As a business owner, I take my reviews and reputation extremely serious and personal. I likewise watch the reviews of my competition to see triggers and trends and hopefully not make the same mistakes. Of the mistakes that can and sometimes will happen, price of services and goods is extremely difficult to get right and often times is difficult to communicate why something costs what it does. I will attempt in this blog to facilitate the reasoning behind the cost, as I feel that even my competition should not receive a bad review just because of the cost.
When I started Simply Right Heating I knew how to size, install, maintain, and repair HVAC systems; what I didn't know was business. I started working out of an existing vehicle that I already owned with regular insurance, a very embarrassing work insurance policy, and enough tools to scrape by. As the business grew with demand and clientele base, so did the need for actual service vehicles, commercial insurance, work order management system, accountant, payroll software, computers, better tools and equipment, and unfortunately more taxes. When it was just me as a sole proprietor ship, the company's money was mine and I could use it anyway I saw fit and believe me I made really good money and had plenty of it. I was doing service calls for $65 flat, selling capacitors at $55 and doing really well. I was keeping up with client's and their request in an excel spreadsheet. This was fine for a very short period of time until the spreadsheet became so convoluted, my tax reporting became near impossible to track, and I was failing fast.
Each time I implemented another process, software, vehicle, insurance, becoming a registered corporation, and hiring people; my prices had to be adjusted to be able to afford all that. The easiest of these to compute was the taxes believe it or not, our tax rate is roughly 35%; in laments terms you might as well say that $35 of every $100 I collect goes to the federal and state governments. The direct cost of a part or system is fairly simple as well seeing as how those prices are black and white from my suppliers. The slightly more difficult ones are operational costs like fuel for vehicles, insurance, softwares, phones, computers, tools, buildings, utilities, employee benefits such as health care and retirement, and labor. Labor will be the last thing we talk about as it can be very tricky. For all but labor in the list, you have to estimate how many hours you will pay that year in payroll, divide the annual costs of that by the number of hours you intend to bill for, and this becomes the first step in the process of figuring your "hourly labor burden". For most companies this will range from $10/hr up to $100/hr, varying because of programs and benefits from company to company. I will digress here for a second and say that the company with the best technicians and installers will typically have the highest labor burden because of the simple fact that they are offering the best pay and benefits packages. The price is what you pay... The value is what you get!
Labor is really difficult to figure as it's a constantly floating target. Let's say for instance a really good technician is making $30/hr, by the time you factor in employee taxes, social security tax (paid exclusively by your employer), uniforms, and fuel, that employee actually costs roughly $55/hr assuming the company has minimal benefit programs. I've worked for companies where that same pay costs $65+/hr because of really great healthcare and retirement packages. Let's stay on the low and keep track of where we are so far. A small company operating at a medium capacity but paying decently will have $55/hr labor burden, $20/hr cost of operation, taxes, and parts.
If we look at a common service call and repair such as a failed capacitor, we can analyze the cost of said job and see what a "fair" price might look like. Let's say this hypothetical contractor is using a cheaper capacitor that cost them $15, and it takes a technician about 30 minutes to drive to a home, another 45 minutes of talking with the homeowner/diagnosing, 15 minutes to communicate repair and get approval, then 30 minutes to repair, test equipment, and collect the bill; we are at a total of 2 hours at $75 labor burden. That's $150 plus the capacitor which is $15, so we are at $165. We would call this number the "break even", meaning the least we could charge to just cover expenses (we haven't figured taxes yet but that's the last thing you do).
The company has to make a profit or it won't stay in business, the profit pays for uncollectible services, paid holidays, lost/stolen/broken tool replacement, paid downtimes like when a client cancels at the last second so a tech is sitting somewhere getting paid while the office tries to shuffle the schedule around; the list goes on. Typically speaking a net 30% profit will actually become an 8%-12% gross profit because of the things I just mentioned. This means that the $165 now should be $200-$275. I know, right now you think I'm crazy, how did a $15 part become this? There's so much more behind the scenes that I didn't even know about in my first year of business and I'm still learning.
Lastly, we need to appease uncle Sam, he's kind of mean if you don't grease his palm. If we sold this service at $230, we would pay roughly $80 in taxes between state and federal. This means that capacitor job needs to be sold at $310 dollars. Typically this will be 2 line items on your invoice, being a service call fee and fee for the capacitor. Keep in mind, this entire time we were using numbers from the bottom of the spectrum except labor, so a company offering great programs for their employees, it would not be unreasonable at all for them to be charging upwards of $450 for this exact same service and part. It could be exponentially greater if they are supplying premium parts such as Turbo capacitors. Some people are ok with buying tools from Harbor Freight, some like Home Depot, and some prefer Snap-On. It's no different in our industry. I can almost promise that Snap-On employees are paid more with better benefits than Harbor Freight, that's not to say there's anything wrong with Harbor Freight as it is a very successful retailer; they're just different.
I hope this helps to shed some light on an often sore subject and hopefully assists with the understanding of why parts and services cost what they do. Please feel free to leave a comment as I would love to hear your thoughts. We might even do a live cast about this is we get enough engagement.
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