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I couldn't pass this up

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  • I couldn't pass this up

    This is an article from Phc News. I thought it dovtailed pretty well with the discussions from the last few days.

    Well worth the time it takes to read it.

    Due to length it's in two parts


    Contractor costs are similar but their prices might not be
    By Richard P. DiToma, L.M.P.
    You can shop around for the best price for any of the items you need to run your business. The value you receive for the dollars you spend will probably be commensurate with the price you pay.
    All things being the same, the operating costs of your PHC competition in your geographic area are mostly similar to yours. Vehicular costs such as vehicle purchase prices, insurance, fuel, repairs, maintenance, inspections and registrations for the same type of vehicle are about the same. Shop/office rental costs for the same type and size of property are also similar. Insurances, supplies, equipment, advertising, professional services, miscellaneous costs for items of equivalent value are probably comparable.
    You may choose to spend the same, more or less money than your competition for any given item, but the gap for the same type of purchase will probably not be that great. One item that may be much more or less than your competition is the salaries you pay to yourself and your employees. But even with this item, both you and your competition must consider salaries that compensate yourselves and your employees at a level that gives rewarding reason as to why your workforce should remain with your business. If you do not properly compensate your workforce, you will probably have a problem maintaining good help.
    Keeping good help means paying employees for a full year, including the slow times. If you cut hours or lay off good personnel every time your business experiences a slow down, you will have difficulty keeping them employed. After all, they have to feed, clothe and shelter themselves and their families regardless of the quantity of work you have. In a fiscal year based on 40 hours per 52 week year there are 2,080 hours paid out for each full time employee. If you give technicians two weeks for vacation or personal time, six holidays, and you incur 244 unproductive hours per technician year to prepare each morning and finish up each afternoon [based on one hour per technician per day per five day workweek], you only have at most 1,708 hours to recover your costs and earn the reward you deserve for the value you deliver and the risks you incur in the delivery.
    In the service portion of the industry, each phc service vehicle with one technician probably gives you a labor/overhead cost between $100.00 to $250.00 per hour dependent upon the area in which you operate, the salaries you pay to your employees and the sale of all 1,708 annual hours. You only have three choices when choosing your selling prices: sell above your cost, below your cost or at your cost.
    The following examples are based on three types of contractors. I’ll refer to them as A, B and C. I’ll base their similar labor/overhead costs at $150.00 per hour if all annual potential hours are sold. Remember, this number is arbitrary and is lower than the average between $100.00 and $250.00. Your costs may be more or less.
    The first set of examples compare the amount of money a contracting firm can bring in from the exact replacement of a gas fired water heater [40- or 50-gal. capacity]. In this example, the cost of the water heater to the contractors is $375.00. The additional potential material they may use for items such as nipples, dielectric couplings, copper tubing and fittings, lengths of vent pipe and fittings, black malleable fittings, solder, flux, grit cloth, acetylene, sealant, etc. costs $120.00. In areas where sales tax is not charged to consumers for water heater replacements, these numbers should include the sales tax contractors pay for the material since the tax now becomes part of the cost of the material.

    In this set of examples the technician (and if your technician is not doing all these steps, he/she should):
    1. Travels to the client to check out the situation, the remedy and the material needed to rectify the problem.
    2. Introduces himself/herself to the client.
    3. Explains company policies.
    4. Discusses the client’s request and/or problem.
    5. Checks out the circumstances.
    6. Makes a list of the material needed to perform the task at hand.
    7. Calculates and quotes a price to the client for the replacement water heater installation.
    8. Asks the client if he/she would like the technician to perform the task.
    9. Writes up a contract/invoice describing the task and the price to perform the task.
    10. Obtains the client’s written authorization to perform the task at the agreed price, terms and conditions.
    11. Travels to supplier (or shop) to pick up the material for task.
    12. Travels back to client.
    13. Removes existing water heater.
    14. Installs and inspects new water heater installation.
    15. Tests water temperature after heater reaches temperature setting to be certain temperature is within the parameters of safety.
    16. Cleans up the work area.
    17. Asks the client if they are satisfied and obtains client’s written acknowledgement of satisfaction.
    18. Gets paid for the task performed.
    19. Goes to service vehicle and calls to inform shop of completion and get information about next call.
    .
    sigpic

  • #2
    Part two Phc article

    According to information found in my Readily Available Pricing Information Digest 2008 for the plumbing heating cooling contractor, the task described will take on average four hours plus initial travel time to client. For the example, I’ll use an average initial travel time of 30 minutes to give the task a total time of 4-1/2 hours.

    Contractor A sells above his/her cost at a 50% profit margin in anticipation of slow times and an intention of receiving a return on his/her investment in the business. He/she sells the task for $2,340.00 earning a profit [reward for excellence delivered and risks taken] of $1,170.00. In this example, the contractor also has room to discount the price in a financially prudent manner for those clients who help keep his/her business going through their faithful and frequent patronage.
    Contractor B sells at $30.00 an hour below his/her cost. I chose the $30.00 amount because in the 18 years I have been consulting with and helping my fellow contractors I have noticed that most contractors sell their services minimally at $30.00 per hour below their cost. That’s called calculating on the stupid curve. This enigma, “the stupid curve,” is caused by contractors following the lead of other contractors who haven’t got a clue as to the real costs of operating a contracting business. They use an erroneous, flawed and absurd number called “the going rate.”
    In this example, Contractor B sells (or should I say “buys”) the job for $1,035.00. It costs this contractor $1,170.00 for labor, overhead and material to do the job. But for some reason which can only be described as extreme stupidity, this mastermind of absurdity adds $130.00 of cost to his/her miserable existence. He/she would be better off sending the consumer a check for $130.00 because then he/she could go out of business and would not have the cost of labor, overhead and materials to pay, and would achieve the same result.
    The contractors who install water heaters for themselves or for the big box retailers for less than their costs fall squarely into this category. They are their own enemies because they can never get where they want to go. They are the disease of the industry because their ridiculous behavior decimates our noble industry. They deliver mediocrity or worse to consumers because their flawed prices will not allow them to deliver excellence.
    Many ignorant contractors assume that volume brings in profit dollars. Here’s a question for you: How many water heaters will Contractor B have to install at a selling price of $1,035.00 to make as much profit as Contractor A who sells the task at $2,340.00? Answer: He/she will never make any profit! He/she will only lose more money with each water heater sold below cost!
    Contractor C sells at his/her cost. He/she sells the job for $1,170.00. The same amount it costs him/her. He/she makes no money and misses the only reason business (other than non-profit business) exists. That is, to make a profit. Although not as extremely stupid as contractor B, contractor C is still stupid.
    Every time contractor A sells this task he/she makes $1,170.00 above costs for the business. That means every 10 water heater tasks of the same sort will give the business $11,170.00 above cost.
    For every 10 water heater replacements contractor B sells below cost the company loses $13,050.00. Is there any wonder why I call this example extremely stupid?
    For every 10 water heater replacements contractor C sells at his cost the business brings in the same amount as it must pay out.
    On the other hand, there is one thing contractors A, B and C share equally besides their real costs: the opportunity to place equipment in a home or business that not only delivers hot water, but also, presents the risk of harming, maiming, or killing the client through scalding with extremely hot water, poisoning with carbon monoxide, explosion of equipment or fire. Taking these risks into consideration, calling contractors B and C idiots would be an insult to idiots.
    Another way to look at this subject is annual hours sold. Again using Contractors A, B and C, figures 4, 5 and 6 show the different amounts of annual revenue each business has the opportunity to realize dependent upon which choice the contractors have made.
    As you can see it doesn’t make much sense (or cents) to sell at or below your cost. Since more contractors than you think choose the path of Contractors B and C, and it makes no sense (or cents) to sell services at, or below, real costs, or at the “going rate,” I do declare, contractors B and C to be “Morons in Perpetuity.”
    Regarding your profit margin, I am not suggesting that you use 50%. First you must correctly calculate your operating costs and then choose the profit margin that will allow you to reach your goals
    sigpic

    Comment


    • #3
      Re: I couldn't pass this up

      Boy you like to keep the pot stirred huh?

      I get PHC also and have been reading DiToma state ever increasing numbers such as these.

      You can only use his or anybody's as a guide though. There are places in the U.S. that if you used these or someone elses numbers exactly you will be out of business soon.

      And I hate to say it, but I'm more likely to listen to someone that actually currently owns a shop.

      J.C.

      Comment


      • #4
        Re: I couldn't pass this up

        I guess no moratorium.....

        J.C.

        Comment


        • #5
          Re: I couldn't pass this up

          Great post NHmaster!!! Thanks, I don't get that magazine yet, though I ordered it recently!
          Water Heater Reviews & Water Heater Information

          Comment


          • #6
            Re: I couldn't pass this up

            Very nice, I spoke to the guy, he's in new york. I enjoy his business education. alot of us could use it and many of us should apply it.

            without it, we are hurting the trade, ourselves and our families.
            sigpic

            Robert

            Comment


            • #7
              Re: I couldn't pass this up

              I thought that was a pretty good article, though the math on the contractor C's loss is wrong. He loses $1300, not $13,000 dollars on 10 replacements. If he lost $13,000 he would notice quickly and either raise his rates or go out of business quick. The danger is probably greatest when you think you are making money, because the price is higher than your easily measurable costs for the job; but not greater than your overall costs.

              Comment


              • #8
                Re: I couldn't pass this up

                Di Toma's business model works or rather makes sense for any company, plumbing or otherwise.

                I agree that the prices probably need to be somewhat adjusted for different area's, but not by much. I think you will find that major operating expenses are pretty much the same throughout the country. We all pay about the same for insurance, rent, vehicles, gas, tools ect. Where the disparities lie will most likley be in salaries. I.E. union vs non union. Note however that with DiToma's model, the size of your shop makes no difference.
                sigpic

                Comment


                • #9
                  Re: I couldn't pass this up

                  I'm reevaluating as I do feel that I've been too low on pricing. And I've told other plumbers that they are too low for years. They don't increase for inflation irregardless of normal operating expenses that are also ever increasing.

                  But I do see holes in the formula. With the internet and the ever advertising HD/Lowes I'm confident I cannot get 50% markup on a water heater. Even promoting that my supply house heater is of higher quality.

                  Another item not considered is what kind of heater? Electric, Gas, PowerVent, Direct Vent, Tankless, or even a change in fuel/venting somehow. The price Mr. DiToma suggests might even be low in his formula. But if it can be low, it can also be high.

                  Would it really cost $1,170.00 to do a like for like changeout of a 50 gallon electric? I work for myself and in his writing he states that this price "includes" labor. Does that mean I should be charging $1,170.00 after my salary?

                  I'm rechecking numbers too see. And it would be great if plumbers everywhere could ethically have a significant increase in pay.

                  But, I'm checking MY numbers. Not theirs.

                  J.C.

                  Comment


                  • #10
                    Re: I couldn't pass this up

                    What are You charging for this W.H. in rochester N.H.? Are You running a full time plumbing Buss. with employees? Are You teaching in a classroom?
                    There is a big difference, being in the trenches,doing Your do,Paying bills ,Vs a heated classroom!
                    I can build anything You want , if you draw a picture of it , on the back of a big enough check .

                    Comment


                    • #11
                      Re: Part two Phc article

                      Originally posted by NHMaster3015 View Post
                      Contractor B sells at $30.00 an hour below his/her cost. I chose the $30.00 amount because in the 18 years I have been consulting with and helping my fellow contractors I have noticed that most contractors sell their services minimally at $30.00 per hour below their cost. That’s called calculating on the stupid curve. This enigma, “the stupid curve,” is caused by contractors following the lead of other contractors who haven’t got a clue as to the real costs of operating a contracting business. They use an erroneous, flawed and absurd number called “the going rate.”
                      In this example, Contractor B sells (or should I say “buys”) the job for $1,035.00. It costs this contractor $1,170.00 for labor, overhead and material to do the job. But for some reason which can only be described as extreme stupidity, this mastermind of absurdity adds $130.00 of cost to his/her miserable existence. He/she would be better off sending the consumer a check for $130.00 because then he/she could go out of business and would not have the cost of labor, overhead and materials to pay, and would achieve the same result.
                      The contractors who install water heaters for themselves or for the big box retailers for less than their costs fall squarely into this category. They are their own enemies because they can never get where they want to go. They are the disease of the industry because their ridiculous behavior decimates our noble industry. They deliver mediocrity or worse to consumers because their flawed prices will not allow them to deliver excellence.
                      Many ignorant contractors assume that volume brings in profit dollars. Here’s a question for you: How many water heaters will Contractor B have to install at a selling price of $1,035.00 to make as much profit as Contractor A who sells the task at $2,340.00? Answer: He/she will never make any profit! He/she will only lose more money with each water heater sold below cost!
                      THANK YOU, THANK YOU, THANK YOU!

                      I was appauled a couple of years ago when I inquired what HD subs get per heater, I opted to stay away...far away.

                      I've conditioned myself to NOT work for food, add to that the family I have to feed.

                      The market is inundated with guys that truly think that as long as they make a little more per hour than they did working for a shop, they're doing good.
                      The fact that you make enough money to put some in the bank IS NOT a bonus, not play money, it's an absolute necessity, PERIOD.

                      The fuel pump went on my truck last week, the $1K it cost to have it replaced wasn't a bonus, it wasn't a personal expense.
                      It was a DIRECT result of driving to and from customers homes.
                      I'm in the market for a new right angle because my current drill is loosing its oomph, a superhawg looks good...the $400 or so I'll spend isn't for a personal toy, it's an expense DIRECTLY incurred from working on customers homes.
                      Explain this to the average homeowner and they'd just as soon suggest you bore the holes with a hammer and wood chisel...as long as you charge a flat rate rather than hourly of course.

                      If I don't charge with all those hidden expenses in mind, I better start playin' lots of lottery tickets with my fingers crossed and the classifieds in my hands, because it's only a matter of time before I'm working for my competition.

                      It never ceases to amaze me when I see individuals openly bashing other plumbers who charge more than they do.
                      It's one thing to take advantage of an ederly woman on a fixed income, it's utter stupidity to give in to the constant browbeating customers can subject us to rather than stand your ground...then label yourself "noble" for not "overcharging".

                      EXCELLENT article!

                      Comment


                      • #12
                        Re: I couldn't pass this up

                        Originally posted by toolaholic View Post
                        What are You charging for this W.H. in rochester N.H.? Are You running a full time plumbing Buss. with employees? Are You teaching in a classroom?
                        There is a big difference, being in the trenches,doing Your do,Paying bills ,Vs a heated classroom!
                        What do you pay your plumbers?

                        Comment


                        • #13
                          Re: I couldn't pass this up

                          I'll have to give that a more careful read. It's appropriate for any business. Running a small computer consulting business out here in the stix, it's always difficult to set prices and rates. I'm at $70/hr for my services, and generally that pays ok. It'll cover the transport costs to and from the client and give me some real money in profit. What I always have a hard time with is parts prices. How much do I charge for a replacement drive or RAM or whatever? For new items, I've been charging what they cost me, including shipping. This is the "stupid curve" going rate thing. I do get the installation time fee, but it's definitely not in my interest to replace parts. This makes me try to find a way to fix what they have, however, instead of replacing.

                          I do have an inventory of used parts from other customers. This differs from plumbing wherein I can actually re-use the drive out of someone else's computer. Or the RAM or power supply. These parts are essentially free to me. The customer has paid me to install their new computer and take away the old. What I do now is reserve those pieces for families that can't afford new. They can get a good repair part for just the cost of installation. It helps everyone, and I feel better about the parts going to good use.

                          This is a great thread, thanks for posting the whole article. Now I just have to have time to read it!!
                          I put it all back together better than before. There\'s lots of leftover parts.

                          Comment


                          • #14
                            Re: I couldn't pass this up

                            Originally posted by toolaholic View Post
                            What are You charging for this W.H. in rochester N.H.? Are You running a full time plumbing Buss. with employees? Are You teaching in a classroom?
                            There is a big difference, being in the trenches,doing Your do,Paying bills ,Vs a heated classroom!
                            I do indeed teach in a classroom now. My company is run by my two other partners and I fill in when I feel like it, and do a bit of estimating. My company employs 11 licensed plumbers, one unlicensed runner, a receptionist and a book keeper. Our prices are pretty close to the ones quoted in the article because we went through years of keeping with the competition and slowley loosing money. Yes we don't get every job we bid. There's plenty of guys willing to work for starvation wages in town. But then again we don't have to do as much to make more. And it weeds out most of the deadbeat customers also.
                            sigpic

                            Comment


                            • #15
                              Re: I couldn't pass this up

                              One more passing thought. Never ever install something that the home owner has purchased. And I don't care where they got it, it does not matter. Why would you take the liability and loose the mark-up.? I see this crap on craigs list all the time. Plumbers that advertise installing your product? I've heard all the reasons, but it's again bad business and just one more thing that keeps plumbers working for low wages. Would you bring your own needle and silk to the doctor to stitch up a gash in your arm?

                              We need to get the hell out of the El Cheepo mentality.
                              sigpic

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