Fear erodes all resources

BY RICHARD P. DiTOMA, L.M.P.

contributing writer

Change is a necessary life occurrence. Without change we would all be sitting in a cave huddling around a fire that did not exist because no one took the steps to discover the existence of fire. Mankind did not create fire. It is caused by the combination of fuel, oxygen and an ignition source. But once discovered, fire has proven to be a very helpful tool that allows us to keep warm, cook food and invent and create, which helps us enjoy life. On the other hand, we must remember that fire is also very dangerous and has the power to destroy life. When tools are not utilized properly and safely, disaster is just round the corner.

Inventors combine what they see with what they envision to be possible. Then they seek ways to make their concept a reality. From the invention of the wheel to the technological advances we use today, the human race has invented many physical items and discovered an abundance of theories & methods, but mankind has never been the creator of the principles that make them work.

To its credit, the human race has set benchmarks in order to have measuring systems by which successes and failures necessary to invention and discovery can be chronicled. One of those is the use of mathematics. By maintaining a value system that is constant, humans can keep score. The most basic mathematical fundamental is that two plus two equals four --  it never equals less -- it never equals more.

When implemented properly, those measuring systems can lead to success. However, just as with fire, improper use or misinterpretation can lead to catastrophe. To properly use a measuring system you must be factual not emotional in your decision making. One of the emotions to avoid is FEAR.

Fear exhausts assets rapidly

Whether your business is a one-man/woman band, a large company with thousands of employees or anything in the middle, you have limited resources available to be able to perform what your clientele wants you to provide them. Your clientele exhausts your valuable resources to get the services they want. Hence, we have the word “consumers.” Regardless of whether your client is Mr. or Mrs. Jones or a Fortune 500 corporation, both are consumers because they consume your valuable resources for their needs.

One of your responsibilities is to be aware of the depletion of those assets and the cost to replace them so that you can have them available to serve the next client who wants to consume them. As a “for profit” business you can accomplish this feat by understanding that regarding your selling price policies you only have three choices. You can choose to 1) sell at your cost, 2) sell below your cost or 3) sell above your cost.

If your choice is “1) sell at your cost,” you totally miss the reason your “for profit” business exists -- which is to make a profit above your cost.

If you choose “2) sell below your cost,” you not only miss the profit, but you have to pay for the depletion of your valuable resources, which were consumed by the consumer for the services they requested and received. With this choice you should consider moving your residence to the confines of a padded room because you could be considered mentally deficient, and you will hurt yourself financially.

To show your intelligence and intention to be profitable, the only choice you should implement is “3) sell above your cost.” But beware: FEAR can tempt you to make the wrong choice.

To sell above your cost you must follow the first rule of business -- identify and calculate all your tangible and intangible costs correctly. Unfortunately, most contractors do not do it 100% correctly. Regarding the calculation of your costs, when you do not include all your costs, or when you place wrong numbers into your calculation, you are not 100% correct. Therefore, you are incorrect because wrong numbers get wrong results. FEAR can keep you from including all your costs in your calculation. And, FEAR exhausts assets rapidly.

Fear eliminates appropriate reward

The second rule of business is to sell your services above your cost while maximizing your profit, and remember “fair is a two-way street.” For those reasons, when the consumer receives what they want or need from the services you perform for them, logic and fairness dictates that you must receive not only the recovery of the costs you incur, but also a reward [profit] above those costs for the delivery of those services. There are only two choices as to who pays for the recovery and the reward -- 1) the consumer responsible for the consumption or 2) you. However, before choosing you must take heed that FEAR eliminates appropriate reward. If you pay for the recovery and/or the reward, you have neither recovered your cost nor earned your reward.

A few months ago my daughter and son-in-law gave me the title of grandfather. Hailey is my first grandchild and she’s beautiful. I see her at least four times a week and I just can’t get enough of her. I bring this up to explain a method you can use to eliminate the FEAR that seems to always creep up just before you quote a price. I have used this method for many years since my children were small. You can change the future no matter how old you are by correctly mending your ways. 

FEAR of doing the right thing leads to doing the wrong thing. Implementing wrong procedures will get you wrong results.  Most contractors buy jobs because they are fearful of losing work. They should instead sell their services at prices that will recover their costs and maximize their profits. If you don’t want to fall into this category, before you open your mouth to quote a price, first put your brain in gear. You can accomplish this by developing proper profitable selling prices. Next, as you look your client in the eye, envision a loved one who will be affected by the result of the price you are about to quote. When you don’t recover your costs and maximize your profits, the money you don’t get is coming out of the mouths of your family members. That’s how FEAR eliminates appropriate reward.

Fearful excuses are ridiculous

Ignorance of proper procedures to use in operating your business is not in and of itself a bad thing. No one knows everything. But staying ignorant of proper business procedures turns ignorant actions into stupidity! When conducting seminars on the subject of operating costs, I often ask attendees if they know the cost of operating their businesses. Several will say they are at the seminar to find out how to calculate their costs. Others will say nothing. Some will raise their hand claiming they know. But when I ask the hand raisers how much it costs them for items such as callbacks or bad debt, they don’t know the correct answers. That makes me come to the conclusion that they are fooling themselves because they don’t know their real costs.

The only person to hold responsible for the results your business realizes is you. If you don’t know your true cost you are at fault. Some contractors make up excuses like I have a bookkeeper or accountant for that. If you place people in positions where you give them the authority to run your business, you are responsible for placing them in that position. Thus, the results your business realizes always reflect on your choices.

One union contractor at a seminar recently told me that to fix operational cost ignorance in the industry I should speak to the unions about costs. That’s absurd. I told him that the unions do not make contractor prices. If his hypothesis were true the extension of his idea would be to speak to every business from where contractors purchased products and/or services. The fact that union contracts are part of the costs is the same thing as a gallon of gas being part of the cost. Does he think I should speak to opec about his fuel costs? Unions are not responsible for contractor costs. Contractors are! Each individual contractor is responsible to their business to purchase needed products and/or services at the best price, and include the costs and their maximized profits in their selling prices. Contractors are responsible for recovering their costs and attempting to earn a profit.

Another union contractor seminar attendee told me [after discovering his costs] he would have to sell his services for $90.00 per tech hour. He said he would not get any jobs. My response was to ask him if he wanted to pay for the costs consumers gave to him through their consumption. He said no. I asked him to delete the direct labor costs he had just figured in his budget and tell me the amount he calculated for his hourly overhead cost for one technician. He said that his overhead cost was $33.00 per technician hour.

I then asked him to tell me the annual gross amount a technician, who was the sole support of a family of four, would have to earn in his area to be at survival level, comfortable level and content level. I defined survival as a family who lived paycheck to paycheck; rented their home rather than owned it; could not afford to save any money or go out to a movie or dinner; and had a car that was only held together by oxidization. I then described comfortable as a family that owned their home [albeit mortgaged]; could save a few shekels for a rainy day; could afford to go out for dinner and a movie once a week; and owned a late model car in good condition.

To round off the explanations I added that the content technician had everything the comfortable one had and then some. The content tech only had to work 40 hours a week and had no need to moonlight, which only serves to take work from the industry, therefore making things worse for everyone. He told me the following amounts: survival needed $35.000.00; comfortable needed $60,000.00; and content needed $85,000.00.

I asked him which type of technician he would prefer to employ. By nodding he indicted he would prefer the content one. To show him he could not have what he wanted with his negative mindset I used his overhead cost in combination with his three salary levels. In figure 1, I have added 25% to his answers to cover added salary expenses: fica matching funds; unemployment, disability, workers’ compensation, and health insurances; liability insurance related to payroll; and a retirement fund.

Those labor/overhead costs are based on selling all the possible hours available [1,708]. If all hours are not sold the cost per hour for sold hours is higher. To be able to employ his preference [the content technician] he would have to charge $5.00 per tech hour more than the $90.00 he said he could not charge and get work. And, at that rate he would not be making a profit. Therefore, he could not possibly attain his goal with his negative mindset.

At the comfortable salary level [as per fig. 1] shows his cost as $77.00 per tech hour. The survival level [as per fig.1] shows his cost at $59.00 per tech hour. At these levels he would have the chance to earn a profit if he charged above his cost and not at $90.00, but, he would not have content employees.

Figure 2 shows the same chart when only 1,500 hours per tech year are sold. The cost per hour increases and this must also be taken into consideration when considering selling prices.

My point is that two plus two equals four -- it never equals less -- it never equals more. It is imperative to act in a business-like fashion, correctly calculate numbers and charge accordingly rather than make silly excuses which contradict the numbers. When this contractor continued to say he couldn’t charge $90.00 per tech hour he was allowing his FEAR to lead him. I told that he was right. He couldn’t get those numbers because his FEAR would not allow him to charge the proper amount to allow him to attain his goal and earn a proper profit. When you say you can’t you are really saying you won’t.

Positive thinking pays

Logical fearless intelligent contractors never say they can’t. Like inventors they combine what they see with what they envision to be possible and find a way to get it accomplished. After that seminar another contractor told me that he found $11.00 of cost per tech hour for which he had not accounted in his selling prices. He was appreciative of the information because it would help his business recover its true cost and earn the proper reward for the services it rendered.

He had 15 technicians. That means by being positive instead of fearful, he realized he could bring in $281,820.00 dollars more for the same work load [$11.00 per tech hour 5 15 techs 5 1,708 annual maximum tech hours per tech]. Not bad!  And, that doesn’t include profit.

Do yourself a favor. Don’t let fear eliminate appropriate results. When the results you are experiencing don’t meet the goals you would like to attain it’s time for you to muster the courage to make changes. If you need help, give me a call at 845/639-5050.

        

Richard P. DiToma is a business consultant and contractor with 36 years of experience in the P-H-C industry. He conducts seminars, evaluates business operations, publishes customized price guides for contractors and offers continuing support.

His book -- “Solutions Management Theories & Methods for the Contracting Business” -- deals with solving pr-oblems contractors face; identifying & calculating costs; developing proper profitable prices; addressing consumer questions; hiring and evaluating technicians; and logical management procedures

It’s also available as a “Workshop On Demand” for individual businesses (from one person to multi-person businesses); contractor groups  (organized or informal); trade associations; and wholesalers to the trade.

Date: Arranged according to your schedule

Location: Wherever you wish. Richard P. DiToma will come to you -- or you can come to him. Contact Richard to find out if there is a workshop coming to your area.

His other book -- “Readily Available Pricing Information Digest 2006” -- for the plumbing-heating-cooling contractor service price reference book is available with plumbing &/or heating &/or cooling section(s). To receive more info about his services, to order his books or to contact Richard at 845-639-5050, by fax at 845-639-6791 or via email at richardditoma@verizon.net