
Option 2: This second choice is more foolish than the first one. You can choose to sell your jobs below your true cost. Using this method will ensure you lose money and increase the stress and frustration levels that normally come with running a business. Continuing to use this method will lead you to cheat yourself, your creditors, your employees and your clientele as you try to make up the difference between your true cost and the prices you charge when you sell below your true cost.
Option 3: This is the only option for wise, honest contractors to choose. And since there are only three choices, the odds are two (options 1 and 2) to one (option 3) against you selling at properly profitable prices.
The third choice is to sell your services above your true cost. This means you must first correctly identify and calculate all your tangible and intangible expenses. Then you divide the true total cost by the amount of time you have available to perform tasks.
In the service arena, a 40-hour work week, 52-week year — with six holidays, two weeks personal time and one hour lost to nonrevenue-producing duties per day — gives you a maximum of 1,708 potential revenue-producing hours per tech annually, even though you paid each employee for 2,080 hours.
If you’re thinking you can get away by not paying for personal time and holidays, think again. But this time think intelligently. I often hear contractors tell me they can’t get good help. Not giving employees paid personal time such as vacation and holiday pay guarantees they will be unable to keep good help. And not paying doesn’t affect the 1,708-maximum revenue-producing hours. If you work a horse to death, the best you will have is a dead horse. So stop beating a dead horse.
In the new construction field, that maximum number of hours per tech (if techs started at the jobsite) would be no more than 1,952 potential revenue-producing hours annually. If you do both service work and new construction, you should have a separate operational budget for each to arrive at your true cost.
The third decision
Avoid the many temptations of a poor businessperson. Those temptations are:
In service work, you must place a qualified technician in a properly equipped vehicle. Both cost money. Trucks must be purchased, registered, insured, fueled, maintained and repaired. When you are maintaining or repairing a truck, you must consider downtime when calculating true cost. Downtime is an example of an intangible expense since it lessens your available revenue-producing hours.
Qualified techs cost more than wannabe technicians who aren’t properly qualified. And all techs want the most money they can earn for their labors. The onus is on you, the contractor, to properly vet candidates for employment before hiring them, as well as paying techs in a fashion that will make them want to stay in your employ and deliver excellence to your clientele so your business will have the opportunity to succeed.
In new construction, the vehicular expenses are probably less since each tech does not require a vehicle; techs may travel to and from construction sites on their own dime and time. It’s the reason you can get a maximum 1,952 revenue-producing hours per tech annually rather than 1,708 hours.
In the new construction sector of the industry, you can use the cost of teams rather than single techs when calculating the true cost of a task.
Regardless of which sector you use, there are always overhead costs to consider when calculating your true operational cost. Without the administrative personnel of a business, service techs and new construction teams would have nowhere to go to perform their given tasks since there would be no one to give them the tasks.
Administrative personnel add to your true cost even if you do everything yourself. After all, you don’t want to work for no pay. Therefore, you must consider all tangible and intangible administrative operational costs to arrive at properly profitable prices.
The fourth decision you must make is to make the right decisions for your business success or the wrong decisions that will lead you down the path of unwanted stress, frustration and the inevitable end of your business journey as you arrive at a destination you never intended to reach — the town of insolvency.