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A contractor seeking my assistance in calculating his true operational cost told me he charged $85/tech hour. However, when I asked him what that hour cost him, he said that was the reason he was calling me. That response makes sense. When you need help, seek it.
Charging $85/tech hour does not make sense (or dollars and cents). But not knowing your true cost of operation and the proportionate hourly cost is insane. Identifying and calculating your true cost per tech hour varies dependent upon tech abilities and geographic locations.
This contractor also wanted to know how to attract techs to his employment. The first step of finding techs is to have a plan that includes knowing how to interview candidates for employment. To attract techs, you must make the compensation you offer attractive. Charging consumers $85/tech hour cannot possibly offer attractive compensation to techs. The numbers don’t work. Your rates must reflect your true operational costs, and charging $85/tech hour does not.
Tech salaries are a very important factor in your cost calculations. A tech who is excellent at performing plumbing and HVAC service diagnosis, repairs, replacements and maintenance should earn more money than someone who only performs either plumbing or HVAC services. Dependable technicians who have strong mechanical aptitude, integrity, loyalty, accountability and deliver excellence to your clientele deserve higher compensation than mediocre misanthropic mechanics. Although techs who do not excel in performance are paid less, they probably cost you more in the long run.
At present, average PHC tech hourly salary rates across the United States probably range between $20 and $50. Rates could be higher than $50 but, rates below $20/hour do not draw top-quality service techs. Think about the fact that politicians are trying to raise the minimum wage to $15/hour.
That $15 is for entry-level jobs that require minimal training and expertise. Top-quality service techs don’t grow on trees. You could pay a novice $15/hour initially if you intend to train him/her, but as he/she learns more — if that rate doesn’t increase, you will lose the tech you trained and have to start over. In addition to tech abilities, you must consider the cost of living in your area when setting your salary rates.
Salary rates, however, are not the only tech salary factors to calculate. You also must identify and calculate the salary expenses you incur related to hourly salary wages. FICA matching funds; workers’ compensation, unemployment, disability, health and liability insurances; vacation and holiday pay, etc., add to the cost you incur for tech labor by minimally 25 percent.
It means the $20/hour tech costs you minimally $25/hour and the $50/hour tech costs you $62.50 for every hour paid. That range of cost is based on selling all your tech hours all the time. If you sell less, the range increases. Throw in the fact that no contractor sells all his or her tech hours all the time and the cost per sold tech hour is higher yet.
Techs need properly equipped vehicles to be able to get to your clients. Those vehicles cost you minimally $7 to $10 per tech hour for depreciation, insurance, fuel, financing, repairs, maintenance, inspection and registration. The $7-to-$10 range also increases when you do not sell all your available tech hours all the time.
Other vehicular cost factors not directly attributed to each service vehicle, such as supervisory vehicles and special vehicles (e.g., delivery vans, dump trucks, etc.), will increase that cost range as it pertains to the vehicular expenses of your business and must be considered when calculating your true vehicular costs.
Those techs and vehicles would have no calls to service if your administrative staff were not there to accept calls from consumers, dispatch those calls to techs, keep your vehicles properly stocked, complete all documentation of calls and perform everyday administrative duties associated with running a business.
Even a one-person business has administrative duties to perform. The time to perform those duties has to be paid by someone. Either the consumer pays or you do. If you pay, don’t complain about having to perform those administrative responsibilities. If you want the consumer to pay, you must consider your administrative costs in your true cost calculations.
Minimally, those administrative salary costs include the same items listed for tech salaries. If your business had one administrative person and three service vehicles, your minimum administrative cost range would be between $5-$12/tech hour, if all hours are sold. If not, the cost range per tech hour also increases.
Your next cost concern is other overhead expenses such as rent, utilities, office supplies and equipment, communications (landline phones and mobile phones), answering services or additional pay for employees answering calls after hours, advertising, accounting, legal, customer relations (every contractor has callbacks, bad debt, breakage and loss, tools, licenses, continuing education, uniforms, bank charges and a myriad of unforeseen items that fall under the umbrella of Murphy’s Law (whatever can happen, will happen).
The minimum cost range for those items is between $45 and $121/tech hour. And, as with the other cost factors, if you don’t sell all your hours all the time, the cost range increases as per tech hours sold.
To arrive at the minimum per tech hour cost to a PHC service business that has one administrative person, three service techs and three vehicles, add the minimum cost per tech hour of $25 for tech salary, $7 for vehicles, $5 for administrative personnel and $45 for other overhead expenses. That’s $82/paid tech hour.
At the higher end of the minimum cost range per tech hours, $62.50 for tech salary, $100 for vehicles, $12 for administrative staff and $121 for other administrative expenses, your cost per tech hour would be $205.50/paid tech hour. Remember, that’s if you sell all your tech hours all the time. If not, the range is higher.
When calculating your true cost, you must remember there is a difference between the hours for which you pay and the hours you have available to sell so you can recover your true cost. For example, when you pay for 2,080 paid hours (40 hours/week x 52 weeks/year) but allow two weeks for vacation/personal time, six holidays and lose one hour each workday to nonrevenue producing time, you only have 1,708 hours available to recover your true cost.
Another issue of concern is that as each factor changes, the number you arrive at changes. The numbers I have used in this article are for example’s sake. You must plug in your numbers and you may need help if you can’t see the forest because of all those darn trees. If you need help, give me a call.
The minimum cost range becomes $100 to $250 per tech hour if all available 1,708 hours are sold. If you only sell 70 percent of each tech’s 1,708 available tech hours, the $100/hour cost rises to $142.86 while the $250.00 cost increases to $357.14.
Figures 1, 2 and 3 each show the minimum hourly rate of pay per tech, the aforementioned 25 percent salary expense, the vehicular expense, administrative expense (the administrative payroll expense shown is proportionate to each tech; this number could be much higher), overhead expense, hourly rate paid with expenses and the cost to contractor if 1,708 hours are sold. Keep in mind, if less than 1,708 hours are sold, the number is higher.
Figure 1 is based on the lower end of the range. Figure 3 is based on the higher end. Figure 2 is based in between Figures 1 and 3.
As you can see, based on the factors supplied, the least it would cost a contractor to employ a qualified service tech and supply the tech with a properly equipped service vehicle is $99.86 per hour if he/she sells all their available tech hours all the time. Keep in mind that the cost could easily escalate to $250.26/tech hour.
If you are charging less than $100/tech hour, you must stop fooling yourself. In life, there are things you can’t do as well as things you cannot control. There are also things you can do and control. When it comes to your business, you can resolve to properly calculate your numbers and take control by developing selling prices allowing you to recover your true cost and earn a profit above that cost. Proper identification and calculation of your true cost is the most important issue you must address in your business.
As for that contractor, whose call for my help regarding his cost calculation and hiring methods prompted the subject of this article, he ordered from me a copy of my book, “Solutions Management Theories & Methods for The Contracting Business,” which will show him how to arrive at his true cost and direct him as to those assets he should look for in candidates for employment.