Informing & Supporting
Conditioning Air Professionals & the Industry
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Tampa, US
3:39 pm, April 13, 2024
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Why Your Gross Margin Doesn’t Matter- by Ruth King

This is a conversation I had with one of my clients:

“I hate duct jobs.”

Why?

“Because we always lose money on them.”

Fine, I’ll show you how to price them. And, if the customer won’t pay the price that you need to be profitable on the job, will you walk away and not do the job?

“Yes.”

I showed him how to price duct jobs profitably. Yes, the price was higher. If the customer wouldn’t pay the price to have a profitable job he DID walk away. And, I never heard another complaint about duct jobs again.

He was making the mistake that a lot of contractors make – pricing by gross margin and gauging profitability by gross margin.

Here’s why pricing/tracking by gross margin doesn’t make sense:

You are guessing at overhead. When you divide by one minus the gross margin you are guessing at the amount of overhead you should add to the job. A high labor job should have more overhead than a high material job.

Why? The majority of overhead is caused by people. A small amount is caused by space (rent, utilities, building repairs and maintenance, building insurance, and building taxes). The rest of overhead expenses can be attributed to labor/people.

You must know the dollar amount of overhead that should be added to each billable labor hour. After all, the only way you generate revenue is through billable hours. No billable hours, no service revenue. No billable hours, no replacement revenue, etc.

So how did we price the duct jobs? (You can use this pricing methodology for all service, maintenance, projects, etc.)

First, we calculated his overhead cost per hour. This is the amount of overhead that is added to every billable hour. Let’s say it was $45 an hour.

He told me he wanted the same net profit per hour as his replacement jobs got. Let’s say it was $100 an hour.

For a duct job that took 32 hours (2 days with two people), the price to the customer:

Net profit: $3,200

Overhead: $1,440

Direct cost for labor and material: $2,000

Price to the customer: $6,640

You may choose to have a lower net profit per billable hour. He wanted to earn the same hourly profit as he did on other jobs – why would he lower his profit?

Did you check your bank accounts online today? This is the first step in protecting your hard-earned cash.

Get the tools you need to grow profitably, build wealth, and live the life of your dreams.

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.

Visit www.financiallyfit.business to get your business financially fit in less than 10 minutes a month!

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