Change the Way You Calculate Labor
For too long, service and repair contractors have been “winging it” by charging for time and materials based on the going market rate. As a result, our industry has one of the lousiest profit margins of any in the business world – an average of about 3%.
Let’s face it – it’s a lost cause trying to determine your overhead costs by following the blind competition. You have to figure out your own overhead costs, and the Service and Repair Calculator is a tool that shows you how to find out your actual cost of doing business.
Although this manual is set up to calculate flat rate or total menu pricing, the contractor who uses time and materials system will benefit too, because it eliminates guesswork.
It is virtually impossible to lose money when the instructions in the calculator are followed. It is the consensus of many contractors that the calculator represents a road map for the shortcut to prosperity.
Labor calculators have been used by the new construction sector for decades, but we believe that this is the first calculator created specifically for the service and repair contractor.
The First Step: The beauty of the Service and Repair Calculator is its simplicity. The easy-to-follow format helps you figure out the most important element of cost analysis – the breakeven or “static point” of each job.
Determining your static point is the first step on the road to profitability. But before you can arrive at this juncture, you must identify your dollar-per-hour labor, dollar-per-hour overhead and net material costs.
Dollar-per-hour direct labor cost must include all fringe benefits associated with direct labor. Dollar-per-hour overhead is determined by simply dividing total overhead dollar expenditure in a given period by the amount of hours sold during that period. For example, $200,000 overhead divided by 6,000 hours sold is $33.33 per hour overhead.
All material costs should be identified at “net cost” – after all discounts have been deducted. Obtain this information from pricing sheets or by calling your supplier.
The static point is the sum of dollar-per-hour direct labor cost, dollar-per-hour overhead and net cost of material. By knowing your static point, you can clearly see where you make or lose money. A job sold for less than your static point is money from your pocket, and anything over is money in your pocket.
The selling price of a job is determined by dividing the static point by the difference between 100% (installed price) and your net profit goal. So if your net profit goal is 20% your static point is 80% of the installed price.
Pricing Grid: It won’t take long for you to become proficient at your cost calculations, and the next step is to apply them to the book’s pricing grid. The grid’s purpose is to help you understand how overhead impacts your net profit goal.
The manual is divided into 12 sections according to product type. At the top of each grid is the product description. The grid consists of several columns. The far left column has three headings – Manufacturer, Model and Description. The next column is Regular and Premium pricing, followed by Code, Material Cost (MC) and Breakeven columns.
Listed horizontally in the first column are product characteristics. This would include dimension and color. The next column is for listing prices – regular is straight time, premium is overtime.
The code lists a guide representing how many hours it takes to install or repair the product. This is an average derived from hundreds of installations. However, these numbers aren’t cared in granite – they should be adapted to each contractor’s experience.
Sample pages at the front of the book feature two versions of the grid – one for the office, another for the field. The pages in the body of the book are for office use only because they include code, materials and breakeven columns.
I recommend that the field version only contain the product and price columns, so your service technician shows the customer just the job price. You don’t need to break down your costs for the customer, because the final price is all he wants to know anyway.
Serious Offers Only: The Service and Repair Calculator encourages the contractor to shift from a pricing system that picks numbers out of thin air to one of precision and profitability. But in order to make this transition, the contractor must be committed to making fundamental changes in his approach to business.