Success requires balance, logic and fairness

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

contributing writer

As a contractor, you must learn to identify and understand the root causes of all your woes in order to solve the problems you will encounter, and to alleviate undue stress and frustration. Balance, logic and fairness can help you get past many trials and tribulations. Many contractors think they know how to operate their businesses correctly, but in truth, do not have a clue. That’s the first root cause of their troubles. The second root cause is their self-denial regarding the incorrectness of the business procedures they use. From there, everything else is downhill. If you, as a contractor, illogically charge ahead into the darkness without illumination so you can see where you are going, you will surely lose your balance. And since pride comes free before the fall, once balance is lost, the fall begins.

Businesses that are run in the darkness lack the necessary essentials for success, and cannot possibly be fair to the business’ owners, employees, clientele and creditors. Without a good game plan, which includes knowing real costs, without choosing proper profit margins, without blending real costs and proper profit margins to arrive at profitable selling prices, and without implementing sound business practices in the deliverance of excellence to consumers, real success is not attainable.

False success

Many contractors think they’re successful because they move a large amount of money. But moving money is not making money. Moving money often leads to “borrowing from Peter to pay Paul.” Making money requires that after all costs are recovered, an amount of revenue (less taxes) remains to be distributed to the owners of the company.

But many ignorant contractors just don’t get it. They confuse many facets of business. One root cause of their problems is thinking their salaries and their profits are the same thing. Salaries of all employees -- including the owner -- and profits of a business are two separate items. Salaries are expenses. Profits are rewards.

But when the confused use wrong information and protocols, they must come up with all sorts of schemes to make the numbers work. One of those is the implementation of slavery. That’s when they work more hours without proper compensation for the extra work in order to make up for their poor business practices. Another form of slavery is not paying themselves or their spouses who work in the business. They just take whatever money is left, if any, then they call it a profit. With a blind eye and deaf ear they shun the reality that they didn’t get paid for their labors. That so-called profit is the only monetary compensation they get. It is often below the minimum wage or non-existent. Two plus two only equals four. It never equals less. It never equals more. Therefore, with wrong numbers you can only get wrong results.

One of those illogical contractors called seeking information as to where he could purchase my price guide, the Readily Available Pricing Information Digest©. I told him that one of the things he needed to know was the labor and overhead cost he incurred for one technician hour because the price guides are customized to the subscriber’s labor and overhead costs. He quickly told me that he knew his costs.

I knew the costs in the area in which he operated were between $100.00 and 200.00 per technician hour. When he told he had calculated his costs for one technician hour at $122.00, I was pleasantly shocked. At least this guy was giving me the perception that he wasn’t one of those brainless masterminds in his area that charge less than $100.00 per technician hour when their real costs are higher.

I thought I was speaking with a PHC contractor who not only had brains, but also used them. Elated as a balloon inflated to its maximum capacity, in an effort to see how intelligent he really was, I asked him the amount at which he sold that tech hour. His answer was like a sharp pin as it burst the balloon and showed that someone who did not use common sense was running his business. He told me he charged consumers $120.00 for one technician hour, which he had calculated to cost him $122.00. After a pause of silence from my side of the phone, I dramatically and emphatically yelled, “What!! Why do you charge two dollars an hour less than it costs you?”                                                       

He quickly said, “I should have rounded it up to $125.00. Right?” My response was, “DUH! Probably more.”

Assuming that his calculated cost of $122.00 per technician hour was correct, at $125.00 per hour his profit margin would only be 2.4%. That’s hardly enough to attain a profit at the end of his fiscal year when he must take into consideration the effects of “Murphy’s Law” -- anything that could happen, will happen.

At a selling price of $120.00, he lost $2.00 an hour. As the conversation continued, he told me that he also charged consumers on a daily eight-hour day basis for two techs. The amount he charged for a two-man, eight-hour day was $1,200.00. Hold it!! Red flag!! $1,200.00 divided by 16 hours (that’s two techs for eight hours each) comes to $75.00 per hour. That’s $47.00 per technician hour less than the $122.00 per hour he told me he calculated his cost to be.

Unfair practices

At a loss of $47.00 per technician hour, this contractor will minimally undercharge the consumer $752.00 per eight-hour day for two technicians. Using 244 workdays in a year (five days x 52 weeks less six holidays and two weeks vacation), that error means this contractor minimally costs himself $183,488.00 annually. I use the word “minimally” because selling prices are supposed to include monies above the contractor’s cost, which are called profit. His illogical and unbalanced mathematical conclusions place him in the position of not being fair to someone or some group of people to make up for his absurd business pricing procedures.

It could be his employees who will eventually leave because of poor compensation; his creditors who will eventually stop issuing credit because of poor payment practices; his clientele who will go elsewhere to avoid corner-cutting workmanship; himself and his own family; or any combination thereof. This guy is a classic example of someone who hasn’t got a clue, a sense of balance, a logi cal mindset, or an ounce of fairness.

If you’re wondering why I claim he doesn’t act fairly, it’s simple. “Fair” is a two-way street. As a contractor he is supposed to deliver value to consumers. And consumers are supposed to deliver money to him so he can recover his costs and earn a profit. But since he is the one who came up with his prices which do not cover his costs and include a profit, you can’t blame the consumer for not paying him enough money to recover his costs and earn a profit. Even if he pays everyone but himself, he wouldn’t be fair to himself and his family.

Know your intangibles

I asked this contractor if he knew what the term “intangible cost” meant. He wasn’t sure. To give him an example, I asked him if he had callbacks. Until this conversation, not one contractor I have asked has ever told me that he/she did not have callbacks. Some would only admit to few. But, in 17 years of contracting business consulting, no one has ever said that they have no callbacks. That is until the conversation with this contractor. He told me he didn’t have callbacks.

I tried to explain that callbacks come in three categories. One is “pilot error.” That’s when the technician didn’t function at 100%. After all, humans are only human. A consumer called my company after another company had replaced her heating system’s circulator. The heat wasn’t functioning properly. She called the other contractor who emphatically told her there was no problem with his circulator.

He was right. There was no problem with his circulator. The problem was with his installation. He put it in backward. I guessed he missed the fact that there are arrows on circulators for a reason. Since he didn’t go back, I guess he could claim not to have had a callback. If that contractor were smart enough to include a line item in his budget for “callbacks” (customer relations), he would have had the money to go back, see the problem and rectify the situation. Instead, he allowed another company to fix his problem and take away his customer.

Then, there is “manufacturer’s defect.” We who pay attention to the world around us know about material that doesn’t function properly. It was made by humans or machines made by humans who are only human. If the contractor supplied the material, it only stands to reason that the contractor has some responsibility if the material malfunctions within a reasonable time after installation. By including a line item cost for callbacks in budgets, contractors can ease the impact of callbacks caused by material defect.

The final category is “the customer is irrational.” One of my technicians replaced a circulator for a hot water baseboard system, which we did not initially install, in a small five-room cottage. A week after the job, the client called back and said one of the rooms had no heat. Initially this did not make sense. The home was small enough for the one heating loop.  If there was a problem with our circulator, the heat in the whole cottage would have been affected, not just one room.

I dispatched a technician to the home. Upon arrival he checked the heating system and everything was functioning properly. He told the customer that everything was functioning properly at the time of the visit, and to let us know if it reoccurred. About a week later, the customer called with the same problem. Once again, I dispatched a technician. And once again everything was fine.

The next week, the customer called with the same problem. This time when the tech arrived, he saw the problem that was not there on the previous two visits. There was a small piece of wood holding the damper of the baseboard in a closed position. When the tech asked the customer about the piece of wood, the customer who was complaining about no heat in one room said, “I put that there because that room was too hot.” My tech explained how the system functioned and the customer was causing his own problem. If we did not monitor the costs of callbacks and budget the proper amount to cover those costs, we would not have had the monetary ability to solve the problem and retain the client.

Taking those types of scenarios into consideration, I asked the illogical contractor to whom I was speaking if he ever had to go back on a job. He couldn’t remember anything specific. Since callbacks are a form of customer relations, and all businesses must address a method of relating to customers, I asked him if he ever had to speak with a customer on the phone to help address a problem with work he had performed.

At least he admitted that as a possibility. Since this contractor worked in the field, the time he spent on the phone took away from the time he had to work in the field. That’s a form of callback (customer relations) cost. I feel this contractor is not thinking with:

• Balance -- He refused to admit to a cost item that all contractors incur.
• Logic -- If a basic contractor cost includes callbacks, which is a form of customer relations, and he doesn’t admit having it, he is as illogical as the proverbial ostrich with his head in the sand and his butt in the air ready for people to take a shot at it.
• Fairness -- When he doesn’t cover his cost and attempt to earn a profit, someone will suffer.

We must also remember that the intangible cost item of callbacks is just one item that this contractor neglected to include in his miscalculation of his erroneous hourly cost for labor and overhead for one technician. I can only wonder what else he forgot. He seemed to take my points into consideration. But, in truth, I came away with the feeling that he was just agreeing so he could get out of the conversation.

I told him that before he could get a price guide that would help him, he had to know his proper costs for labor and overhead and choose a proper profit margin that would allow him to attain his goals. I explained that I could help him in a step-by-step manner and/or he could purchase my book, Solutions Management Theories and Methods for the Contracting Business©. He said he would get back to me.

That was about a month ago as of this writing. I haven’t heard from him yet. Assuming that he hasn’t changed, in that month’s time, this mastermind of business cost himself minimally $640.00 ($2.00 per tech hr. x 2 techs for 8 hrs. per workday x 20 workdays) by using his cost/selling price per tech hour: With his two techs for $1200.00 per day method, he cost minimally himself $15,040.00 ($752.00 x 20 days).

You might wonder why he hasn’t called. It’s simple! He has no balance, no logic and no fairness in his business management procedures. If you feel that you need help, give me a call.                   

           

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