Calculating Cost Per Workhour

July 3, 2000
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WILKES-BARRE, PA — In the Appalachian region of eastern Pennsylvania, an hvacr contractor has spent a lot of time researching the best method to keep profits up, while serving customers in his community. He has narrowed down his search to what installations bring him the highest profits, based on “manhours” — or, if you prefer a gender-neutral term, “workhours.”

Ken Rex, owner of Ken Rex Plumbing-Heating-Cooling, is a contractor who decided to take the conventional wisdom of tracking profits per job one step further.

“We’ve always spent time figuring out our labor, materials, and profits each year,” Rex said. “Over the years the statistics have evolved into a table [showing all costs].”

Rex took the table one step further and added a column entitled “Profit per manhour.” He figured if he compared all of the installations his company did based on profits per hour worked, he’d be able to spend less time on the least profitable work and more time on the most profitable.

It seemed like a simple idea — and it was.

Rex didn’t see a future selling a lot of forced-air gas furnaces because many of the homes in this region of Pennsylvania do not use hot air heat. “There isn’t a lot of forced air in our neck of the woods,” he said. “A lot of the older homes have relied on steam and baseboard heat.”

He certainly didn’t see profitability working on new homes. “We weren’t making anything working for home builders,” he added.

So he took some of the knowledge he gained from attending Carrier seminars, as well as other types of industry training, and started calculating. Having been in business for 25 years, selling all types of systems, he had a very good idea where to start looking for profitability.

“Forced air isn’t real big in this area — steam heat is used quite a bit,” he said. But the growing market that continually garnered more of his sales was ductless air conditioning. Rex has installed over 1,500 ductless systems in his market area.

Bingo — it was obviously time to calculate his workhour profitability on ductless system installations.

Ductless Profit Picture

Rex has enjoyed a close relationship with Samsung, manufacturer of ductless mini-split air conditioners and heat pumps. He recently sent them results of his “Ductless Statistics” for 1999, which included a spreadsheet tracking lead source, installation hours, labor and material costs, gross and net profit, and net profit percentage.

In his cover letter to Samsung, Rex wrote “the most important number on the page [spreadsheet] is the last column labeled Profit Per Manhour. As a contractor with a limited number of trucks and mechanics, we are in the business of selling ‘manhours of labor’ to repair, install, etc., hvac and plumbing systems.

“It is my job to find the Widget that generates the most profit per manhour of labor.” For his company’s market, this widget is the ductless air conditioning/heat pump system.

Rex compared the costs of installing a central ducted system and a ductless system and came up with the following statistics:

“A new central ducted system installed in an attic consumes on an average of 64 manhours of labor per installation with a net profit of $800 to $1,000,” he said. “That’s a $12 to $16 profit per manhour compared to $48 to $90 for ductless.”

Rex doesn’t understand the logic behind his competitors pushing a ducted system on a customer just because the actual installation costs are higher. “If they only knew how much money can be made by installing ductless,” he said.

Rex is so enthusiastic about selling ductless systems and helping other contractors (non-competitors) increase their profits that he even suggested that Samsung put on some educational seminars with himself as a featured speaker on profit and time analysis.

Good salesmanship and high temperatures have helped his company sell over 100 ductless systems this year, and Rex and is determined to keep up the pace.

“Ductless takes a big marketing effort to sell,” he said. “But the last two months my closing ratio on these sales has been over 90%.

“I bring in an air handler with a remote control during my presentations and demonstrate the ‘touchy-feely’ part of ductless.”

Rex is always looking for projects other than ductless systems that have a high potential for profit, including selling solar pool heating systems. But for now, ductless has consumed over 90% of his sales and he will stick with a winning formula.

“I made over $50,000 profit on ductless after the salesman’s commission and warranty fund, which was set aside for future non-billable service calls,” he added. “And that equals 90 hours of problems in the next year that I doubt very much will happen.”

If contractors take the time to analyze their labor and material costs and calculate profitability, like Rex did, they too can find their most profitable niche.

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