# Follow This Recipe to Calculate Costs

November 21, 2000
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You need to price your jobs so that everyone gets a paycheck and the owner gets a profit. You don’t say how large your company is, how many employees, or what kind of overhead you have. If you are small, you still have overhead, and if you grow you’ll really have overhead.

Employment and ownership are two completely separate animals. Just because you take home a paycheck doesn’t mean you’re making a profit, especially if you work all day and spend all night doing payables, receivables, and payroll.

We cost out every job and enter it into a database where each piece of equipment has its own field: furnaces, air handlers, air conditioning condensing units, heat pump condensing units, evaporator coils, humidifiers, electronic air cleaners, etc. This way I can search all jobs based on the different fields. I use this database to develop a “cookbook” for equipment pricing.

## Use Historical Data

I usually go back one year and retrieve all of the jobs with the characteristics I want to price (100,000-Btuh furnace, 36,000 a/c, 36,000 coil). I average the total job costs (equipment, material, labor, permits, etc.) to come up with a cost per job for that particular combination of equipment.

This process is done for every combination of equipment I have in my “cookbook.”

I then decide on the gross profit I want to target, say 45% (if you assume 25% for overhead expenses and set a target of 20% net profit; if I see 10% to 15% I’m ecstatic because wages, gasoline, and other variables are continuously changing).

I take my total average cost and divide it by the difference between 100% and 45% (1 – 0.45 = 0.55) to come up with the projected price. Let’s assume a total direct cost of \$2,500; dividing that by 0.55 equals \$4,546. This is how I arrive at the price I would charge for that particular system.

## A Word To The Wise About Discounting

I don’t think I can caution you enough about lowering your prices. You must know exactly how much profit is in a job before you even consider discounting your price.

Let’s assume that you have proposed a job for \$5,000 and your competition bids the same job for \$4,000. The customer really likes you and your work, so he’s willing to give you the job — if you split the difference. Lower your price to \$4,500 you’ll get the job.

Would you do it? Sure, it’s only \$500, you get the job, keep the customer, beat out your competitor, and make \$500 more than the competition would have.

Let’s review. “They” say that an average hvac contractor has a net profit of between 3% and 5%. You’re above average and historically have a net income of 8% at year end. If you discount \$500 from a \$5,000 job, you’ve given away 10% of a job that should generate an 8% net profit. This results in a realized loss of 2%.

In other words, you end up losing \$100 for the privilege of getting the job and beating your competition.

## Flat Rate Is The Way To Go

As far as pricing for demand service is concerned, go with flat rate. You’ll make better profits and your customers will be reassured knowing how much a repair is going to cost before it is made.

I personally use Collier Consulting’s flat-rate software to develop my own books. I base the labor rate at \$125/hr. A good technician has about 50% billable hours, the rest is spent driving, drinking coffee at the supplier’s, etc., so you only realize \$62.50/hr worked.

We won’t even talk about marginal or bad technicians. (If you calculate the cost to keep a stocked van on the road with all associated overhead included, I’ll bet you get close to \$50-plus/hr, plus wages paid to the tech. I’ve based my estimates on a 2,040-hr year).

It really doesn’t matter which program you use, Collier, Main, Callahan Roach, etc. — just use one and make sure it’s user friendly. Keep it small and only put in the repairs you use regularly.

In addition to being on The News’ panel of Contractor Consultants, Miles is with Jerry Kelly Heating & Air Conditioning, St. Charles, MO.

Publication date: 11/27/2000

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