The cost of a simple task

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

Whether they admit it or not, many contractors are always questioning their own prices. At supply house counters you continually overhear conversations starting with, “How much do you charge for (any job)?” The reason for the doubt is simple. Most contractors don’t correctly calculate the costs they incur for the tasks they perform. And, deep down inside, they know it! Their pricing policies are based on what the competition charges. Then, they charge a dollar less.

Unfortunately, the competition’s price is more than likely based on ignorance, stupidity, fear and absurdity. This “charge a dollar less than the other guy” procedure could eventually lead to contractors paying consumers for the privilege of providing service to them.

If you don’t know your real costs and you use incorrect numbers -- or overlook any costs -- the result will be wrong selling prices. True costs blended with a profit margin will allow you to earn the reward you deserve for the excellence you deliver to consumers; and, the risks you incur in the delivery is the only way to arrive at proper profitable selling prices.

When calculating your cost of operation you must understand that you incur both tangible and intangible costs. Tangible costs are those for which you pay dollars at the time of purchase such as a gallon of gasoline. Intangible cost is best described as the cost of an item for which you pay without actually seeing dollars being spent at the time of purchase.

Callbacks are an example of an intangible cost. Every contractor has callbacks including those with egos that will not allow them to admit having callbacks. Turning a blind eye to that which is a fact doesn’t make the fact go away. There are some contractors who actually calculate that which they think are their costs, but don’t do it correctly. They often let their egos blind them from the possibility that they used incorrect numbers. And as always, wrong numbers lead to wrong results.

Budget costs to consider

In my firm opinion, service plumbing contractors in our nation minimally incur a $75.00 per hour overhead cost for each service technician with a service vehicle. It could easily be as high as $175.00 per hour. Those numbers don’t include the tech’s salary and salary related expenses.

Figure 1 illustrates three technician salary levels interpolated into an hourly tech labor cost. The example includes 7.65% fica matching fund which all contractors pay. It includes 2% for unemployment/disability insurance; 7% for workers compensation insurance; a 3% factor for liability insurance as it pertains to payroll; and 3% for retirement. Those percentages, with the exception of fica, may vary among contractors. Additionally, the chart designates a $7,500.00 allowance for health insurance. It should be noted that health insurance for a family plan is most likely much higher. It also indicates those hourly salary level costs with a minimum $75.00 and a maximum $175.00 per hour overhead cost. Keep in mind that with time numbers usually increase. These numbers are probably close as of this writing.

Salary and related salary expenses for an administrative person to take care of all the managerial responsibilities of the contracting business are overhead costs you incur whether it is your second job, your spouse’s job, or someone else’s job. Figure 2 shows the hourly cost of that person’s administrative salary and related salary expenses.

Example of the cost of a simple task

To show the effect these expenses have on the cost of a common task performed by plumbing contractors, see figures 3 and 4 (page 98). For the example, I have chosen the replacement of one 11/2" 17-ga. chrome-plated tubular p-trap. Many plumbing contractors charge between $150.00 and $250.00 for this service. Let’s see how the numbers fit. Figures 3 and 4 show:

1. The description of work performed by the technician and administrative person respectfully;
2. The time each spends regarding the task;  Note: time is broken into decimals -- .08 = 5 minutes; .17 = 10 minutes; .25 = 15 minutes; .42 = 25 minutes
3. The three hourly salary levels for the technician and administrative person;
4. Figure 3: hourly overhead cost to contractor based on $50.73 (the minimum $75.00 per hour less the level 1 $24.27 administrative salary expense);
5. Figure 4: hourly overhead cost to contractor based on $150.73 (the maximum $175.00 per hour less the minimum $24.27 adm. salary expense);
6. The cost of the service to the contractor at different salary levels with two different overhead expenses. One at the minimum $50.73. Another at the maximum $150.73; and
7. The numbers in red indicate the cost to the contractor. Red is the color blood when it hits the atmosphere and is appropriate because the contractor is bleeding these costs.

How do the numbers add up?

Within the confines of the illustration, the lowest cost to the contractor is $193.62. Any contractor who charges less than $193.62 with regards to the sample is losing money. That’s not too bright. And at that level the tech is only paid $30,000.00 annually [$14.42 per hour]. At the $60,000.00 annual salary level, the tech salary is $28.85 per hour, and the task cost to the contractor is $237.26. Therefore, at the $250.00 selling price it appears that the level 1 and 2 contractors earn a profit of $56.38 and $12.74 respectively. But, you must remember these costs were based on selling 1,708 tech hours in a year. That’s the maximum hours available in a 40hr/52wk year less 16 vacation/holidays and 244 non-productive hours per tech (1 hour each workday). No one sells all their tech hours for all their techs all the time. That means the costs in the example will most likely be higher. In turn, the profits of are probably not only non-existent, but have been replaced with a negative number.

The only reason business exists is to make a profit. For sake of example, if a contractor based his/her costs on the maximum 1,708 hours (recommended) and he/she only sold 75% of the maximum (1,281 hours), he/she would need a 33% profit margin on each task performed to attain a 10% profit by the end of a fiscal year.

Using a 33% profit margin, the selling price for the task with a low cost of $193.62 would be $288.99. At the high cost of $485.88, the selling price with a 33% profit margin would be $725.19.

I’m sure there will be many boo-birds out there saying that you can’t charge those numbers. To the negative naysayer, I most steadfastly claim that numbers don’t lie. Therefore, the $150.00 to $250.00 dollar selling price of this simple task should only be used by those contractors who want to be losers.

As a member of a noble trade charged with the protection of the health of the nation, I beg those losers to “get smart” or “get out” of the contracting business. Go work for a smart contractor. You can’t get where you want to go doing it your way. And, you are setting artificial, stupid, inane benchmark prices which affect the industry as a whole, including the quality of workmanship provided to the consumers who need the services of PHC contractors.

For those of you who want to be winners, a word to the wise is sufficient. I suggest that you carefully calculate the costs you incur for every task before you perform the task so that you know the amount you expect to incur regarding the task before quoting a selling price. Then, apply a profit margin that will allow you to succeed. Remember, wrong numbers lead to wrong results. If you need my help, as always 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