Now that you have the basics and why you want to increase your company’s profitability, let’s continue ways to increase profitability.
#6 – Know Your Overhead Cost per Hour.
Overhead cost per hour is simply total overhead cost divided by billable (revenue producing) hours. If your overhead cost per hour is $50 per hour and your competitor’s overhead cost per hour is $30 per hour, then for an 8 hour job your overhead cost is $400 and your competitor’s overhead cost is $240. Your competitor can charge the same price and earn $160 more than you do. Or, your competitor can charge $160 less and win the job.
A quick and easy way to decrease overhead cost is to ask your field and office personnel. If you ask, “How would you decrease overhead by $500 or $1000 a month, they won’t be able to think of anything. That’s number that is larger than they can imagine from a personal level. If you ask, “How can we shave $100 a month from overhead costs?” they will probably come up with some great ideas. Implement the simple things they suggest, whenever feasible, to decrease your overhead cost per hour.
And, the greater the number of billable hours, the lower the overhead cost per hour. As you add more field labor, assuming they stay billable at least 85% of the time, then your overhead cost per hour will decrease.
#7 – Price from the bottom up.
Most contractors still determine what their costs are and then divide by 1 minus the gross margin. This does NOT take overhead into consideration.
Start at net profit. What net profit do you want to earn for the job? Do you want a higher net profit for jobs with higher equipment cost? Do you want a lower net profit for jobs with a higher labor cost?
These are questions you need to ask before you establish your pricing.
One of my clients continually complained about duct jobs. He moaned that he could never make money on them because of the labor involved.
I said, “Fine. What net profit per hour do you want for duct jobs?”
He answered and then we established the prices for duct jobs.
He agreed that if a customer was not willing to pay what he required to do those jobs, then he would not do the work.
And, I never head a complaint about duct jobs again.
So, start at the bottom line.
- What profit do you want to earn?
- What is the overhead cost (using overhead cost per hour)?
- Add the two numbers. This gives you your gross profit per hour.
- How many hours will the job take?
- Multiply those hours by the gross profit per hour.
- This gives you your total gross profit.
- Then add the direct cost for the job. (Make sure you add commission in these numbers).
This is the selling price to the customer.
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Ruth King is well known as “The Profitability Master.” She is passionate about helping small business owners become profitable and stay profitable. For over 40 years she has coached, trained, and helped contractors and others achieve the business growth and goals they wanted to achieve.
Contact Ruth by emailing ruthking@hvacchannel.tv.
